Tax Reform

Arizona Delivers COVID-19 Tax Relief

With the 2020 tax deadline approaching, Arizona Senate President Pro Tempore Vince Leach and House Majority Leader Ben Toma realized their state had not yet conformed its tax code to important relief provisions in the federal Coronavirus Aid, Relief and Economic Security (CARES) Act. Many states around the country conformed their state tax codes to the CARES Act to offer state-level tax relief, but Arizona’s tax code still applied pre-COVID-19 tax policy to income earners. Consequently, Arizona taxpayers’ 2020 tax liabilities became much higher than taxpayers in states that offered COVID-19 tax relief.

The CARES Act passed by Congress in March 2020 changed the federal tax code for years surrounding the COVID-19 pandemic to offer relief to both individuals and businesses. Provisions like allowing carrybacks and removing the 80% limit for net operating loss (NOL) deductions, extending the business interest expense deductions and making forgiven paycheck protection program (PPP) loans income tax free saved federal taxpayers an estimated $408 billion in 2020.

These temporary federal tax reforms trickled down to state policy as state governments considered their conformity to the federal Internal Revenue Code (IRC) following passage of the CARES Act. States conform to federal tax specifications on either a rolling or static basis to ease policymaking and make tax compliance simpler. States with rolling conformity automatically conform to any federal tax changes, but they have the option to decouple from specific provisions to fit state policy goals. States with static conformity must pass legislation to conform to federal IRC changes and have the option to conform or not on each change.  Where states with rolling conformity align automatically with each IRC change unless legislation is passed, states with static conformity must take action to conform to any IRC change.

As a static conformity state, Arizona had to pass specific legislation changing which form of the IRC their state code conformed to in order to extend CARES Act tax relief to state taxpayers. But by the time 2021 arrived, Arizona had not yet passed legislation conforming to the CARES Act. With most states conforming to CARES Act tax relief in some way, not conforming to federal tax relief provisions threatened to make Arizona’s tax code more burdensome than other states.

To correct this imbalance, President Leach and Leader Toma worked together to pass Senate Bill (SB) 1752 and conform Arizona’s tax code to all tax relief provisions in the CARES Act. Allowing Arizona taxpayers to both carryback net losses and claim the full NOL deduction, deduct more of their business interest expenses and other tax relief provisions are estimated to save Arizona taxpayers $625 million on their 2020 tax bills.

President Leach first worked on this reform at the 2020 ALEC Annual Meeting with the ALEC Model Net Operating Loss Reform Act. Then, during Arizona’s 2021 legislative session, SB 1752 delivered the benefits of an expanded NOL deduction to Arizona taxpayers.

In April, the Arizona Legislature passed SB 1752 unanimously and Governor Doug Ducey signed the bill into law. To highlight the significance of SB 1752 for Arizona taxpayers, President Leach stated, “Many Arizonans and businesses have experienced financial hardships during the pandemic, and this bill will provide immediate tax relief at a time when it is needed the most. Those out of work will now see the first $10,200 in unemployment income excluded from taxation and businesses that participated in the Paycheck Protection Program are provided clarity when filing their taxes. In total, my bill provides more than $600 million in tax relief to Arizonans. It is truly gratifying to sponsor a bill that will have such a positive impact on lives in our state.”

Now, Arizona taxpayers are afforded the same relief on their state taxes as the CARES Act secured for federal tax liabilities. As the COVID-19 pandemic wanes but economic problems persist, the CARES Act and SB 1752 offers much needed tax relief to businesses and individuals. With over $600 million returned to taxpayers rather than deposited into state coffers, businesses have more resources to keep workers employed and their doors open. Thanks to the efforts of Arizona lawmakers like President Leach and Leader Toma, Arizona’s economy will emerge from the COVID-19 pandemic better prepared for economic recovery and growth.

In Depth: Tax Reform

Mainstream economists, small business owners and taxpayers across the country understand that growth-oriented reforms mean increased opportunity for all. As demonstrated by the annual Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, sound tax and fiscal policies are critical to economic health, allowing businesses and households to flourish. A…

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