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Arizona Tax Cut Proposals Likely Dead

Posted on Apr. 27, 2020

Arizona's Legislature has decided against adjourning the 2020 session next month, but the COVID-19 pandemic and the resulting economic downturn nonetheless appear to have killed several major tax cut proposals.

Arizona, like many other states, suspended its 2020 session because of the pandemic. Legislative leaders indicated April 21 that they’d vote May 1 to adjourn sine die, but that decision looks to have been nixed by other lawmakers who protested the move.

While it’s possible that some tax policy bills may advance if and when the Legislature resumes the session, House Ways and Means Committee Chair Ben Toma (R) told Tax Notes April 22 that key tax cut proposals that were advanced earlier this year are likely dead. He also noted that the pandemic has wiped out the state’s anticipated $1 billion surplus.

Instead, “now we’re looking at a potential $1.6 billion shortfall,” Toma said.

The tax cut proposals include those contained in a House omnibus tax bill backed by Toma, H.B. 2778, which seeks to lower the individual income tax rate for every bracket, increase the state's subtraction for net long-term capital gains from 25 percent to 50 percent (for gains from assets acquired in 2020 and after), annually increase the percentage of the state's charitable contribution deduction for non-itemizers based on inflation, and conform to the federal bonus depreciation for corporations.

Competing tax cut proposals are included in a Senate omnibus tax bill, S.B. 1398supported by Senate Finance Committee Chair J.D. Mesnard (R). That bill proposes to reduce commercial property taxes, increase the state's dependent credit and, similarly to H.B. 2778, increase the subtraction for net long-term capital gains and conform to the federal bonus depreciation for corporations. Another proposal (H.B. 2779), introduced by Rep. Warren Petersen (R), would enact a statewide property tax reduction.

All three bills passed their respective chambers of origin in February. Mesnard told Tax Notes April 23 that the proposals were set to be negotiated to develop a compromise package, but they now appear to have little chance of passing.

“Certainly the motivation for any potential tax cut has changed,” Mesnard said. “Before it was, 'We have a lot of revenue.' . . . Now, if we were to do any kind of tax cut — and I’m seriously doubtful of it — it would be to help small businesses because of COVID.”

Toma had a similar take. “I think any bill dealing with funds and money at this point, and income to the state, is going to be in limbo,” he said. “The financial impact [of the pandemic] at this point is still unknown. . . . We know it’s going to be bad, but we don’t know how bad.”

Other tax cut proposals advanced this session include one by Gov. Doug Ducey (R) to exempt veterans’ pensions from state taxation.

Mesnard said Ducey's measure had proven unpopular with some lawmakers. “It was going to be a product of negotiation,” Mesnard said. “Like the other proposals, it’s probably not” going to advance, he added.

However, the decision to suspend the legislative session means that bills awaiting action have at least some chance of passing if lawmakers reconvene and decide they’re enough of a priority. Toma mentioned H.B. 2354 as an example of a bill that could still pass. That legislation would provide many businesses an additional 30 days when they receive an extension to file their state taxes.

“When they’ve been granted an extension of time to file, it goes to seven months instead of [the current] six months,” Toma said. That way businesses "can do their federal [returns] first," he added. H.B. 2354, which has no revenue impact, passed the House unanimously in February.

Lawmakers will also likely have to consider conformity with the federal Coronavirus Aid, Relief, and Economic Security Act, either in the regular session or a subsequent special session, Toma said.

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