State legislation would adjust tax brackets for inflation

PHOENIX -- Arizona taxpayers may soon no longer need to fear inflation -- at least as far as the tax man is concerned.

Without dissent, the House Ways and Means Committee approved legislation Monday to require that the state's income tax brackets be adjusted annually to account for inflation. HB 2465 now goes to the full House.

Rep. Rick Gray, R-Sun City, pointed out that Arizona's individual income tax system, like its federal counterpart, has various tiers.

For example, married couples filing jointly pay 2.59 percent if their state adjusted gross income -- after all the state deductions are taken from federal figures -- is $20,000 and 2.88 percent if the figure is even just a penny more. The rates go higher at the $50,000, $100,000 and $300,000 levels, with the tax rate of 4.54 percent at the top.

"You could have somebody that's making $19,500 and they may even get like a 3 percent pay raise,' Gray said. That throws them into the higher tax bracket.

"Yet if we have a 5 percent inflation factor, they've actually lost money,' he explained with just a 3 percent raise. "Yet they're paying more taxes.'

Using his example, that taxpayer with a raise, pushed into the higher bracket, would owe the state more than $578. But if there were indexing, and the taxpayer got hit for the same rate as before, the taxes would be just $520.

Gray acknowledged that if his measure becomes law, the state could lose money in the future.

"But this bill isn't focused on making money for the government,' he said. "It's really saying what's fair for the taxpayer.'

Gray said the Internal Revenue Service already does such indexing of federal tax brackets.

His legislation would require the state Department of Revenue, beginning next year, to make adjustments based on the cost of living index for the Phoenix metro area. The most recent figures from the Bureau of Labor Statistics had inflation for the area at an annual rate of 2.2 percent.

BLS statistics show there have been times where there actually has been deflation, with the cost of living actually dropping. That occurred in 2009 when the agency reported a 1.9 percent drop.

But Gray's bill is one way only: It would not allow the Department of Revenue to reduce the break points at any time.

Gray defended using the Phoenix metro cost of living index rather than a national figure, saying it should better reflect what is going on here. He also said that those living elsewhere in Arizona could benefit if it turns out that inflation hits Phoenix harder than the rest of the state.

Arizona lawmakers actually approved indexing of tax brackets in 1978. But that system was scrapped in 1990 during an economic downturn when lawmakers were looking for additional cash.

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