Expert: Talks on Arizona tax are confusing taxpayers

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(The Center Square) - Tax negotiations between the Republican-controlled Arizona Legislature and Democratic Gov. Katie Hobbs are causing confusion among taxpayers, according to Glenn Farley, the policy and research director for Common Sense Institute Arizona.

Arizona Republicans introduced a new tax plan, House Bill 2485, this week after Hobbs vetoed their previous version, which was projected to save Arizonans $1.1 billion over the next three years. Republicans don't have enough seats in the Legislature to override Hobbs' vetoes.

House Speaker Steve Montenegro, R-Surprise, said the legislation occurred “because inaction left taxpayers exposed, and the Legislature has a responsibility to step in and restore clarity.”

Senate President Warren Petersen, R-Gilbert, noted state taxpayers “shouldn’t have to guess whether the forms they’re using are accurate, and they shouldn’t be forced to refile or pay more in taxes.”

“Tax reform was meant to make filing simpler and more predictable, not create confusion, anger, and frustration for Arizona taxpayers,” he added.

Farley told The Center Square that Arizona Republicans’ current tax plan is modeled on a “full conformity bill” to HR 1, also known as the One Big Beautiful Bill Act.

However, based on Hobbs’ public statements, he noted the governor will “veto [it] for the same reason” as she vetoed the previous one.

Hobbs axed the previous bill because “she thought it went too far and it was more than just a conformity bill,” Farley explained.

The Republicans’ tax plan includes “elements of conformity that the governor wants [and] it still includes all the other elements of conformity that the governor is on record as not wanting,” he stated.

Farley said he anticipated the Arizona Legislature would transmit the new tax plan to Hobbs’ desk next week.

If Hobbs did sign the tax plan into law, Farley said it would make it easier for taxpayers.

The Internal Revenue Service is already accepting tax returns, so the Arizona Department of Revenue has “already issued forms that make assumptions about how [Arizona] conforms to HR 1," Farley said.

Based on his understanding, Farley said, the tax forms fully conform to Hobbs' middle-class tax-cut packages, including no tax on tips or overtime. He added that the tax forms also include “expensing and depreciation provisions” that the governor doesn’t want.

Farley said if the Republicans’ tax plan became law, “it would minimize disruption [and] the need to amend returns.”

If Hobbs does veto the tax plan, it will cause “confusion” for Arizona taxpayers, he said.

“The longer it takes and the noisier it is, the less certainty there is for taxpayers,” Farley said.

According to Farley, Arizona taxpayers can take two options to address the uncertainty.

The first is to delay filing taxes until the state Legislature and Hobbs reach a decision and adjust the law, Farley said. The second option is to file taxes using the current form the state Department of Revenue has already sent, then amend the tax plan in the future, he explained.

The best option for Arizona taxpayers is to make the tax plan law, as the tax form would be aligned with state and federal law, Farley said.

However, from a policy or state fiscal perspective, the Republican tax plan may not be optimal, he noted.

Farley said the earliest tax return filers tend to be people who “take the standard deduction” and “only have a W-2 income.” He added these tax returns are the “least likely to be significantly impacted by the [conformity] provisions.”

The tax issues the Arizona Legislature and Hobbs are negotiating will affect only a small percentage of Arizonans, Farley noted.