Arizonans have won BIG since Congress passed the Tax Cuts and Jobs Act (TCJA) in December 2017.
At the end of April of this year, over $215 Million dollars has been returned to taxpayer and rate payer pockets. Raises, utility rate cuts, bonuses and expanded benefits have enriched families and small businesses, as well as supercharged the national economy.
The federal legislation didn’t just cut tax rates, but also made reforms to the tax code that greatly simplified and streamlined our tax system, saving average taxpayers time, money and heartburn. For example, the bill doubled the standard deduction, which will save most Americans the hassle of having to itemize their deductions.
Despite the tremendous benefits to residents in our state, the TCJA poses both a challenge and an opportunity for Arizona.
Arizona’s tax code is reliant on the federal tax system as our income tax forms begin with the Federally Adjusted Gross Income (FAGI) figure. Each year when the federal government makes tweaks to the federal tax code, the Arizona legislature runs a “tax conformity” bill to align our codes.
The TCJA was passed in December of 2017 and most of the changes went into effect in January 2018 – some even applied retroactively. These were not small technical changes; but constituted the largest tax overhaul of the last 30 years. Therefore, the usual tax conformity bill at the Arizona legislature was insufficient to retain coupling with the federal tax code.
Moreover, because the tax cuts put more money directly back into taxpayers’ hands, the average Arizonan’s FAGI also increased. What does that mean? If the Arizona legislature does nothing, the State of Arizona will see a significant revenue windfall, borne by Arizonans by way of an unintended tax increase.
In fact, the Joint Legislative Budget Committee and the Department of Revenue, which does the fiscal forecasting for the state’s budget, estimates a $173M increase and a $236M tax increase respectively, in FY 2019 alone. The number is expected to grow to over $300 million by FY 2020.
The State cannot afford to do nothing.
Aside from the unintended tax increase, if the Legislature and Governor fail to pass tax conformity and reform before the 2019 tax year begins, there will be complete tax chaos in the state.
According to DOR, the impacts of not conforming would include:
- For 2017, taxpayers would have to amend their returns to back out from federal retroactive changes, including depreciation deductions and taxpayers affected by natural disasters in 2016 and 2017
- Taxpayers filing for 2018 would not be able to rely on the amount determined in their federal return for the starting point in their state return. This would add the following complexities:
- DOR would need to create a new form that lists all the adjustments necessary to determine a taxpayer’s 2018 FAGI
- Taxpayers would need to complete schedules that include hundreds of adjustments simply to determine Arizona’s starting point
- Major Changes would need to be made to DOR’s tax system
- The complexities would grow each year with non-conformity
- Because the additions and subtractions would be non-specific, explaining the process to taxpayers will be extremely difficult
Without a doubt, no one except the CPAs will profit from such a scenario as this.
Historic federal tax reform has opened a window for Arizona to rethink our tax structure and make changes, that like the federal changes, modernizes and surges our economy.
The state has an opportunity to not just avoid a tax increase, but to use it to address inequities in the tax code, ensure 90 percent of taxpayers do not have to itemize their deductions, and even consolidate tax brackets.
With a major election behind us, it is time for our lawmakers to get down to the actual work of the jobs for which they have been hired. That means calling a special legislative session prior to January and passing a conform and reform bill. If they wait and allow the chaos to ensue, they can be sure that voters won’t forget and won’t rehire them in the future.