BILL #    SB 1166	TITLE: conformity; internal revenue code; exceptions
SPONSOR:    Mesnard	STATUS: As Introduced
PREPARED BY:    Sam Beres

Description

This bill, as introduced, would conform Arizona to certain federal tax law changes for tax year (TY) 2018.  The bill, however, would not conform to the following changes from the federal Tax Cuts and Jobs Act (TCJA):

· The $10,000 cap on the state and local tax deduction.

· The limitations on the mortgage and home equity loan interest deductions.

· The elimination of miscellaneous deductions that exceed 2% of personal income.

· The repeal of the overall cap on itemized deductions.

· The limit on the deduction for pass-through business losses.

· The increases to bonus depreciation and business expensing. 

The tax law changes enacted by this bill would be effective only for TY 2018.  In future tax years, Arizona would continue to conform to the federal Internal Revenue Code as of January 1, 2017.

Estimated Impact

The bill would result in an estimated one-time General Fund Revenue gain of $10 million.  This estimate is largely based on national estimates from the Joint Committee on Taxation, which have been prorated down to reflect the impact on Arizona revenues.

The JLBC Staff estimates that simply conforming to all of the recent federal tax law changes would generate additional General Fund revenues of $155 million.  The provisions that this bill would not conform to, however, account for $145 million of this estimate.

These changes are effective only for tax year 2018.  Most of the impact will occur in FY 2019, but some will occur in FY 2020 for individuals and entities filing extended returns. 

The Department of Revenue (DOR) had previously estimated that conforming to the provisions contained in this bill would result in a General Fund revenue gain of $53 million.

Analysis

Internal Revenue Code Conformity

The federal Tax Cuts and Jobs Act (TCJA) enacted on December 22, 2017 includes over 100 provisions and represents the largest revision to the Internal Revenue Code (IRC) in more than 30 years.  Many provisions became effective January 1, 2018 and sunset January 1, 2026.  In part, the state tax code is tied to the federal tax code.  For example, Arizona uses the federal definition of income for calculating state individual and corporate income taxes.  The JLBC Staff estimates are based on the following sources

· Department of Revenue Tax Simulation Model:  DOR utilizes a tax simulation model, which is currently based on a sample of Arizona tax returns from tax year 2015, to simulate the impact of tax law changes.  The results from this model are then adjusted by DOR for tax liability growth to represent the current tax year.  The JLBC Staff utilized these estimates where available and reduced the DOR model estimates by 10% to reflect uncertainty. 

(Continued)

Not all provisions of TCJA can be modeled by DOR.  For example, most of the provisions that SB 1166 would conform to cannot be modeled by DOR.

· Prorated national estimates:  The federal Joint Committee on Taxation (JCT) produced national estimates for each of the provisions included in the TCJA.  In instances where the DOR model could not simulate the impact of a specific provision, the JLBC Staff relied on prorating the JCT's national estimates to reflect an Arizona impact.  For each of these provisions, we reduced the prorated national estimate by 25% to reflect uncertainty.

Of the $10 million estimate, the increase on individuals would be $4 million, while businesses would pay $6 million in additional taxes.

For more detail, please see our full tax conformity report published on our website. 

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 result in a one-time URSF distribution increase to cities and towns of $1.5 million.

2/11/19