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BILL # SB 1465 |
TITLE: |
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SPONSOR: Livingston |
STATUS: As amended by House WM |
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PREPARED BY: Sam Beres |
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Description
The strike everything amendment to SB 1465 would allow public utility companies that operate a water or sewage system to continue to deduct "contributions in the aid of construction" from their state taxable income. While these "contributions" have not been taxable in the past, if the state were to conform to recent federal tax law changes for tax year (TY) 2018 and beyond, these contributions would become taxable beginning in TY 2018. The bill retroactively exempts these contributions from state income taxes, beginning in TY 2018.
Estimated Impact
Continuing to allow water companies to exclude contributions in aid of construction from their taxable income could have multiple different impacts, depending on the following scenarios:
· If Arizona does not conform to federal tax law changes for TY 2018, and therefore continues to conform to the federal tax code as of January 1, 2017, the bill would have no impact. Water companies already can exclude these contributions from their taxable income under the 2017 federal tax code, and thus the bill would not change current law.
· If Arizona does conform to the federal tax law changes for TY 2018, the bill would reduce the amount of revenue generated by conformity, since the repeal of this exclusion was factored into the JLBC Staff's estimates that conformity would raise $155 million in FY 2019 and $217 million in FY 2020 and beyond.
Under this second scenario, the JLBC Staff estimates that the bill would reduce the General Fund revenues generated from conformity by $(200,000) in FY 2019 and $(400,000) in FY 2020. This estimate is based on a national analysis of the federal Tax Cuts and Jobs Act (TCJA) by the Joint Committee on Taxation (JCT). The JLBC Staff then prorated this national estimate to the state level. This estimate is highly speculative and could be either understated or overstated based on the following:
· The national JCT estimate applied to several different changes to the tax treatment for "contributions to capital", which include contributions to entities other than water companies. As a result, our estimate could be overstated, since it applies to other tax law changes.
· Our estimate could also be understated. According to proponents of the bill, Arizona is more reliant on private companies for the supply of water and sewage utilities than the nation as a whole, and thus this issue could be more important for Arizona than other states.
The Department of Revenue (DOR) estimates that the bill will result in a General Fund revenue loss of $(300,000) in FY 2019 and $(600,000) in FY 2020. The difference between the JLBC Staff and DOR estimates is due to differences in the way JCT projections were prorated. DOR also expects to incur up to $(10,000) in administrative costs to process amended returns from companies that choose to take the exemption in TY 2018.
(Continued)
Analysis
TCJA made several changes to Section 118 of the Internal Revenue Code, which governs exclusions from taxable income for “contributions to the capital” of a corporation. Previously, certain “contributions” to utility companies that provide water services were not considered as income and were therefore exempt from taxation. These contributions will now be taxable at the federal level. For example, if a water company receives a payment from a developer for hookup fees for a new project, this income previously would have not been taxable. Under TCJA, this income would now be subject to taxation. If Arizona conforms to these recent federal tax law changes, these contributions would become taxable at the state level as well.
At the time of its enactment, the federal JCT estimated the national impact of each of the TCJA's provisions. In their analysis, the JCT projected that revisions to the treatment of contributions to capital would increase federal revenues by $200 million in TY 2018 and $400 million in TY 2019. Based on Arizona's share of corporate taxable income and the difference between state and federal tax rates, this amounts to a state General Fund revenue impact of $200,000 in FY 2019 and $400,000 in FY 2020.
If the bill is enacted, it would continue to allow water companies to exempt contributions in the aid of construction. As a result, state General Fund revenues would be decreased by $(200,000) in FY 2019 and $(400,000) in FY 2020.
This estimate applies to several revisions to the tax treatment for contributions to capital. While contributions to water companies represents a portion of this estimate, other changes are included in the estimate. For example, the exclusion for contributions to capital by a government or civic group that is not in exchange for stock in the corporation was also repealed by TCJA. For this reason, the JLBC Staff's prorated estimate for the provisions specific to this bill may be overstated.
Proponents of the bill have noted that private water companies service a greater share of Arizona's market than in many other states. As a result, the prorated JCT estimate could understate the impact on Arizona revenues, as contributions in the aid of construction could be greater in Arizona than in the nation as a whole.
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 $(30,000) in FY 2021 and $(60,000) in FY 2022.
4/11/19