By Howard Fischer
Capitol Media Services
PHOENIX -- Unwilling to wait to see what happens in Washington, Arizona lawmakers are moving to make tips exempt from state income taxes.
On a voice vote Thursday, the state House gave preliminary approval to the proposal by Rep. Gail Griffin, R-Hereford, to let tipped workers deduct what they get directly from customers from their taxable income. HB 2081 now needs a final roll-call vote before going to the Senate.
Whether it will have support from Democrats at that point remains unclear.
Rep. Maria Sandoval, D-Goodyear, said she wants to help those who are among the lower-wage earners. But she said that, as crafted, there is no cap on how much someone can claim in what they say are tips.
"Lawyers, doctors can request to be paid $100,000, $50,000 in tips so they don't have to pay tax on that income,'' Sandoval said.
"We want to get fish,'' she said. "But we're also going to get sharks and piranhas.''
To guard against this, Rep. Seth Blattman, D-Mesa, sought to put in a cap to make only those whose income is less than 80% of area median income eligible for the tax break. He said that translates out to about $57,000 a year.
Republicans were having none of that. Griffin, for example, questioned how taxpayers would be able to compute their eligibility.
But the concern by Democrats goes beyond the possibility of fraud and abuse. Blattman cited the estimated $31 million loss to the state.
"I believe it is the goal of both parties to help families that are struggling,'' he said. But Blattman said the best way to help them is with state-funded programs like food assistance and social services.
"That's where I view the best bang for the buck,'' he said.
That drew a question from Rep. Jeff Weninger, R-Chandler.
"What you just said was basically instead of giving those families in need a tax cut, you think it's better if the government keeps it and has programs that helps them rather than them using that money on their own?'' he asked.
Blattman said it's more complex than that.
"I believe in a taxation system, if I'm writing it myself, where working families pay as little as possible into the system, and people who can afford to pay in more do pay in more,'' he said.
The whole issue has caught fire since Donald Trump made eliminating tips on wages a campaign theme.
While Congress is in Republican hands, it remains unclear whether the plan can get approval. At least some of that could depend on the price tag, with the Committee for a Responsible Federal Budget, a private watchdog group, pegging the loss at between $150 billion and $250 billion over a decade.
If federal law is changed, it would make the Arizona legislation unnecessary.
That's because Arizona is a "piggy back'' state, with residents using their federally adjusted gross income as a starting point for computing their state income taxes. And if tips are deducted on the federal form, they already are not included in taxable state income.
Griffin's bill is designed to push the issue along here. And it starts, she said, with a philosophy.
"Tips, in my opinion, are gifts and should not be taxed,'' Griffin said.
What she did not mention -- and what did not come up in debate -- is that is not how they are considered in state labor laws.
Those laws require employers to pay workers a minimum wage, currently $14.70 an hour. But they also permit restaurants to pay their workers $3 an hour less than that as long as their tips -- what Griffin labels as "gifts'' -- get them up to the minimum.
Weninger questioned the $31 million estimated loss to the state prepared by legislative budget staffers. He said if the affected workers have more disposable income, they will spend it, with at least some of those expenditures on items that are subject to the state's 5.6% sales tax.
Blattman argued that there is no way for the loss to the state to be made up that way.
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