This year, the tax cuts from the Trump Tax Cuts and Jobs Act of 2017 were set to expire. Failing to extend the cuts would have resulted in a 22% tax hike for the average taxpayer. For Arizonans, it would have meant an average tax increase of $2,824. And there would have been an even larger tax increase for Arizona small businesses. Thankfully, earlier this summer Congress finally passed Trump’s One Big Beautiful Bill (OBBB), not only extending the personal income tax cuts from 2017 but making them permanent.
The OBBB also included several new tax provisions as well, such as no tax on tips and overtime, an increase in the standard deduction, full expensing and special depreciation for business, just to name a few. This assortment of changes to federal tax law now leaves states like Arizona with a big decision to make: provide partial conformity tax relief, full tax relief, or do nothing and provide no conformity tax relief at all.
This should be an easy choice, as choosing the non-conformity option would leave Arizona taxpayers with one big ugly tax bill to pay.
How big of a tax bill? According to nonpartisan budget analysts for the legislature, $425 million. That’s why the legislature and Governor Hobbs need to commit to full conformity tax relief as the starting point for the budget next session.
What does full conformity tax relief look like? At least $425 million in tax relief for Arizona taxpayers. Anything less is a tax increase on Arizona families and taxpayers.
Conforming to the tax relief provided by the OBBB doesn’t mean lawmakers need to align exactly to every provision of the OBBB. For example, the OBBB included a special new tax deduction designed to help seniors lower their social security tax bill, but Arizonans already are exempt from paying state taxes on social security.
As an alternative, Arizona lawmakers could instead adopt a reform introduced by Senator Mesnard last session that would allow for seniors to subtract their other retirement income (401ks and IRAs) from their taxable income up to the current standard deduction. It would even protect younger workers looking to save by extending this deduction to Roth accounts as well. Arizona should take full advantage of the opportunity provided by the OBBB and look to get out of the business of taxing our retirement savings.
Other provisions in the OBBB are critical for Arizona to adopt as well. The increased standard deduction, ending taxes on tips and rolling back taxes on overtime are just a few of the provisions that must be included in the conformity package. It makes little sense to provide this tax relief to hardworking taxpayers on the federal tax form, only to see it yanked away and taxed by the state.
The truth is that Arizonans have been overtaxed for decades, and the numbers prove it. Though 2021 brought a landmark, across the board tax cut for Arizonans with the adoption of the lowest flat tax rate in the country, no major tax cuts have been adopted since, and revenues are still nearly double what they were less than 10 years ago (as is spending).
President Trump and Congress delivered, preventing the potentially largest tax hike in generations by permanently cementing the 2017 tax cuts into law, and going even further. Now, Arizona lawmakers must deliver too, ensuring Arizonans get to enjoy the full benefits of the OBBB by fully conforming in an amount of at least $425 million, lest Arizona taxpayers foot the bill to fill the state coffers.
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