Getting Conform and Reform Right

Getting Conform and Reform Right

As the Club has covered for over a year, Arizona taxpayers are facing the largest income tax increase in state history if a proper federal tax conformity plan is not adopted by the legislature. The department of revenue estimates that the conformity tax increase would be over $200 million dollars in the first year, with some estimates as high as $300 million.

The good news is that policymakers appear to be on the same page that any additional conformity revenues must be given back. This is a big win for taxpayers. What remains an open question is the manner in which the money is returned.

The second issue is just as important as the first.  Though a simple approach on stopping the tax hike (such as cutting all the tax rates) could be done, the Club has advocated that the conformity issue be used as an opportunity to reform and simplify our income tax code.

Reforming Arizona’s income tax code is long overdue, and if done right could be bring us closer to neighboring states Utah and Colorado with a simple flat income tax. If we can’t eliminate the tax, a simple/flatter system is the next best choice.

Unfortunately, most of the discussions related to conform and reform have been behind closed doors in budget meetings, with little input from the public. Though various components have been leaked, it has been extremely difficult to determine which proposals are best without reviewing the projected impact on taxpayers.  

For example, adopting a reform model that cuts taxes for some taxpayers while raising taxes on others (picking winners and losers) would be suboptimal. The only way to figure this out is through modeling from the Department of Revenue.  Yet most of this data is only accessible to lawmakers and the executive branch; it leaves interested observers and stakeholders at a disadvantage on making an informed decision.

Without a front row seat to the debate or access to modeling, the Club has been seeking out a reform plan that both returns all of the money and holds taxpayers across all income ranges harmless.

The 3 Bracket Solution

Last week a conform a reform plan was released that appears to do the trick (The plan can be viewed by clicking HERE).

Developed by Senate Finance Chairman JD Mesnard, his 3-Bracket model would implement the following income tax reforms:

  • Offset the entire conformity income tax increase and return the money to taxpayers.
  • Provide an offset for additional tax revenue generated by the proposed implementation of an online sales tax (a.k.a. Wayfair) thereby preventing another tax increase.
  • Collapse Arizona’s income tax brackets from 5 to 3
  • Mirror Federal Tax Reform by doubling the standard deduction for all taxpayers.
  • Keep the medical deduction and add a new charitable deduction.
  • Implement a new child and new family tax credit

Why the 3-bracket plan? This is only plan so far released that will hold individual income taxpayers (which include small businesses) harmless across all income thresholds and stops multiple tax increases, saving taxpayers over $300 million per year. Other reform plans, though well intentioned, appear to shift taxes across income levels that would trigger a tax increase on thousands of Arizona families and small businesses.

As structured, the 3-bracket plan would provide taxpayers making $50k or less with a substantial income tax cut. Taxpayers in this income group would see their tax bill slashed by an average of 20 percent.

Finally, the 3-bracket solution would simplify our tax code while flattening out the brackets. Reducing the progressivity of our income tax code should be the cornerstone of any reform package.

As the legislature (hopefully) heads into the final stretch, it the Club’s hope that the 3-bracket plan is seriously considered and adopted as the conform and reform solution in the budget.