|The Arizona Legislature passed two bills today dealing with federal tax code conformity. This normally routine procedure has higher stakes this year because the federal tax law changes enacted last year are tenuously estimated to cause a $155M increase in general fund collections in FY2019.
This is because the federal tax bill eliminated or capped certain deductions that have the effect of raising Federally Adjusted Gross Income (FAGI), which is the starting point for Arizona state income tax. The bill contains a 0.11% income tax rate reduction, designed to reduce revenue collections by approximately $157M. If the forecast of $155M is correct, then the net impact to the general fund will be negative $2M. If the estimate is high, the state could lose more revenue. If the estimate is low, the state could gain additional revenue. We likely will not know until the April tax filing deadline
The bills were passed with simple majorities, but not with the 2/3 majorities needed for them to take effect immediately upon the governor’s signature. It is unknown whether the governor will sign them, or if he does, how the department of revenue would collect taxes based on a tax law that will not go into effect until after the Legislature adjourns. The governor will have five days (excluding Sunday) to act on the bill after it reaches his desk.
ASBA supports revenue conformity, but does not support the tax rate reduction to offset revenue gains.