Arizona House sends measure for flat income tax to state Senate - East Valley Tribune: Politics

Arizona House sends measure for flat income tax to state Senate

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Posted: Monday, March 14, 2011 8:12 pm | Updated: 8:21 pm, Mon Mar 14, 2011.

It could soon be a lot easier to compute your state income taxes.

But the trade-off is, lots of you will end up paying more.

The House on Monday voted 40-18 to scrap virtually all of the deductions now available to Arizona residents to reduce their taxable income.

And by 2015, the current graduated tax rates, from 2.59 percent at the bottom end to 4.54 percent, will also be gone. In its place would be a flat rate of 2.08 percent.

Rep. Steve Court, R-Mesa, who crafted HB 2636, said it is designed so the state takes in just as much as it would under the current system. What that means, he said, is there will be winners -- and losers.

One group are those who reduce their taxable income by the amount of interest they pay on their home mortgages. Charitable deductions also will be gone.

But Court's proposal, in eliminating the personal exemptions and standard deductions, would affect those who have, until now, owed no state taxes at all. Generally speaking, a couple with at least one dependent with a federal adjusted gross income of about $15,000 a year have been able to reduce their state tax liability to zero.

No more. And Court said that is by design, even though the federal poverty level for a family of three is $18,310 a year.

"They're using state services,'' he said. "And it's a nominal amount.''

At $15,000, that 2.08 percent tax rate would compute out to about $312 a year.

Court said having everyone pay taxes also is good from a public policy standpoint.

"They would have greater interest in votes in the future that somebody's proposing to raise taxes and now they'll be affected,'' he said.

Rep. Steve Farley, D-Tucson, said there is evidence that people all up and down the income scale will be hit.

He cited a report prepared by Walter Dudley, a certified public accountant, who took the taxes of six different families and compared what they pay now versus what they would pay in the future. The incomes ranged from $17,784 to $248,456.

"What he discovered was every single one of those households saw their taxes increase under these rules,'' Farley said, ranging from $370 more a year for the family at the lowest end of the six to $5,274 in extra taxes for the family at the top end of the scale.

"So if you're voting for this bill, you're voting for a massive tax increase on every household in the state of Arizona according to calculations,'' Farley told other legislators.

Rep. John Kavanagh, R-Fountain Hills, said such a conclusion would be expected from accountants "who are going to lose an awful lot of business.''

And Court said that, by definition, there is no way that everyone will end up paying more. He said the measure is designed to ensure that the total revenues collected by the state remain the same.

Rep. Justin Olson, R-Mesa, also pointed out that each of the examples Dudley cited involved specific individuals, suggesting that the people who are likely to do worse may be those who are the ones who have to go to accountants in the first place.

"You will have individuals in each taxing bracket that will see increases, those individuals who are doing the best job of taking advantage of the tax code that we currently have,'' Olson said. "Those individuals that don't spend as much time taking advantage of every deduction and every tax advantage that exists in the tax code ... may see a tax decrease.''

Ultimately, Court said, it comes down to a question of philosophy. He said there is no reason for those who are doing better to pay a higher percentage of their income to support government.

"Even with a flat tax, if you make 10 times more than I do, you'll pay 10 times as much tax,'' he said. "I'm just trying to get everybody back down to a level playing field.''

The measure now goes to the Senate.

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