ARIZONA STATE SENATE

RESEARCH STAFF

GAIL HICKS

ASSISTANT ANALYST

FINANCE COMMITTEE

Telephone: (602) 542-3171

Facsimile: (602) 542-7833

TO: MEMBERS OF THE SENATE

FINANCE COMMITTEE

DATE: March 2, 2001

SUBJECT: Strike Everything Amendment to S.C.R. 1001

(individual income tax rate reduction)

Purpose

Requests voters to approve, during the next general election, changes to how taxable income is calculated and modifications to individual income tax rates.

Background

In Arizona, taxable income is calculated beginning with federally adjusted gross income and then reducing this number by subtracting allowable deductions, exemptions and subtractions. Once taxable income is determined, taxpayers multiply this amount by the applicable tax rate for their income bracket. For example, an individual with taxable income of $10,000 or less is subject to a 2.87 percent tax rate.

The strike everything amendment to S.C.R. 1001 proposes eliminating all of the individual income tax deductions and exemptions, as well as individual and corporate subtractions that are currently used when calculating taxable income. It also gradually decreases the number of income tax brackets for both single and married taxpayers from five to two and, beginning in tax year 2003, eliminates the state income tax altogether for taxpayers in the lowest bracket. For example, for the 2003 tax year, single taxpayers with taxable income of $10,000 or less, and married couples with taxable income $20,000 or less, would pay nothing.

The fiscal impact of this amendment cannot be determined at this time because tax rates for all of the modified tax brackets have not been established.

Provisions

1. Modifies the definition of taxable income and Arizona adjusted gross income by eliminating all individual income tax deductions, and exemptions, and individual and corporate tax subtractions beginning in tax year 2003. The eliminated deductions, exemptions and subtractions include such things as:

· The optional standard deduction;

· Itemized deductions;

· Personal exemptions;

· Exemptions for blind persons, persons over 65 and dependents;

· Amortization of private commercial capital investment by a qualified defense contractor;

· Agricultural crops contributed to a charitable organization;

· Medical savings accounts;

· Restoration of a substantial amount held under claim of right;

· Subtraction for World War II victims;

· Subtractions for wood stoves, wood or gas fired fireplaces and construction of an energy-efficient residence;

· Subtraction for adoption-related expenses; and,

· Subtractions for various other items such as exploration expenses, state lottery prizes and winnings, and excess of a partner’s share of income or losses.

2. Decreases the number of income brackets for both single and married taxpayers from five to two over a four-year period, and eliminates the state income tax for those taxpayers in the lowest brackets beginning with tax year 2003.

3. Changes to an unspecified percentage the tax rates for all but the lowest tax bracket for all tax years beginning with 2003.

4. Allows a taxpayer who meets certain income restrictions to receive tax credits for nondependents residing in the household.

5. Modifies the elements included in taxable income calculations for past tax years.

6. Makes numerous technical and conforming changes.

7. Provides for all changes to apply to taxable years beginning with 2003.

8. Requires the Secretary of State to submit the proposal to voters at the next general election and becomes effective if approved by the voters and on proclamation of the Governor.

GH/jas