|
BILL # SB 1371 |
TITLE: income tax; subtraction; retirement distribution |
|
SPONSOR: Mesnard |
STATUS: As Introduced |
|
PREPARED BY: Benjamin Newcomb |
|
SB 1371 would subtract: (1) distributions from pension and retirement accounts and (2) nondeductible contributions to individual retirement accounts (IRA) from the calculation of Arizona gross income (AGI), thus reducing a taxpayer's individual income tax (IIT) liability. The income subtraction would apply to public and private pensions as well as distributions from qualified retirement plans and IRAs. Contributions to IRAs that are not deductible from federal income tax (such as Roth IRAs) would also be exempt from state income tax. The bill would become effective retroactively from Tax Year (TY) 2025, affecting FY 2026 collections.
Estimated Impact
We estimate the bill would reduce General Fund revenue by $(913.5) million annually starting in FY 2026. Our estimate does not reflect the bill's potential dynamic effects, which are typically secondary to the direct impact. For example, all else being equal, exempting retirement distributions from IIT may serve as an incentive for more retirees to move to the state, which would increase consumer spending that may result in greater economic output. If implementation of this bill would require lower state spending, taxpayers may lower their consumption, which may result in lower economic output.
Given the lower level of liability under the bill, taxpayers may qualify for a lower level of nonrefundable IIT credits.
We have asked the Department of Revenue (DOR) for their estimate of the bill's impact but have not yet received a response.
Distributions from Pensions and Retirement Accounts
According to the most recent data from the Internal Revenue Service (IRS), taxable retirement distributions in Arizona were $30.33 billion in TY 2022. Based on the 5-year average annual growth in retirement distributions, which is 4.6%, we estimate this total will grow to $34.7 billion by TY 2025. Under the bill, this amount would be subtracted from tax filers' AGI, and therefore not subject to IIT. Since the state's IIT rate is 2.5%, there would be an $(867.6) million annual decrease in income tax collections beginning in FY 2026.
Nondeductible Contributions to Individual Retirement Accounts (IRA)
Under the Internal Revenue Code, the amount of contributions to a Roth IRA cannot be deducted from Federal Adjusted Gross Income (FAGI) and is therefore subject to federal income tax. Under SB 1371, however, contributions to Roth IRAs would be subtracted from Arizona Gross Income and would therefore not be subject to state IIT. Some or all of the contributions to other IRAs may be nondeductible as well depending on whether the taxpayer is covered by a retirement plan at work and if their income exceeds a certain threshold. Under the bill, all nondeductible contributions to an IRA will be deductible for state income tax purposes.
Based on the latest IRS data, which is from TY 2020, we estimate that the total amount of nondeductible IRA contributions in the U.S. was $59.5 billion that year. Since Arizona makes up about 2.2% of the U.S. population, we estimate approximately $1.31 billion of taxable contributions were made by Arizonans. Growing this total to 2025 based on the 7.0% 5-year average annual growth rate of taxable IRA contributions, we estimate that this amount would be $1.83 billion by TY 2025. Subtracting this from AGI would lower General Fund revenues each year by $(45.9) million in FY 2026.
Combining the impact of subtracting retirement income and retirement contributions from AGI, we estimate annual IIT revenue will decrease $(913.5) million beginning in FY 2026.
Local Government Impact
Incorporated cities and towns receive 18% of individual and corporate income tax collections from 2 years prior from the Urban Revenue Sharing (URS) Fund established by A.R.S. ยง 43-206. Since the bill would decrease statewide IIT revenue by $(867.6) million in FY 2026, overall URS distributions to cities and towns would decrease by $(164.4) million in FY 2028.
2/7/25