Arizona State Legislature 2021 End-of-Session Report

Date: August 12, 2021

NFIB helped win historic accomplishments for small business

The 55th first regular session of the Arizona State Legislature adjourned June 30, 2021, with some historic victories for small business that NFIB lobbied for. 
$1.75 Billion Income Tax Cut

Prior to Prop 208, Arizona had one of the lowest income tax rates in the country, allowing the state to compete against states with zero income tax, such as Nevada and Texas. Following the passage of Proposition 208 in 2020, small businesses in Arizona were faced with a 77.7% tax increase—moving Arizona from a 4.5% maximum marginal tax rate to a combined 8% rate. Thankfully, the legislature majority appreciated small business and responded with bold action during this legislative session. The recently enacted budget includes historic changes to the individual income tax code that will protect small businesses from this burdensome tax hike by placing a tax max rate of 4.5% –the same top tax rate as there was before Proposition 208. Additionally, instead of the five different brackets in the existing system, all Arizonans will soon pay a personal income tax rate of 2.5 percent, except for the highest earners, who will pay 4.5 percent. This reform was made possible in part by the fact that Arizona was projected to build up a budget surplus of nearly $4 billion over the next three years.

Alternative Income Tax for Small Businesses

In addition to the historic reductions and flattening of the income tax rate structure, the Legislature also enacted an optional alternative income tax system for small businesses. This tax would be paid only on business income and would be accounted for separate from the owner’s personal tax return. This option could be useful to many different business owners depending on the circumstances of their business. However, if a business owner chooses this option, there will be no standard deduction included so the first dollar will be taxed at the rate of 3.5% which will also be lowered to 2.5% in subsequent years as the brackets in the personal income tax are flattened and eliminated.

Property Tax Reductions

Businesses who own or lease commercial property currently pay 80% more per dollar of assessed value than a residential property does on property in the same jurisdiction. Through a reduction of what is called the assessment ratio, this year’s tax legislation will reduce property taxes on small businesses by 10% by incrementally lowering the assessment ratio that commercial property is subject to over four years beginning in 2022. This change will provide a meaningful reduction in the tax burden discriminately placed on commercial property and will move commercial property closer to equity with residential.

COVID Liability Protections

Senate Bill 1377 establishes commonsense liability protections for small businesses and others that are taking responsible steps to prevent the spread of the virus. This is welcome news for small-business owners who now will not have to worry about an enterprising trial attorney attempting to draw the business into litigation.

Federal Income Tax Conformity – NOL Carrybacks

The Arizona Legislature annually conforms with changes made to the federal government’s internal revenue code. Due to the federal government’s pandemic response, this year’s conformity legislation included significant tax reductions. For example, the CARES Act included a provision allowing for net operating loss carrybacks which allow a small business to carry back current year losses and deduct them from prior year profits. The net operating loss carryback provisions alone were estimated to be a tax reduction of $203.5 million by the end of FY 2022 (June 30, 2022).  All told, Joint Legislative Budget Committee fiscal note estimates that conforming to the federal CARES Act, the Consolidated Appropriations Act 2021, and the American Rescue Plan Act equals a one-time tax cut of $624.8 million over the next several years.

Challenges Ahead

The unions and out-of-state interests who financed the campaign for the Prop 208 tax increase in 2020 have started collecting petition signatures on select provisions of the tax legislation that protects small business from the tax increases. The supporters of Proposition 208 filed three separate referendums targeting the provisions of the income tax reform. The unions and out-of-state interests wish to have the cost of Proposition 208 placed directly on the shoulders of small-business owners. The Arizona Constitution allows voters to refer recently passed legislation to the ballot for a vote at the next General Election. These unions and their allies must gather 118,823 signatures by September 28, 2021, to have the legislation suspended and placed on the 2022 General Election ballot for a vote. If asked to sign one or any of these petitions, one can kindly, “decline to sign.”

Photo courtesy of the Arizona State Legislature website

 

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