Fri, Jan. 17

State income tax won't account for inflation

PHOENIX -- Arizonans who manage to get a raise to keep pace with inflation are not going to get relief from what could be a nasty surprise on their income taxes.

Gov. Jan Brewer on Wednesday vetoed legislation that would have indexed the state's income tax brackets to account for inflation. That leaves in place the current laws that can result in someone winding up in a higher tax bracket with just a small hike in salary.

In her veto, 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, is making sure the state has the money it needs.

Rep. Justin Olson, R-Mesa, the sponsor of the measure, called the veto "unfortunate.'

"It's broad-based income tax relief for everybody that's paying an income tax,' he said.

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 goes up to 2.88 percent for those in the $10,001 to $25,000 bracket, 3.36 percent up to $50,000, 4.24 percent up to $150,000 and 4.54 percent above that.

The figures are double for married couples filing jointly.

Under current law, if a pay hike takes someone from $49,900 to $50,000, that $100 hike puts them into the 3.36 percent tax bracket rather than 2.88 percent. The legislation would have said if that $100 is less than the change in the Phoenix metropolitan area consumer price index, the taxpayer would have stayed in the 2.88 percent bracket.

Put another way, that $100 raise is going to cost this particular taxpayer $240 in taxes solely because of bracket creep.

The most recent inflation figure for 2011 was 2.75 percent. That would have permitted that worker at $49,900 to earn another $1,372 without bracket creep.

Olson said the lack of indexing -- which exists in the federal Internal Revenue Code -- is unfair. He said it is wrong to boost tax rates simply because of inflation, especially as that same inflation reduces the value of the dollars that the taxpayers get to keep.

Brewer, however, said she sees automatic reductions in tax rates the same as formulas in law that require the state to increase spending. In fact, it was Brewer who proposed during the recession that Arizona stop paying the automatic increases in state aid to schools.

That decision, which was approved by the Legislature, ultimately was overturned by the state Court of Appeals and now is before the Arizona Supreme Court.

Brewer, in her veto, said any automatic change in revenues and expenses "hinders future decision making and may create a structural imbalance over time.'

Legislative budget analysts said indexing would cut state revenues by about $10.9 million in the 2015 budget year.

The governor gave a similar reason for vetoing an increase in how much the state can provide in tax credits for research and development, from $5 million a year to $10 million in 2014 and $15 million annually after that.

Brewer noted this is a "refundable tax credit,' meaning that if a firm qualifies for the credit but does not have matching tax liabilities to reduce, the state actually has to write out a check. The governor said the state needs to consider such a change in light of other budget priorities.

But the governor did agree to allow businesses to take an instant deduction on any equipment they purchased starting at the beginning of the year.

Current law lets businesses write off no more than $25,000 in such expenses on state income tax returns. Anything else has to be deducted in future years.

The price tag for that, according to gubernatorial press aide Matthew Benson, is about $25 million a year beginning this coming budget year.

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