Senate OKs re-crafted bill to adjust income brackets for inflation

Rep. Justin Olson, R-Mesa, wants to adjust state income tax brackets to be sure Arizonans don't pay more to the government simply because of inflation.  (Capitol Media Services file photo by Howard Fischer)

Rep. Justin Olson, R-Mesa, wants to adjust state income tax brackets to be sure Arizonans don't pay more to the government simply because of inflation. (Capitol Media Services file photo by Howard Fischer)

PHOENIX -- It looks like Gov. Jan Brewer is going to have to decide whether Arizona taxpayers should be penalized because of inflation -- at least for this coming year.

Without comment, the Senate approved legislation Monday to require the Department of Revenue to adjust income tax brackets to account for the fact that the dollar next year may not be what it it is worth now.

The House already approved HB 2377 without a single dissenting vote. That means the legislation goes to Brewer following a final roll-call vote in the Senate, possibly as early as today. (eds: tuesday)

Only thing is, Gov. Jan Brewer vetoed a similar measure last year.

But Rep. Justin Olson, R-Mesa, said he's recrafted his measure in a way he thinks will get Brewer to reconsider: Adjust the brackets just one time, effective this coming year. And those new brackets would remain in place unless and until lawmakers decide to make another inflation adjustment.

More to the point, he said that should overcome Brewer's objection to having a perennial inflation adjustment built into the tax code.

The governor's office would not comment on the new version.

Olson's proposal is designed to ensure that taxpayers don't get hit harder -- and the state does not benefit -- from "bracket creep.'

Under current law, an individual making up to $10,000 a year in state income, after various deductions, is taxed at the rate of 2.59 percent. That rate goes up to 2.88 percent for anything earned in the $10,001 to $25,000 range, 3.36 percent for the next $25,000, 4.24 percent for everything from $50,001 up to $150,000, with all earnings above that taxed at 4.54 percent.

The figures are double for married couples filing jointly.

So someone who was earning just under $50,000 and gets a raise finds all that new income taxed at the 3.36 percent rate rather than 2.88 percent.

Under the terms of HB 2377, if inflation this year were computed at 2 percent, the new dividing line between the tax brackets would rise to $51,000. That means someone whose pay hike was no higher than inflation would not have any of that increase taxed at the higher rate.

That difference to any one taxpayer might not be a lot. Legislative analysts figure that someone right at that line who gets a $100 raise might end up paying perhaps an extra dollar a year.

But Olson figures that, at current inflation, the state will collect $5 million less from taxpayers statewide.

"This will do away with a hidden tax increase that occurs every year,' he said, as inflation makes the dollar worth less but the tax rate goes up. "The same purchasing power this year will have the same tax rate next year.'

Olson said he recognizes that inflation also hits government and that the cost of running the state also increase from year to year.

"But if we are going to make a conscious decision to apply a higher rate to a given amount of earnings, then we ought to do that by conscious vote of the Legislature,' he said. "We shouldn't just automatically apply a higher rate to the same amount of earnings just because of inflation.'

In her veto last year, the governor said she supports "appropriate adjustments' to relieve individual income tax burdens. And she said adjusting brackets for inflation is one way to deal with that.

"However, such action should not occur automatically,' the governor said. "Instead the Legislature should make those adjustments after careful consideration and in relation to other tax and expenditure decisions.'

The key, Brewer said at the time, is making sure the state has the money it needs.

That could become the make-or-break issue this time.

Brewer and legislative Republicans still had not come to an agreement midday Monday about a spending package for the coming fiscal year. And the plan offered by GOP lawmakers was still about $175 million less than what Brewer wants.

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