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ARIZONA STATE SENATE
Fifty-Sixth Legislature, First Regular Session
REVISED
AMENDED
income tax; credit; labor costs
Purpose
Establishes the Credit for Increased Hourly Labor Costs (Credit) for employers in a city or town that has adopted a local minimum wage that is more than the state minimum wage and requires the State Treasurer to withhold monies from the city's or town's Urban Revenue Sharing Fund (URS Fund) distribution to reimburse the state for a portion of the Credits claimed for the taxable year.
Background
Statute sets the state minimum wage, which is annually increased based on the increase in the cost of living. Effective January 1, 2023, the state minimum wage is $13.85. A county, city or town may regulate the local minimum wages, but may not set a minimum wage that is lower than the state minimum wage (A.R.S. §§ 23-363 and 23-364).
A monthly entitlement is distributed from the URS Fund to incorporated cities and towns in Arizona. The annual entitlement is 18 percent of income tax collections distributed in 12 equal installments. The URS Fund draws monies from both corporate and personal income tax and is distributed according to the population of each incorporated city and town using population estimates made by the U.S. Census Bureau (A.R.S. §§ 42-5033.01 and 43-206).
Individual income tax is levied on an Arizona resident's
taxable income at a single tax rate of 2.5 percent. Corporate income tax is
levied on a corporation 's taxable income at 4.9 percent. Statute authorizes
certain tax credits that reduce a taxpayer's income tax liability (A.R.S.
§§ 43-
1011; Version 2 and 43-1111;
JLBC).
The Joint Legislative Budget Committee fiscal note estimates a state General Fund cost of $(21.1) million in FY 2025 and $(127.1) million in FY 2026 based on the current local minimum wage laws in Flagstaff and Tucson. URS Fund withholding would likely not occur until FY 2026 to offset the state General Fund costs (JLBC fiscal note).
Provisions
1. Establishes the Credit allowed against individual and corporate income tax liability, for taxable years beginning January 1, 2024, for increased hourly labor costs that result from paying a local minimum wage that is more than the state minimum wage.
2. Sets the amount of the Credit at 10 percent of the difference between the actual hourly labor costs the employer paid during the taxable year and the total amount of hours worked by employees during the taxable year multiplied by the state minimum wage.
3. Requires the State Treasurer, on notice from the Arizona Department of Revenue (ADOR), to withhold from a city's or town's URS Fund distribution an amount equal to one-twelfth of the total Credit amount claimed by taxpayers in that city or town for the prior taxable year.
4. Requires the State Treasurer to deposit the withheld URS Fund monies in the state General Fund.
5. Requires, to qualify for the Credit, an employer to:
a) employ employees who work in a local minimum wage adopting city or town; and
b) certify to ADOR the amount of the difference between the hourly labor costs employers actually paid during the taxable year and the total amount of hours worked by employees during the taxable year multiplied by the state minimum wage.
6. Prohibits
the State Treasurer from withholding any amount that a city or town certifies as
being necessary to make any required deposits or payments for debt service on
bonds or other
long-term obligations that were issued or incurred by a pledge of URS Fund
monies.
7. Requires ADOR, by the beginning of each fiscal year, to notify the State Treasurer of:
a) each city or town in which an employee of an employer who claimed the Credit works; and
b) the amount to withhold from that city's or town’s URS Fund distribution to reimburse the state for the Credits claimed for the taxable year.
8. Allows the Credit to be carried forward for five consecutive years, if the Credit exceeds the claimant's liability.
9. Allows co-owners of a business to claim a pro rata share of the Credit based on the ownership interest, not to exceed the amount that would have been allowed a sole owner.
10. Adds the Credit to the Joint Legislative Income Tax Credit Review Committee's review schedule for years ending in 3 and 8.
11. Defines local minimum wage as a minimum wage established by a city or town that is more than the state minimum wage.
12. Defines state minimum wage as the statutorily established minimum wage.
13. Contains a purpose statement.
14. Makes technical changes.
15. Becomes effective on the general effective date.
Amendments Adopted by Committee of the Whole
1. Specifies that the Credit for increased hourly labor costs is 10 percent of the difference between the amount of hourly labor costs that the employer actually paid during the taxable year and the total amount of hours worked by employees during the taxable year multiplied by the state minimum wage.
2. Makes technical and conforming changes.
Revisions
· Updates the fiscal impact statement.
Senate Action
FIN 1/30/23 DPA 4-3-0
Prepared by Senate Research
February 14, 2023
MG/ZS/sr