Can Arizona lawmakers prevent another tax policy deadlock in the future?

Since the beginning of the legislative session in January, Democratic Gov. Katie Hobbs and the GOP-led Legislature have squabbled over how to adopt federal tax cuts included in President Donald Trump’s tax cut and spending plan that passed Congress over the summer.

Arizona is in the situation in the first place, because the Legislature and governor must approve any change to the tax code, even those that conform with changes at the federal level.

In most years, they agree to adopt those federal changes with little fanfare in order to simplify the tax filing process for Arizonans.

But when Congress passes large tax cuts or makes other significant changes, the process can become more complicated as policymakers debate the merits of each cut and whether the state can absorb cuts to its tax revenues.

Change the process?

Sen. J.D. Mesnard (R-Chandler), who chairs the Senate Finance Committee, said there have been discussions in the past about changing state law to become a so-called “rolling” conformity state, meaning Arizona would automatically adopt federal tax changes into the state tax code.

But there isn’t much support for that proposal, he said.

“The general sentiment is we don't want to just defer all of our policy making to what the feds are doing,” Mesnard said. “We may like it in some cases, not in other cases. Even this is a good example where, well, most of us like the vast majority of what they did, but there's a couple of things we'd like to swap out.”

Howard Fischer/Capitol Media Services

Mesnard was referencing a $440 million tax cut plan passed by Arizona Republican lawmakers last month that Hobbs promptly vetoed. That plan adopted most of the federal tax cuts with some changes, including the exclusion of an increase in the the cap on state and local tax deductions.

Hobbs has repeatedly called for lawmakers to pass her smaller tax plan, which includes only the federal cuts she believes will most benefit the middle class.

“I am willing to discuss other tax conformity issues, but, as I’ve said, those come with a huge price tag. They have to show us how they are going to pay for that when we get to budget negotiations,” Hobbs said.

In the meantime, Mesnard is backing a bill that would require the Arizona Department of Revenue in the future to assume lawmakers will conform with all federal changes when it comes time to make new tax forms.

“It's a balance between what we typically do and the fact that DOR does have to make a decision on what goes in the forms,” Mesnard said.

That’s actually what the Department of Revenue did this year when it issued tax forms to Arizonans that fully conform with the most recent federal changes.

The only problem is those forms conflicted with both the Republican plan — which Hobbs vetoed — and the governor’s own plan, which only partially-adopted the federal cuts.

That’s led to concerns that some number of Arizonans using those forms now will have to re-file their taxes in the future if Hobbs and lawmakers adopt a plan that deviates in any way from the federal tax cuts.

“And we've now, in an unprecedented way, we've broken what has been a 30-year policy that I'm simply trying to codify so it doesn't happen again,” Mesnard said. “This is not a Republican thing, a Democrat thing. I just have never seen this happen, so now we have to address it.”

Hobbs has repeatedly said that most Arizonans won’t have to refile, because a majority of taxpayers in the state utilize the standard deduction. Both Hobbs and Republicans agree that Arizona should adopt the new standard deduction approved by Congress, which is also included on the current forms.

“I can tell Arizona filers right now that the majority of you, if you file right now today, with the forms that are available to you; you will not have to file an amendment,” Hobbs said.

However, both Republicans and Hobbs’ Department of Revenue have warned that other Arizonans who itemize deductions will likely have to refile if they use the current forms. The department told lawmakers that a third of Arizonans, or about a million tax filers, could have to file amended returns.

Fix the timeline

Gage Skidmore

/

CC BY 2.0

Following Hobbs’ veto, Republicans are now backing a plan to fully conform with the federal tax changes — which are reflected in the state’s current forms. That plan is working its way through the legislature and passed committees in the House and Senate this week along party lines.

Mesnard, who sponsored the bill, said it is needed to provide certainty for Arizonans and avoid forcing anyone to refile.

“The Republicans in the Legislature will never, ever, ever support requiring people to amend tax forms after the fact,” he said.

Kevin McCarthy, president of the Arizona Tax Research Association, agreed.

“We're now well over a month into filing season, and we think you should stop talking about this, and make clear that the forms that the department has put on the street are legal and avoid the chaos that is clearly going to ensue if you do otherwise,” McCarthy said.

Trump’s tax cut plan passed in July, but Hobbs and lawmakers did not begin hashing out their own proposals until the legislature came into session in January.

McCarthy said he doesn’t support becoming a “rolling” conformity state to avoid a delay like that. But he said legislators could consider passing a law requiring the governor and lawmakers to react more quickly when Congress makes significant changes to the federal tax code.

“The legislature would have to go into session and say, thumbs up, thumbs down. We're either going to accept it or we're not,” McCarthy said.

Mesnard said he supports that concept, though he suggested a future bill to force the governor and legislature to act could face legal challenges.

“But do I think as a matter of policy, or maybe stick it in the Constitution if you could write it in a way that triggers correctly? Yeah, I'd be all on board. That's the right way to do it,” he said.