Federal tax conformity offers $200 million in revenue for Arizona, impacts top 1 percent

January 28, 2019

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Mon., Jan. 28, 2019 — Today simultaneous hearings of the Senate Finance and House Ways and Means committees will consider whether or not to conform Arizona state law with the Tax Cuts and Jobs Act (TCJA) passed by the U.S. Congress in December 2017, with $200 in revenue at stake.

The TCJA lowered income and corporate tax rates while broadening the tax base by eliminating personal exemptions and reducing or eliminating a majority of itemized deductions. Conforming would mean the reduction or elimination of deductions and exemptions at the state level in line with the TCJA.

Bills before the Senate and House committees — SB 1143 and HB 2522 — reject conformity, in spite of Gov. Ducey’s support for the move.

The Grand Canyon Institute’s (GCI) recent policy paper State of the State 2019: Tax Conformity Brings $200 Million to Improve Schools and Stabilize Budget found that conforming Arizona’s tax laws to agree with the TCJA would raise an estimated $200 million in revenue, providing important fiscal stability as the economy is expected to slow. The only income earners whose state taxes would rise of any significance are the top 1 percent; a group that comes out far ahead on the TCJA even after tax conformity.

“Tax conformity would have a modest impact on state taxes paid by wealthy individuals whose after-tax incomes rose by nearly 4 percent due to their substantially-reduced federal tax liability after passage of the TCJA,” said Max Goshert, GCI’s Senior Research Associate. “This added state revenue, if used wisely, would improve the fiscal management of the state. It would create a cushion to weather an upcoming recession and shore-up needed state investments that have not been possible due to limited state government revenues.”

GCI’s policy paper analyzed the impact of tax conformity on state tax payers in a range of income brackets using figures provided by the Joint Legislative Budget Committee. It found that tax conformity would primarily impact income earners in Arizona with household incomes of $882,657 per year or more. There are four deductions that will raise most of the $200 million in revenue for the state:

$56.9 million from limiting the State and Local Tax Deduction.
$47.4 million from limiting mortgage interest deductions on new mortgages above $750,000 for joint filers ($375,000 for single filers).
$61.5 million from limiting unreimbursed employment-related expenses and other deductions that exceed 2 percent of adjusted gross income.
$31.6 million from limiting business losses that can be counted against earnings if earnings exceeded $250,000 for individuals and $500,000 for married couples.

Arizona has consistently aligned its tax laws with those of the federal government. “Arizona has what is called static conformity, meaning that, each year, the Arizona legislature amends Arizona law to mirror any changes made at the federal level,” said Goshert. “This has occurred every year so far this decade, except in 2018, when the legislature chose not to conform state tax law to the changes made in the TCJA.”

GCI has reported on the decline in state revenues over the past 10 years. In a study last year, GCI found that Arizona only brings in $3 now for every $4 that it brought in during FY 2007, adjusted for inflation and population. Revenue raised through tax conformity would help move toward closing that income gap for the state. This will be particularly important in helping to recover some of the revenue that might be lost due to a slowing economy and Prop. 126 whose ban on taxing services may reduce Prop. 301 education funding by $250 million per year starting in 2021.

Read the full report here.