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History of Arizona’sIndividual Income Tax System
Presentation to the Joint Task Force on Income Tax Reform
August 21, 2013August 21, 2013
JLBCJLBC
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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
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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)
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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)
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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
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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%)
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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
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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
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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
$150,001 & over
Taxable Income (Single Filer)
Mar
gina
l Tax
Rat
e (%
)
1990(3.8% - 7%)
2007 (2.59% to 4.54%)
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IIT System History- Tax Expenditures Overview
Foregone revenues to the General Fund, cities, and towns• Federal and state subtractions• Exemptions• Standard and itemized deductions• Tax credits
These items grew 7% annually from 1991 to 2006 • Itemized deductions and tax credits made up
2/3 of the growth• Number of credits offered grew from 4 in 1991
to 24 in 2006 (30 offered in 2013)
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IIT System History- Largest Tax Expenditures in TY 2006
TY 2006($ 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.
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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
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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)
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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
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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 %
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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