History of Arizona’sIndividual Income Tax System

Presentation to the Joint Task Force on Income Tax Reform

August 21, 2013August 21, 2013

JLBCJLBC

2JLBCJLBC

Individual Income Tax (IIT) System Today- Overview

GF Revenue – Source of $3.4 billion in ‘13. Made up 35% of Base Revenue

Urban Revenue Sharing – 15% of collections from 2 years prior are distributed to cities and towns ($430 M in ‘13)

Who pays – In addition to individuals, IIT is collected from estates, trusts, and owners of pass-through entities

• Pass-through entities include sole proprietorships, partnerships, limited liability companies, and S corporations

3JLBCJLBC

Federal Adjusted Gross Income (AGI) — $135 billion• Gross income less federal subtractions

Less: Sum of State-level Additions, Subtractions and Exemptions — $(18) billion

Equals: Arizona AGI — $117 billion

Less: Standard/Itemized Deductions and Personal Exemptions — $(27) billion

Equals: Taxable Income — $90 billion

IIT System Today- Calculating AZ IIT (TY 2011 Tax Abstract)

4JLBCJLBC

Multiply: Taxable incomeby progressive rate schedule• (25)% rate reduction on

long-term capital gains phased in 2013 to 2015

Equals: Tax Liability — $3 billionLess: Tax CreditsEquals: Tax Due

IIT System Today- Calculating AZ IIT (TY 2011 Tax Abstract)

Single Married Rate

$0 to $10 $0 to $20 2.59%

$10 to $25 $20 to $50 2.88%

$25 to $50 $50 to $100 3.36%

$50 to $150 $100 to $300 4.24%

$150 and over $300 and over 4.54%

($ in thousands)

5JLBCJLBC

1933 – Established IIT• Property taxes insufficient in the Depression

– AZ assessments fell 50% from 1929 to 1936– One of 18 states to enact IIT in response

• Progressive rates (1% to 4.5%)• Net Taxable Income

1954 – Patterned state’s system more closely with federal system• Added standard and itemized deductions and

personal exemptions• Established a withholding payment system

IIT System History- Legislative Milestones

6JLBCJLBC

IIT System History- 3 Rate Increases from 1933 to 1967

0%

2%

4%

6%

8%

10%

12%

Taxable Income (Single Filer)

Marg

inal T

ax R

ate

(%

)

TY 1933(1% - 4.5%)

TY 1967(2% to 8%)

7JLBCJLBC

1972 – Voter initiative established Urban Revenue Sharing for cities and towns

1973 – Creation of Arizona Department of Revenue; consolidated different agency tax functions

1978 – Furthers ties to federal system• New tax code• Federal AGI is starting point for AZ Gross Income

1979 – Taxation of S Corporations

IIT System History- Legislative Milestones

8JLBCJLBC

1983 – Required estimated payments

1990• Conformed to federal itemized deductions• Adjusted tax brackets to current levels

1992 – Established and taxed Limited Liability Companies

2012 – (25)% rate reduction for long-term capital gains

IIT System History- Legislative Milestones

9JLBCJLBC

IIT System History- 7 Rate Reductions from 1990 to 2007

2%

3%

4%

5%

6%

7%

8%

$0-$10,000

$10,001 -$25,000

$25,001 -$50,000

$50,001-$150,000

$150,001 & over

Taxable Income (Single Filer)

Mar

gina

l Tax

Rat

e (%

)

1990(3.8% - 7%)

2007 (2.59% to 4.54%)

10JLBCJLBC

IIT System History- Tax Expenditures Overview

Foregone revenues to the General Fund, cities, and towns• Federal and state subtractions• Exemptions• Standard and itemized deductions• Tax credits

These items grew 7% annually from 1991 to 2006 • Itemized deductions and tax credits made up

2/3 of the growth• Number of credits offered grew from 4 in 1991

to 24 in 2006 (30 offered in 2013)

11JLBCJLBC

IIT System History- Largest Tax Expenditures in TY 2006

TY 2006($ millions)

Cumulative Percent

Home and Mortgage Interest $ 320.6 17%

Medical and Dental Expenses $ 197.9 28%

Standard Deduction $ 176.8 37%

State and Local Income Tax $ 153.6 45%

Charitable Contributions $ 116.0 51%

Personal Exemptions $ 351.3 70%

Other $ 563.8 100%

Total Tax Expenditures * $ 1,880.0       

*Does not include tax credits. More recent credit data is available on the next slide.  

12JLBCJLBC

IIT System History- Largest Tax Credit Expenditures in TY 2010

TY 2010($ in millions)

Cumulative Percent

Taxes to Other States/Countries $ 84.1 30%

Public School Extracurricular’s $ 43.7 46%

Private School Tuition $ 43.2 61%

Low-income Credit (Prop 301) $ 35.3 74%

Charitable Org. Contributions $ 16.2 80%

Other Credits $ 56.0 100%

Total Tax Credits $ 278.5  

13JLBCJLBC

IIT Revenue Reliability- Annual Growth of IIT GF Revenue

9.2% 7.7% 7.9%

-24.5%

-9.7%

4.1%

18.0%

-5.5%-4.1%

6.3%

0.0%

25.7% 24.5%

2.57

2.09 2.1

2.9 3.092.86

2.422.31

3.43.413.753.69

2.3

-30%

-20%

-10%

0%

10%

20%

30%

40%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Fiscal Year

Y/Y

% G

row

th

-4

-3

-2

-1

0

1

2

3

4

GF

Reven

ue ($ b

illion

s)

14JLBCJLBC

IIT Revenue Reliability- Capital Gains is a Volatile Component of IIT

-55.5%

90.6%

-34.1%

45.9%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Tax Year / Calendar Year

Y/Y

% G

row

th

AZ Net Capital Gains

Final / Estimate Payments

15JLBCJLBC

IIT Revenue Reliability- Corporate Income Tax is More Volatile

12.3%

-28.5%

6.2%

24.6%

42.1%

25.0%

14.1%

-14.4%

-20.7%-24.6%

38.2%

16.8%

-6.7%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Fiscal Year

Y/Y

% G

row

th

IIT Max %

IIT Min %

16JLBCJLBC

IIT Revenue Reliability- Transaction Privilege Tax is Less Volatile

5.6%0.6% 1.1%

7.9%11.1%

16.7%

5.6%

-3.5%

-13.7%-10.0%

1.8%5.9% 4.1%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Fiscal Year

Y/Y

% G

row

th

IIT Max %

IIT Min %

JLBC Tax Handbook

http://www.azleg.gov/jlbc/12taxbook/12taxbk.pdf