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BILL # HB 2359 |
TITLE: income tax; charitable deductions |
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SPONSOR: Toma |
STATUS: As Amended by House WM |
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PREPARED BY: Sam Beres |
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Description
This bill, as amended, would allow Arizona taxpayers who take the standard deduction to deduct charitable contributions from their taxable income. Under current law, only taxpayers who itemize are eligible for the charitable contribution deduction. This change would be effective starting in tax year (TY) 2019.
Estimated Impact
The JLBC Staff estimates that this bill would result in a General Fund revenue loss of $(29.4) million in FY 2020. This amount represents an estimate of additional deductions that would be claimed in TY 2019 by two groups:
· Taxpayers who do not currently deduct donations from their state taxes but would now be allowed to do so under HB 2359.
· Current itemizers who may shift to the standard deduction and still take the charitable deduction.
Due to uncertainty regarding the overall level of charitable donations, this estimate should be viewed as speculative.
The Department of Revenue (DOR) estimates that the bill would reduce General Fund revenues by between $(20) million and $(30) million annually, beginning in FY 2020. In addition, DOR anticipates incurring administrative costs of $(1.5) million in FY 2020 in order to implement the tax law change.
Dr. Dennis Hoffman, a professor at Arizona State University, projected that the bill would reduce General Fund revenues by up to $(33) million annually.
Analysis
Background
Under current law, taxpayers who choose to itemize their deductions may deduct charitable contributions from their Arizona taxable income. A taxpayer does not need to itemize on their federal forms in order to itemize on their state forms. While there is no data on charitable contributions deducted from Arizona state taxes, data from the Internal Revenue Service (IRS) shows that Arizona residents deducted $3.7 billion of charitable contributions from their federal taxes in TY 2016. The JLBC Staff assumes that taxpayers deducted the same amount from their state taxes during that year. We assume that the amount of charitable deductions grew by 3% to $3.8 billion in TY 2017, based on a report by Giving USA.
State Revenue Loss
HB 2359 would allow taxpayers to take both the state standard deduction and a charitable deduction. This tax law change would result in a reduction of state General Fund revenue to the extent that taxpayers are able to deduct charitable donations that they would not be able to deduct under current law. This revenue reduction would be related to 2 separate groups, as discussed below.
(Continued)
Taxpayers Who Currently Take the Standard Deduction
The bill would result in a reduction of revenues collected from taxpayers who currently make charitable donations but do not itemize their deductions at the state level. Under the bill, these taxpayers would be eligible to deduct these donations.
According to the report by Giving USA, Americans donated an estimated $287 billion to charities nationally in 2017. According to IRS data, Arizona taxpayers claimed 1.6% of all charitable deductions. Based on this, we estimate that total charitable contributions (both deducted and non-deducted) in Arizona were $4.5 billion in TY 2017.
Whether this amount will grow further by TY 2019, the year the bill becomes effective, is unclear. Charitable giving in the U.S. tends to grow on an annual basis. This growth, however, may be affected by provisions in the Tax Cuts and Jobs Act (TCJA). Among other provisions, TCJA doubled the federal standard deduction. These changes will result in fewer taxpayers itemizing at the federal level. Because taxpayers need to itemize to claim the charitable deduction, these federal tax law changes could reduce charitable giving. For the purpose of this analysis, the JLBC Staff has assumed that the 2017 donation level will be unchanged through TY 2019.
As discussed in the Background section, above, we estimate that Arizona taxpayers deducted $3.8 billion of the total $4.5 billion in charitable deductions in TY 2017.
Assuming that this level remains flat through TY 2019, the JLBC Staff projects that $688 million of charitable donations will not be deducted under current law in TY 2019 [$4.5 billion of total charitable contributions minus $3.8 billion that would be deducted under current law]. Under HB 2359, however, the $688 million could be deducted. In the most recent year with available data, the average state individual income tax rate (total tax liability divided by taxable income) was 3.4%. Applying this rate to the $688 million in additional charitable deductions, we estimate that annual General Fund revenues would be reduced by $(23.4) million. This revenue loss would start in FY 2020.
The DOR analysis used a similar methodology, concluding that the revenue loss associated with these taxpayers would be between $(15) and $(25) million annually.
Taxpayers who Currently Itemize
The bill would also reduce revenues collected from taxpayers who currently itemize on their state tax returns. This revenue reduction would occur for a variety of reasons.
Most directly, some taxpayers who currently itemize may have an incentive to take the standard deduction under HB 2359. This would be the case if a taxpayer could gain a larger total deduction by taking the standard deduction and also deducting their charitable donations than they otherwise would be able to do just by itemizing. To estimate the revenue reduction resulting from this behavior, DOR used its tax simulation model. This model projected that General Fund revenues would be reduced by approximately $(6) million as the result of this behavior. The JLBC Staff has incorporated this projection into our own overall estimate.
Local Government Impact
Incorporated cities and towns and cities receive 15% of state income tax collections from 2 years prior from the Urban Revenue Sharing Fund (URSF) established by A.R.S. § 43-206. The bill therefore would reduce URSF distributions to cities and towns by an estimated $(4.4) million beginning in FY 2022.
2/14/19