What you need to know about tax conformity before filing in Arizona

In most instances, the phrase "tax conformity" would be more likely to lead to eyes glazing over than thoughts of a bitter political dispute. But this year is not most instances.

The GOP-controlled Arizona Legislature last week sent Gov. Katie Hobbs a bill that would conform Arizona’s tax code to most — but not all — of the changes Congress made in the One Big Beautiful Bill Act. In a move that was not a surprise, Hobbs vetoed the bill, saying it included some provisions she didn’t like, and excluded some she did.

And this debate has practical implications for all of us who file state income taxes.

Adam Chodorow, a professor at Arizona State University’s Sandra Day O’Connor College of Law, joined The Show to discuss more.

Full conversation

MARK BRODIE: Adam, let's start with the One Big Beautiful Bill Act, which is kind of why we're even talking about all this.

ADAM CHODOROW: Every time Congress changes the tax code, the state Legislature has a decision to make. And that decision is: Do we go along with what they just did, or do we decide to deviate in some way?

BRODIE: And this year, the conversation is not do we go along or not. Because nobody's saying we shouldn't do anything related to provisions in the One Big Beautiful Bill Act.

The question is: How far do we go? How much conformity do we go along with?

CHODOROW: Exactly right. So the Big Beautiful Bill Act did a couple of things. It lowered rates, which is an easy way to lower taxes, but then it had a bunch of rifle shot provisions targeted at different kinds of taxpayers. And we have to remember, of course, that this was passed using the reconciliation process, which means that essentially there was no Democratic participation at all.

And as you can imagine, the Republicans in the state are saying we love that bill and we should implement all of the provisions. And the Democrats, including our governor, are saying, wait a minute, this is extraordinarily expensive because it's one thing to say, hey, we're going to lower the rates, but to counter the loss of revenue, what we're going to do is we're going to expand the tax base.

What the Big Beautiful Bill did is said we're going to shrink the tax base. So we're going to shrink the things subject to tax, and we're also going to lower the rates. And so it's created a, a huge deficit problem in Washington, D.C., and the question before our state legislators and the governor is, do we want to duplicate that here in Arizona?

BRODIE: Well, so what are those conversations like or what should they be like in your mind? Sort of the cost-benefit analysis of exempting certain things from taxes or giving taxpayers more of a break versus the ability to pay for state services.

Because both of these, both the governor's proposal and the legislative Republicans proposal are upwards of a couple hundred million dollars at least of revenue that the state will not be getting.

CHODOROW: Right. So I approach this as a tax professor, which is a little different from how a politician would approach it. And I'm about to demonstrate why I will never get elected to anything. I think that it's one thing to lower rates, but most of the rifle shot provisions we find in the federal bill I think are wholly illegitimate from a tax perspective.

BRODIE: Things like no tax on overtime, tips, things like that.

CHODOROW: Exactly. Or expensing capital purchases, right. Each of these provisions panders to its specific audience. It lowers the taxes for that audience, but it's not justifiable from a theoretical perspective. So if we exempt taxes on tips, what we're basically saying is that we're going to tax bartenders at a lower rate than we're taxing teachers.

On the business side, when you buy an asset, you shouldn't get a deduction. You've just changed your cash from cash of $100 into an asset worth $100. But what Congress did was they said, no, we're going to give you 100% deduction. And what that does is it allows you to lower your income so you pay less in taxes even without a rate decrease. And that's wrong from a tax perspective. But that's where the lines are being drawn right now in this fight.

BRODIE: Right. So both plans have no tax on tips, no tax on overtime. Nobody's saying in the state Legislature or the governor's office that that should not happen.

But what you're saying is from a purely tax policy perspective, if you're going to reduce the amount of income coming into the state through the tax code, that's not how you should.

CHODOROW: Right, right. I think that what we should be doing if we want to reduce the revenues, which, by the way, I don't think we want to do that because, right. We should never talk about taxes in isolation. Whenever we think about taxes, we should also say, and what do those taxes fund? But we're at the point where both sides are saying, yes, we're willing to give up some revenue, and it's just a fight about how much revenue and from whom.

BRODIE: There's also the question of filing taxes, right. Like we all file taxes. And this is one of those things where if the Legislature and governor don't figure this out sort of on the soon end, it's going to affect how and when we're able to file.

CHODOROW: Right, right. It's a huge problem because it takes the Department of Revenue some time to organize the forms and figure out what the rules should be. And then most of us use some form of tax prep software. And. And it turns out that they've got to figure out what the rules are and get it into their software.

So until they come to an agreement and something gets signed, there's a real risk that you would file your taxes and then be told, oh, no, it's all wrong, because we've now changed the rule essentially retroactively.

BRODIE: Right. Which seems likely at this point.

CHODOROW: Right. It's almost a certainty, right. Here we are towards in the second half of January, most people are supposed to file April 15, and it doesn't look like they're close to an agreement right now.

BRODIE: So when you look at the totality of this in terms of the elements of the One Big Beautiful Bill Act that the state could take on as its own or not, the amount of money that each of those would cost or revenue that the state wouldn't get. You talked about how you would not do no tax on tips and overtime, things like that.

Are there certain provisions that to you make more sense for the state to include in conformity versus others?

CHODOROW: Yeah. The one that I really like is the expanded standard deduction, right. So taxpayers earn money, they spend money on various things. And without a standard deduction, you have to keep track of them all, you have to list them all, you have to keep records. I mean, it's really painful.

And the idea of the standard deduction is, you know what? Rather than do all that, you just get a standard deduction of x. And before 2017, the standard deduction was relatively small. And one of the things I really liked about the 2017 act and the Big Beautiful Bill Act is that they said we're going to blow up that standard deduction to around $15,000 for an individual, which means 90% of the people just take the standard deduction because their itemized deductions are less than that. And so that simplifies doing your taxes dramatically.

So that one I like, I would love to see that implemented here. But most of them, the ones that get all the press, those are the ones that you look at and think this is unfair because it's treating this taxpayer differently from that taxpayer. So we talked about teachers versus bartenders.

Well, let's imagine two businesses. One is a factory that is buying equipment and the other is an accountant firm. Well, the one that's buying assets, this equipment, right, is getting this massive tax break. And the accountants who have almost no equipment aren't. And when we had tax reform back in 1986, which is the last bipartisan, fabulous tax reform, basically everybody gave up a little bit so that the whole system could be better.

And we're now back to taxpayers basically saying, no, I want my advantage. And it's a shame that you're you, but you know, I'm going to win and you're going to lose.