Capitol Media Services
PHOENIX -- Arizonans hoping to get a head start on preparing their 2025 income taxes could be in for a nasty surprise.
The state Department of Revenue has published the forms for individuals as well as the instructions for how to fill them out. And they tell people who don't itemize their expenses they can take a standard deduction of $15,750 -- twice that for married people filing jointly.
Only thing is, that's not the law in Arizona. The actual inflation-adjusted figure for this year would be $15,000. So, what gives?
Gov. Katie Hobbs issued an executive order in November directing the agency to publish the new forms with the tax break she says she will propose when the Legislature convenes this coming week. But if the Republican-controlled Legislature doesn't go along with what the Democratic governor wants, that means anyone who already filed their taxes using the numbers in the state-provided form would then have to fill out an amended return. And there's actually reason to believe that the GOP majority won't give Hobbs the tax cuts she wants unless they also get the tax cuts they want.
What's behind all this is the HR 1, the "Big Beautiful Bill'' adopted by Congress last year. It includes a series of tax cuts for individuals and businesses.
With few exceptions, Arizona lawmakers always have altered the law here to conform, if for no other reason than to simply filing for state residents. Otherwise, Arizonans who have computed their federal taxes -- the starting point for state taxes -- would have to make additional calculations before filing their state forms. Only thing is, full conformity would cost the state more than $440 million according to legislative budget analysts.
So Hobbs, up for reelection this year, wants to conform only to the parts she is calling "my middle class tax cut,'' including the higher standard deduction and other breaks like no tax on tips or overtime and a larger deduction for seniors. That costs about $250 million.
Sen. J.D. Mesnard acknowledged it has been the practice for the Department of Revenue to start preparing tax forms on the presumption that lawmakers will fully conform. But the Chandler Republican, who chairs the Senate Finance Committee that is in charge of reviewing changes in the state tax code, said he takes exception to the governor directing the state agency to start printing tax forms that include only the parts of HR 1 she wants -- and none of of the others.
"I have a big issue with the governor's executive order saying she was telling DOR what to do on these things,'' he said. "That is injecting politics into something that should not be a political thing.''
Gubernatorial press aide Christian Slater defended the decision to direct the agency to include only what his boss wants in the tax forms. "These provisions affect the vast majority of tax filers,'' he said. "And the governor wants to deliver certainty to them early in the tax season.''
That "certainty,'' however, depends on a majority of lawmakers agreeing with Hobbs. And several Republicans have said they want this to be enacted as a single package, including the breaks for business.
One of those, for example, includes allowing businesses to write off the cost faster of new equipment they have purchased, a move that would reduce their taxable income.
Another allows businesses to fully and immediately deduct research and development costs. And a third provides an additional deduction of interest costs.
None of that is in the tax forms that Hobbs directed the Department of Revenue to prepare. But Slater said that was a conscious decision by his boss. "She believes the other provisions affecting the wealthy and corporations should be negotiated in the budget, as is standard for legislation with fiscal impacts,'' he said.
But that isn't what Slater is saying about the tax cuts his boss wants. He said Hobbs wants lawmakers to pass her tax cut package at the beginning of the session. She's going to get part of her wish -- at least the part seeking quick action.
Mesnard said the plan by the Republican majority is to send Hobbs the entire tax cut package -- including the parts the governor does not want -- as soon as possible after coming into session this coming week.
"We want the whole thing,'' he said, saying that approving only what Hobbs wants now and then having to negotiate with her later on the rest of the package is not a realistic option. "Our intention, at least to start, is to send up conformity so that everybody, small businesses included, can file their taxes more quickly.''
Slater pronounced such a plan with all the tax cuts dead on arrival at the governor's desk.
"Gov. Hobbs wants tax cuts for middle class Arizonans immediately,'' he said. "If Republicans want to give handouts to corporations and the wealthy, they need to show the people of Arizona how they're going to pay for it in the state budget without cutting vital programs.''
"That would be sad,'' said Mesnard of the governor's threat. "And then we'll sort of have to cross that bridge when we come to it.''
The forms that the Department of Revenue has prepared have another quirk. Sen. Mitzi Epstein pointed out that what's actually on the main tax form redesigned by the Department of Revenue at the governor's direction does not contain the other breaks the governor wants: no taxes on tips, no taxes on overtime, a larger deduction for seniors, and a deduction on interest paid on the purchase of a new car built in the United States.
Instead, they are supposed to be calculated by taxpayers on another worksheet -- one not actually filed with the Department of Revenue -- and then put into a line on yet another form listing "other adjustments.''
Epstein, a Tempe Democrat, called that "far from appropriate.''
There's also a deeper issue.
Epstein, who serves on the Senate Finance Committee, said she questions even the parts of the federal law that the Democratic governor wants to incorporate into the tax code.
"The tax policies in HR 1 are, by in large, really dumb tax policies,'' Epstein said.
"Of course, we all want to do nice things for people who serve us at restaurants, people who work overtime,'' she said. "It's great to do nice things for them. But at what cost?''
Epstein said that she sees tips to be part of someone's wages. In fact, state law allows businesses to pay workers up to $3 less than the minimum wage -- now $15.15 an hour -- if they can make up the difference in tips.
What that means, she said, is tips are not a gift. "The bottom line is, if they were not doing that work, you wouldn't be giving them this money,'' Epstein said. "Therefore the money is for work. It's wages.''