On tax conformity, enact Plan B

If messes could be officially declared, like disasters, Arizona’s tax filing season would qualify. And make no mistake, the mess belongs entirely to Gov. Doug Ducey.

The mess is caused by the failure to timely conform Arizona’s income tax laws to changes made at the federal level as a result of President Donald Trump’s tax cut.

Ordinarily, conformity is a routine matter. This time was different, because conformity would increase what Arizonans owe to the state. The federal changes broadened the tax base. Simply conforming to the tax base changes would produce a revenue windfall for the state.

That raises some thorny policy questions. Should the state pocket the windfall or give it back? And if given back, how?

Republican legislators wanted to decide those policy questions last legislative session, well before tax filing season began. Ducey said no. After the election, GOP lawmakers wanted to have a special session, again to settle the questions before anyone began filing their tax returns. Ducey again said no.

So, tax filing season commenced without conformity being adopted. Nevertheless, Ducey’s Department of Revenue issued forms that assumed conformity were enacted without any offsetting reductions in rates or an increase in the standard deduction. What legal authority the department has to issue forms not based on current law, which ties Arizona income taxes to the federal structure pre-tax cut, isn’t clear.

Ducey wants to pocket the windfall. Republican lawmakers want to give it back, making conformity revenue neutral to the state.

The Legislature passed a conformity bill (Senate Bill 1143) that rolled rates back a tad to approximate revenue neutrality. Ducey vetoed it and then went on a Trumpesque Twitter tantrum, bellowing about irresponsibility.

Given the uncertainty about the size of the windfall, it is arguably more prudent to pocket the money for a year to get a better sense of the state’s fiscal status post-conformity. But, given the state’s huge surplus, approximating what would constitute revenue neutrality isn’t irresponsible.

What is irresponsible is Ducey’s gross mismanagement of the issue. Ducey apparently wanted to duck the conformity policy questions before the election. Shirking a duty, but politicians do that. However, putting the kibosh on a post-election special session to settle the issue before tax-filing season begins was an inexcusable dereliction of duty.

In his veto message, Ducey said this issue should be dealt with as part of budget negotiations. It’s hard to convey how nutty that is. The budget won’t be settled until late March or April, if things go incredibly smoothly. So, Ducey is proposing that the entire tax filing season come and go without taxpayers knowing what they owe for 2018.

Sen. J.D. Mesnard, one of the chief tub-thumpers for revenue-neutral conformity, has a Plan B (SB 1166). The Legislature’s budget staff has identified around 50 items where Arizona tax law is now out of compliance with federal law. Mesnard’s Plan B would conform with all of them except a handful that produce most of the windfall. Those would remain as they are for one year.

So, there would be a substantial step forward for simplicity, but no windfall.

One of the virtues of Plan B is that there is none of the uncertainty that Ducey was bellowing about. The Legislature wouldn’t be guessing about the windfall and then giving it back. It would be not collecting it in the first place. Zero risk of overshooting.

For high-earners, tax filing would be slightly more complicated. But they would undoubtedly prefer that to Ducey’s tax increase. Or to Ducey’s prolonged irresolution about what is owed.

This issue needs to be resolved promptly. Getting this far into tax filing season without a clear answer as to what is owed on income earned last year is an abuse of taxpayers.

Through his dereliction of duty and gross mismanagement of the issue, Ducey has forfeited the moral standing to demand his preference of creating and pocketing a windfall. He needs to yield to the preference of GOP lawmakers for revenue-neutral conformity.

The Legislature should quickly pass Plan B and Ducey should immediately sign it.

Ducey made this mess. He shouldn’t stand in the way of Republican legislators cleaning it up.