A bid to enact a flat income tax rate in Arizona is dead. But residents may at least be able to escape the effects of inflation-caused income tax “creep.”
Rep. J.D. Mesnard, R-Chandler, said Wednesday he has been unable to get traction for his plan to shrink the number of state tax brackets from five to three. That would be a first step to a single tax rate.
Mesnard told Capitol Media Services he still believes the state eventually should enact a single rate that Arizonans would use to compute each year to find out how much they owe the state. He said a flat rate sends a positive message to businesses seeking to locate here.
He said, though, that efforts to craft a plan so that no one would pay more have so far proved too difficult. So he is shelving the idea for this year.
But Mesnard is pushing full-steam ahead with the idea of indexing tax brackets. He said that language in HB 2664 provides important protections for Arizona taxpayers.
“Right now, the system through inflation has an annual tax increase,” he said.
For example, under current law a single person who has an annual adjusted gross income of between $25,000 and $49,999 a year pays a top tax rate of 3.36 percent. But every dollar over $50,000 is taxed at 4.24 percent, even if that pay increase simply matches inflation.
And at $150,000 the rate for every dollar earned above that goes to 4.54 percent.
Mesnard's legislation would leave the rates alone, but it would require the Department of Revenue to alter the cut points according to inflation.
So, if inflation was at 2 percent, the point at which the higher rate would kick in would go up by the same amount, to $51,000. More to the point, someone whose pay hike was no more than inflation would not have any of it taxed at the higher rate.
Figures prepared by legislative analysts said the difference for taxpayers right at that line is minimal, saving them perhaps $1 a year for a $100 raise. But he said that, whatever the difference, it's wrong to ding taxpayers for keeping pace with inflation.
“The feds have acknowledged that,” he said. “They have an inflationary adjustment every year.”
Ditto, he said, for some other states.
“It's good public policy, it's the fairest to the taxpayer,” Mesnard said.
But what stands in the way of enactment is not the cumulative effect of all that.
Legislative budget analysts estimate that “bracket creep” enriches state coffers by an estimated $10.9 million a year. Gov. Jan Brewer, whose spending plan does not allow for such a loss, made it clear last year she was not interested in that.
In vetoing an identical plan last year, the governor said she supports “appropriate adjustments” to relieve individual income tax burdens. And she said adjusting brackets for inflation is one way to deal with that.
“However, such action should not occur automatically,” the governor said. “Instead the Legislature should make those adjustments after careful consideration and in relation to other tax and expenditure decisions.”
The key, Brewer said, is making sure the state has the money it needs.
Mesnard said he hopes to speak with the governor and convince her otherwise, but he also has sweetened this year's version, attaching the indexing provision to some other pro-business tax breaks.