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1 Joseph Henchman, Arizona Weighs Income Tax Reform 1 (2011)

handle is hein.taxfoundation/ffcgfxz0001 and id is 1 raw text is: FOUNDA 'ION..,.,..... .... ... Marc! 21, 2011 No. 265 Arizona Weighs Income Tax Reform By Joseph Henchman Introduction On March 14, the Arizona House of Representatives approved HB 2636, a package that would ambitiously reform the state's individual income tax code.' The proposal, which now goes before the state Senate, would: * Phase out the existing graduated income tax structure, replacing the current rates, which range from 2.59 percent to 4.54 percent, with lower rates between now and 2014, and with a flat 2.08 percent rate beginning in 2015. * Eliminate standard and itemized deductions and personal exemptions; tax will be paid on federal adjusted gross income (AGI) with only a few permitted deductions. Retain existing credits. The plan would be phased in through 2015, and sponsors say it is intended to be revenue-neutral. A special commission would be set up to establish the final single tax rate, with the parameters of remaining within the designed income tax base and not setting an income tax rate higher than 3 percent. Sponsors argue the objective is to simplify the tax system by avoiding numerous complex calculations reflecting multiple exemptions, deductions, additions, subtractions, and tax rates.2 Opponents argue that a one-rate income tax will be unfair to many taxpayers. Proposal Eliminates Deductions, Trading Them for Lower Rates Arizona currently provides myriad deductions from state income tax. These include three major categories: * Federal itemi zed deductions that are imported into the Arizona code, such as home mortgage interest and charitable contributions. Standard deduction amounts (currently $4,677 for a single taxpayer; twice that for married filing jointly) and personal exemptions for each filer (currently $2,100 for a single taxpayer; $4,200 for married filing jointly; $6,300 for married filing jointly with dependents). * Arkona-specific deductions (such as deductions for Holocaust survivors, constructing energy-efficient residences, military pay taxed under federal law, and pension income up to $2,500). 1 This proposal is separate from legislation signed into law last month by Gov. Jan Brewer (R), that phases in a corporate income tax reduction from 6.968 percent to 4.9 percent and single-sales factor apportionment, starting in calendar year 2014 and completing in four years; expands the Research & Development tax credit; creates a Quality Jobs tax credit and renews the Job Training tax credit; and adopts accelerated depreciation for business property expenses. That law is projected to be a net revenue reduction of $538 million per year when fully phased in. 2 HB 2636, http://%v,a-vwmir o65.cor, li tjaton, vievx Z id, . 4btia e i

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