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ARIZONA STATE SENATE
Fifty-Sixth Legislature, Second Regular Session
income tax credit; labor costs
Purpose
Establishes, beginning in TY 2025, 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, 2024, the state minimum wage is $14.35. A county, city or town may regulate the local minimum wage, but may not set a minimum wage that is lower than the state minimum wage (A.R.S. §§ 23-363 and 23-364; ICA).
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 individual 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. The calculation of Arizona individual income tax begins with the federal adjusted gross income and the corporate income tax begins with federal taxable income, which are then subject to various additions, subtractions and deductions. Statute also authorizes various tax credits that reduce a taxpayer's income tax liability (A.R.S. Title 43, Chapters 10 and 11).
If establishing the Credit results in claims against individual and corporate income tax liability, there may be a fiscal impact to the state General Fund.
Provisions
1. Establishes, for taxable years beginning January 1, 2025, the Credit allowed against individual and corporate income tax liability 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 5 percent of the difference between the actual hourly labor costs the employer paid during the taxable year and the total 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), each month 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. Caps, at $5,000,000, the amount that may be withheld from a city's or town's URS Fund distribution and 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 city or town that has adopted a local minimum wage; and
b) certify to ADOR the amount of hourly labor costs employers actually paid during the taxable year and the product of the total number of hours worked by all 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 to ADOR and the State Treasurer 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 Credit 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 terms.
12. Contains a purpose statement.
13. Makes technical changes.
14. Becomes effective on the general effective date.
Prepared by Senate Research
January 31, 2024
MG/JC/cs