Revenue impact of Arizona's tax expenditures

              ARIZONA DEPARTMENT OF REVENUE
THE REVENUE IMPACT
OF ARIZONA’S TAX
EXPENDITURES
FY 1997/98
PREPARED FOR: THE GOVERNOR & THE LEGISLATURE
BY: THE OFFICE OF ECONOMIC RESEARCH & ANALYSIS
Jane D. Hull Mark W. Killian
Governor Director
November 13, 1998, Preliminary
July 1999, Final
1
The following report on Arizona's Tax Expenditures was prepared for the Governor and the
Legislature in compliance with A.R.S. §42-105.
The 1998 report provides a broad range of information. The report contains sections for all
taxes imposed by the state. The preliminary report, released November 15, 1998, did not
have information on tax expenditures from the Individual Income Tax. The individual
income tax information included in this final report was made available through the 1996
Individual Income Tax Simulation Model.
If you have any questions or comments regarding this report, please contact the Office of
Economic Research and Analysis at the Arizona Department of Revenue at 542-3062.
TABLE OF CONTENTS
INTRODUCTION ........................................................................ Page 1
AIRCRAFT LICENSE TAX EXPENDITURES ......................... Page 3
AVIATION FUEL TAX EXPENDITURES ................................ Page 9
BINGO TAX EXPENDITURES .................................................. Page 13
BOXING TAX EXPENDITURES ............................................... Page 19
CORPORATE INCOME TAX EXPENDITURES ...................... Page 23
ESTATE TAX EXPENDITURES ................................................ Page 35
FIDUCIARY INCOME TAX EXPENDITURES ........................ Page 39
FLIGHT PROPERTY TAX EXPENDITURES ........................... Page 49
IN-LIEU PROPERTY TAX EXPENDITURES .......................... Page 53
INDIVIDUAL INCOME TAX EXPENDITURES ...................... Page 57
INSURANCE PREMIUM TAX EXPENDITURES .................... Page 73
JET FUEL EXCISE AND USE TAX EXPENDITURES ............ Page 81
LUXURY TAX EXPENDITURES .............................................. Page 85
MOTOR CARRIER FEE EXPENDITURES ............................... Page 91
MOTOR VEHICLE FUEL TAX EXPENDITURES ................... Page 97
PARI-MUTUEL TAX EXPENDITURES ................................... Page 101
PRIVATE CAR PROPERTY TAX EXPENDITURES ............... Page 105
PROPERTY TAX EXPENDITURES .......................................... Page 109
SEVERANCE TAX EXPENDITURES ....................................... Page 117
TRANSACTION PRIVILEGE AND USE TAX
EXPENDITURES ...................................................................... Page 121
UNDERGROUND STORAGE TANK TAX
EXPENDITURES ...................................................................... Page 145
UNEMPLOYMENT INSURANCE TAX EXPENDITURES ..... Page 149
USE FUEL TAX EXPENDITURES ............................................ Page 157
VEHICLE LICENSE TAX EXPENDITURES ............................ Page 161
WATERCRAFT LICENSE TAX EXPENDITURES .................. Page 167
WORKMEN'S COMPENSATION PREMIUM LIEU TAX
EXPENDITURES ...................................................................... Page 173
1
THE 1998 ARIZONA TAX EXPENDITURE REPORT
INTRODUCTION
The Arizona Tax Expenditure Report is a
study prepared for the Governor and the
Legislature by the Arizona Department of
Revenue's Office of Economic Research
and Analysis. The report is prepared in
compliance with A.R.S. §42-105.
Tax expenditures are provisions within
the law (exemptions, exclusions,
deductions and credits) that are designed
to encourage certain kinds of activity or
to aid taxpayers in certain categories.
Such provisions, when enacted into law,
result in a loss of tax revenues, thereby
reducing the amount of revenues
available for state (as well as local)
programs. In effect, the fiscal impact of
implementing a tax expenditure would be
similar to a direct expenditure of state
funds. This report provides a list of tax
expenditures, plus, whenever possible,
details the approximate costs of
exempting certain types of income,
goods, services or property from their
respective tax statutes.
The purpose of this report is to provide a
better understanding of the costs
associated with the existing set of tax
exemptions, exclusions, deductions and
credits. There are sections on every tax
imposed in Arizona. In each section,
provisions dealing with that specific tax
type are analyzed. The analysis includes
a detailed explanation of the provision as
well as the approximate cost of that
provision, if possible. Sections
pertaining to tax types not administered
by the Arizona Department of Revenue
were reviewed by the agency
administering the tax. Any figures
presented in these sections were provided
by that agency.
ASSUMPTIONS
This report is not intended in any way to
determine the desirability of the tax
expenditures currently established in law.
The Legislature and the Governor
determine the taxation environment that
they wish to create in Arizona and
formulate law to create this taxation
policy. All tax expenditures were
conscious public policy decisions at the
time of enactment. For example, since
1990, public policy decisions were made
to relieve the individual income tax
burden on persons age 65 and over in
Arizona. To that end, the amount of the
age 65 and over exemption was increased
in 1992 to $1,750 from $1,500 and
increased again for tax year 93 to $2,100.
In tax year 1995, 1996 and 1997, the age
65 and over exemption remained at
$2,100.
The costs associated with the specific
provisions shown in this report are the
estimated impact of that provision based
upon the information available for the
stated fiscal year. There is no
consideration of decreased demand as a
result of higher taxes. For example, if
taxes on a certain type of liquor were
increased to $3 per gallon, the
2
calculations presented assume that the
same demand exists under the $3 per
gallon tax as exists when the tax is 84¢
per gallon. This constant demand would
not exist in the "real" world, but the tools
are not available to the Department of
Revenue to estimate the elasticity of
demand. Therefore, the estimated costs
should be used only as a guide and not as
an exact representation of what would
occur in later years.
Finally, the summary page(s) at the end
of each section provides a total value of
the tax expenditure. This total value is
only a general guide and should not be
used in isolation from the rest of the
expenditure amounts. In fact, the
expenditures for any particular tax cannot
generally be added to reach a total. The
presence or absence of one expenditure
for a tax type can directly affect the value
of another expenditure for that same tax
type.
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AIRCRAFT L ICENSE
TAX EXPENDITURES
4
5
AIRCRAFT LICENSE TAX EXPENDITURES1
1Any figures presented for Aircraft License Tax Expenditures were provided by the Arizona Department of
Transportation.
A license tax is imposed on aircraft
operating in this state at the rate of 0.5%
of the average fair market value of the
particular make, model and year of the
aircraft, but not less than $20. The
proceeds from this tax are deposited into
the state aviation fund.
AIRCRAFT L ICENSE TAX
EXEMPTIONS
Certain aircraft are exempt from this
license tax, as set out in A.R.S. §28-8322.
Aircraft operated by an airline company
and regularly scheduled for the primary
purpose of carrying persons or property
for hire in interstate, intrastate, or
international transportation are exempt
from this tax. Calculating the tax value
of this tax expenditure would require
knowing the average fair market value of
every aircraft carrying persons or
property for hire that stops at an airport in
this state. Therefore, the tax value of this
tax expenditure is not quantifiable.
A.R.S. §28-8326 provides an exemption
for aircraft owned by a nonresident who
bases his/her aircraft in Arizona for a
period not greater than 90 consecutive
days or 90 days in any one calendar year,
provided that such aircraft are not
engaged in any intrastate commercial
activity. The tax value of this tax
expenditure is not quantifiable because
the average fair market value of all
nonresident-owned aircraft falling into
this category is unknown.
Aircraft owned and operated exclusively
in the public service by the federal
government, by the state or by any
political subdivision thereof, or by the
civil air patrol is exempt from the vehicle
license tax (A.R.S. §28-8323). Although
the average fair market value of aircraft
owned by the federal government and
operated in Arizona is unknown, it is
known that there were 101 aircraft owned
by the Arizona Department of
Transportation, the Arizona Department
of Public Safety, various Arizona
counties and cities, and the civil air patrol
in Fiscal Year 1997/98. The average fair
market value of each aircraft is $128,500
which equates to a tax value of $64,892
for this tax expenditure.
A.R.S. §28-8383B also exempts aircraft
owned and held by a bona fide aircraft
dealer solely for the purposes of sale, as
long as these aircraft are registered
within ten days of the dealer's purchase
date. There were 166 aircraft of this type
registered by bona fide aircraft dealers in
Arizona in Fiscal Year 1997/98. The tax
value of these aircraft was $532,030.
PREFERENTIAL TAX RATES
There are preferential aircraft license tax
rates granted to certain types of aircraft in
A.R.S. §28-8336. The license tax rate for
a nonresident who bases his aircraft in
Arizona for more than 90 days but less
than 210 days in a given calendar year,
provided that the aircraft is not engaged
in any intrastate commercial activity, is
equal to 0.1% of the average fair market
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value of the particular make, model, and
year of aircraft (A.R.S. §28-8336). This
tax rate is 20% of the tax rate imposed on
resident-owned aircraft. The total aircraft
license tax paid by nonresidents falling
into this category in Fiscal Year 1997/98
was $7,719. Multiplying this figure by
four yields the foregone tax collections
allowed by this preferential rate, or
$30,876.
Aircraft in storage or being repaired is
charged a license tax of $20 (A.R.S. §28-
8337). There are 442 aircraft which have
been granted this license tax rate with a
fair market value of $442,952,903. The
tax value of this preferential license tax is
$2,205,925, which is the total fair market
value multiplied by 0.5% less $20 per
aircraft.
The annual license tax for a salvage
aircraft that is in storage or that is being
restored is $5 (A.R.S. §28-8338). There
are 50 aircraft which were registered
under this provision. Assuming no
market value for salvage aircraft, the tax
value of this tax expenditure is the
difference between the $20 minimum
license tax imposed on all other aircraft
and the $5 minimum license tax imposed
on these tax, or $750.
A.R.S. §28-8339 allows a $20 license tax
for an antique, classic, warbird, glider,
experimental, homebuilt, or balloon
aircraft . There are 1,364 aircraft
registered in Arizona under this
provision, with a total market value of
$6,811,570. The tax value of this tax
expenditure is the total market value
multiplied by 0.5% less the $20 license
tax paid per aircraft, or $6,778.
Maintenance aircraft owned by a
nonresident (A.R.S. §28-8341) and
manufacturer's aircraft (A.R.S. §28-
8340) are required to pay an aircraft
license tax of $20. There are no
nonresident-owned maintenance aircraft
and 14 manufacturer's aircraft registered
in Arizona, for a total market value of
$2,214,100. The tax value of this tax
expenditure can be calculated by
multiplying the total market value by
0.5% and subtracting the $20 per aircraft
tax paid, or $10,790.
7
SUMMARY OF AIRCRAFT L ICENSE TAX EXPENDITURES
Revenue Gain
AIRCRAFT L ICENSE TAX EXEMPTIONS:
Aircraft operated for the primary purpose of carrying persons or
property for hire .................................................................................................... NIA*
PREFERENTIAL TAX RATES
Preferential rate for nonresidents with aircraft in the state from 90
to 210 days ....................................................................................................... $31,000
Preferential rate for aircraft in storage or being repaired ................................ 2,206,000
Preferential rate for salvage aircraft in storage or being repaired ............................. 800
Preferential rate for antique, classic, warbird, etc., aircraft .................................... 7,000
Preferential rate for maintenance aircraft ...................................................................... 0
Preferential rate for manufacturer's aircraft .......................................................... 11,000
Nonresident-owned aircraft in the state for less than 90 days .................................. NIA
Aircraft owned by a government or by the civil air patrol ................................. $65,000
Aircraft owned by an aircraft dealer for sale ...................................................... 532,000
TOTAL QUANTI FIABLE AIRCRAFT L ICENSE TAX
EXPENDITURES2
*No Information Available
....................................................................................................................... $2,852,800
2These tax expenditures represent foregone revenues to the state aviation fund.
8
9
AVIATION FUEL TAX
EXPENDITURES
10
11
AVIATION FUEL TAX EXPENDITURES3
3Any figures presented for Aviation Fuel Tax Expenditures were provided by the Arizona Department of
Transportation.
An aviation fuel tax is imposed on every
distributor for each gallon of aviation fuel
possessed, refined, manufactured,
produced, blended or compounded in this
state by the distributor or imported by the
distributor, whether in the original
package or container in which it was
imported or otherwise. Beginning
January 1, 1998, all suppliers are required
to pay tax on all aviation fuel. In order to
qualify for exemptions on certain types of
aviation fuel, the taxpayer must file for a
refund. The fuel tax rate is 5¢ per gallon.
Exemptions from the aviation fuel tax are
set out in A.R.S. §28-1519. Aviation fuel
moving in interstate or foreign
commerce, not destined or diverted to a
point within this state is exempt from
aviation fuel tax. This information is not
required to be reported; therefore, the tax
value of this expenditure is unknown.
Also exempt from aviation fuel tax is
aviation fuel sold to the United States
armed forces for use in ships or aircraft,
or for use without this state (A.R.S. §28-
1519). The amount of aviation fuel
purchased by the United States armed
forces is not reported and the tax value is
unknown.
Although not listed as an exemption, a
taxpayer may request a refund for
aviation fuel for use in applying seeds,
fertilizer or pesticides (A.R.S. §28-
1520A). If such fuel were subject to
taxation in Fiscal Year 1997/98, an
additional $4,300 in aviation fuel tax
would have been received.
Aviation fuel which is exported from the
state is exempt from aviation fuel tax
(A.R.S. §28-1520A). The taxpayer must
apply for a refund. If such fuel were
subject to taxation in Fiscal Year
1997/98, an additional $6,050 in aviation
fuel tax would have been received.
Also not listed as an exemption, a
taxpayer may request a refund for losses
of fuel due to fire, theft or other accident
(A.R.S. §28-1520A). No requests for
refunds were made in Fiscal Year
1997/98.
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SUMMARY OF AVIATION FUEL TAX EXPENDITURES
Revenue Gain
Aviation fuel moving in interstate or foreign commerce ........................................ NIA*
Aviation fuel sold to the United States armed forces ............................................... NIA
Aviation fuel for use in applying seeds, fertilizer or pesticides ........................... $4,000
Exported aviation fuel ............................................................................................ 6,000
Aviation fuel lost due to fire, theft or other accident .................................................... 0
TOTAL QUANTIFIABLE AVIATION FUEL TAX EXPENDITURES4
* No Information Available.
......................................................................................................... $10,000
4The tax expenditures represent foregone revenues to the state aviation fund.
13
BINGO TAX
EXPENDITURES
14
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BINGO TAX EXPENDITURES
The tax on state licensed bingo
operations is based on a multi-tiered
licensing structure. There are three
classes of bingo licenses, each of which
has a different tax rate. Each class' tax
rate is based on bingo receipts. All bingo
tax collections are deposited into the
general fund.
Class A licensees, whose gross receipts
do not exceed $15,600 per year, are taxed
at 2.5% of their adjusted gross receipts
(A.R.S. §5-414). Adjusted gross receipts
equals gross receipts less the amount paid
for prizes. Therefore, prize money is
exempt from taxation for this class of
bingo licensees. In FY 1997/98,
$2,249,940 was subtracted from gross
receipts by this group of taxpayers.
Determination of the tax value of this
subtraction, however, is not a simple
matter. If prize money were not allowed
as a subtraction from gross receipts, it is
unlikely that this group would have a
2.5% tax rate. However, if a 2.5% tax
rate is not used, a more appropriate tax
rate must be selected.
The tax value of the prize money
subtraction for Class A taxpayers is
calculated in two ways. Option 1 is to
multiply the subtraction amount by 2.5%,
the Class A tax rate. This results in
potential collections of $56,249. Option
2 is to multiply the subtraction amount by
the average effective tax rate of the Class
A licensees, calculated by dividing Class
A tax collections by Class A total gross
receipts. This rate for the Class A
licensees is 0.30%. (This method is
based on the premise that the Class A tax
rate would not be 2.5% if the subtraction
were not allowed.) Multiplying the prize
money subtraction amount by 0.30%
results in potential collections of $6,750.
Class B and Class C licensees are taxed
on their gross receipts. Class B licensees,
whose gross receipts do not exceed
$300,000, are taxed at 1.5% of their gross
receipts. Class C licensees, whose gross
receipts exceed $300,000 annually, are
taxed at 2.0% of their gross receipts.
This is a preferential rate structure
because different tax rates are imposed on
similar taxpayers (all involved in the
business of bingo) based on some criteria
set in Arizona statutes. This preferential
rate structure allows taxpayers with lower
gross receipts to be taxed at a lower tax
rate. Measuring the tax value of allowing
a preferred tax rate for bingo is difficult
because the lowest-income taxpayers
(those whose receipts do not exceed
$15,600 annually) have a tax rate higher
than the highest-income taxpayers.
Normally, this type of calculation would
simply involve applying the highest tax
rate to all taxpayers to find the revenues
that might have been received.
Therefore, the tax value of allowing
preferential tax rates is also calculated in
two ways. Option 1 determines the
additional tax that would be received if
all classes of licensee were taxed at the
highest rate. For this option, the Class A
tax rate is considered to be the effective
tax rate of 0.30%, as explained above,
making the highest tax rate among the
three classes 2.0%. If Class A and Class
B were taxed at 2.0%, additional general
fund revenues would total $136,778.
(The calculation for Class A involves
16
substituting 2.0% as the effective tax
rate.) The problem with this method of
determining the tax value of preferential
tax rates is that it assumes (1) there is a
possibility of a legislative change which
would raise the bingo tax to a uniform
rate that is the highest tax rate currently
being imposed and (2) small bingo
operations would not be affected by an
increase in the tax rate (the same level of
bingo activities would occur irrespective
of the tax rate).
Option 2 looks at preferential rates
slightly differently. This option assumes
that if a uniform tax rate were to be
imposed to tax all licensees identically,
the new rate would be revenue neutral,
resulting instead in a burden shift. The
effective tax rate on all bingo activities,
determined by dividing total tax
collections into gross receipts, is 1.66%.
If this rate is applied to all classes of
bingo licensees, total tax collections
remain the same, but, as can be seen
below, the amount of tax paid by class of
licensee shifts.
Class
Or iginal Tax
Collections*
New Tax
Collections
Differ ence
A $7,872 $42,754 $34,882
B $303,343 $336,724 $33,381
C $407,541 $339,278 ($68,263)
Total $718,756 $718,756
*This amount reflects collections for tax
only, and does not include penalty and
interest.
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SUMMARY OF BINGO TAX EXPENDITURES
Revenue Gain
Subtraction from Gross Receipts for Class A L icensees
Option 1 .............................................................................................................. $56,000
Option 2 .................................................................................................................. 7,000
Preferential Tax Rates for Class A and Class B L icensees
Option 1 ............................................................................................................ $137,000
Option 2 ......................................................................................................................... 0
TOTAL QUANTIFIABLE BINGO TAX EXPENDITURES5
5These tax expenditures represent foregone revenues to the state general fund.
......................................................................................... $7,000 - $193,000
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BOXING TAX EXPENDITURES
20
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BOXING TAX EXPENDITURES6
6Any figures presented for Boxing Tax Expenditures were provided by the Arizona Boxing Commission.
Any person who promotes a boxing
contest in Arizona must pay to the
Department of Racing (collecting for the
state Boxing Commission) a 4% tax on
the gross receipts of such match or
exhibition, after deduction of city, state
and federal taxes (A.R.S. §5-104.02A).
Gross receipts are defined as receipts
from the face value of tickets sold.
Tickets issued as complimentary by the
promoter of a boxing match are exempt
from taxation, as long as the number of
complimentary tickets does not exceed
2% of total number of tickets issued or 75
tickets, whichever is greater. During FY
1998, 16 boxing contests were held and,
at each, 75 complimentary tickets were
issued.
Had the value of these tickets been
taxable, an additional $1,000 in boxing
taxes would have been received.
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SUMMARY OF BOXING TAX EXPENDITURES
Revenue Gain
Complimentary tickets issued ............................................................................. $1,000
TOTAL QUANTIFIABLE BOXING TAX EXPENDITURES7
7These tax expenditures represent foregone revenues to the state general fund.
...................................................................................................... $1,000
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CORPORATE INCOME TAX
EXPENDITURES
24
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CORPORATE INCOME TAX
EXPENDITURES
The Department of Revenue collected
over $528 million in net corporate
income taxes during Fiscal Year 1997/98.
Net income tax (corporate, individual and
fiduciary) collections are deposited into
the general fund after 15.8% of net
income tax collections received two years
prior is disbursed to cities and towns. In
other words, 15.8% of net individual plus
corporate plus fiduciary income tax
received in Fiscal Year 1997/98 will be
distributed to incorporated cities/towns in
Fiscal Year 1999/00. When reviewing
the tax value of the corporate tax
expenditures, therefore, the assumption
can be made that 84.2% of the tax value
is general fund revenue, although the
remaining 15.8% is not actually disbursed
for two years in the future.
Arizona corporate income tax filers begin
their calculations with federal taxable
income. Therefore, any subtractions
available federally in the calculation of
federal taxable income are allowed under
Arizona law by conforming to the
Internal Revenue Code definition of
federal taxable income. From federal
taxable income, certain exemptions and
subtractions are allowed in reaching
Arizona taxable income. Finally, after
the calculation of Arizona tax liability,
corporations may take advantage of
certain credits to reduce tax liability.
Most of the corporate tax expenditures
are not quantifiable. The tax value of the
federal subtractions in the calculation of
federal taxable income cannot be
determined because these are for
corporate income from all states, not just
Arizona income. The tax value of
Arizona's subtractions from federal
taxable income cannot be calculated
because subtractions are deducted from
federal taxable income prior to
apportionment of income to Arizona.
Therefore, it cannot be determined what
percent of the subtractions is used in the
calculation of Arizona tax. The
remaining subtractions and tax credits are
only quantifiable to the extent that data
exists.
SUBTRACTIONS ALLOWED IN
THE CALCULATION OF
FEDERAL TAXABLE INCOME
The starting point for the calculation of
Arizona corporate tax liability is federal
taxable income, as calculated on the
federal corporate income tax returns. The
Arizona legislature must approve
legislation annually to conform to the
definition of federal taxable income as of
January of the current year. In
conforming to the definition of federal
taxable income, Arizona accepts the
subtractions from gross income allowed
by the federal government. These
subtractions include:
• Compensation of officers.
• Salaries and wages.
• Incidental repairs that do not add
to the value of the property or
appreciably prolong its life.
• Debts that became worthless in
whole or in part during the tax year.
• Expenses of renting or leasing a
vehicle.
26
• Contributions or gifts actually
paid within the tax year to charitable
and governmental organizations and
any unused contributions carried over
from prior years, except the total
amount claimed may not be more than
10% of taxable income.
• Depreciation, plus the part of the
cost (up to $10,000) that the
corporation elected to expense for
certain tangible property placed in
service during the tax year.
• Certain percentage depletion rates
applicable to natural deposits.
• Contributions to pensions, profit-sharing
or other funded deferred
compensation plans.
• Contributions to employee benefit
programs not elsewhere claimed.
• Amortization of certain bond
premiums, research and experimental
expenditures, qualified forestation and
reforestation costs, business start-up
expenditures, organizational
expenditures for a corporation, etc.
It is not possible to estimate the tax value
of these subtractions. While the
Department of Revenue does receive
information from the Internal Revenue
Service on corporations with an Arizona
address, information on corporations
headquartered outside of Arizona but
operating within the state is not available.
Even if it were available, multi-state
corporations would include income and
deductions from all states in which they
operate in the calculation of federal
taxable income, making it useless for
Arizona tax expenditure calculation
purposes.
EXEMPT ORGANIZATIONS
Certain organizations are exempt from
corporate income tax according to
Arizona law. The organizations
specifically set out in statute as exempt
are:
• The United States, the state,
counties, municipalities, school
districts or other political subdivisions
or units of this state or the federal
government (A.R.S. §43-104.23).
• Labor, agricultural or
horticultural organizations, other than
cooperative organizations (A.R.S.
§43-1201.01).
• Qualifying fraternal beneficiary
societies, orders or organizations
(A.R.S. §43-1201.02).
• Cemetery companies owned and
operated exclusively for the benefit of
their members or which are not
operated for profit (A.R.S. §43-
1201.03).
• Qualifying corporations organized
and operated exclusively for religious,
charitable, scientific, literary or
educational purposes or for the
prevention of cruelty to children or
animals (A.R.S. §43-1201.04).
• Nonprofit business leagues,
chambers of commerce, real estate
boards or boards of trade, no part of
the net earnings of which inures to the
benefit of any private shareholder or
individual (A.R.S. §43-1201.05).
• Nonprofit qualifying civic leagues
or organizations operated exclusively
for the promotion of social welfare, or
local organizations of employees
(A.R.S. §43-1201.06).
• Clubs organized and operated
exclusively for pleasure, recreation
and other non-profit making purposes
(A.R.S. §43-1201.07).
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• Corporations organized for the
exclusive purpose of holding title to
property, collecting income therefrom
and turning over the entire amount of
such income, less expenses, to an
organization which itself is exempt
from the tax imposed by this title
(A.R.S. §43-1201.08).
• Voluntary employee's beneficiary
organizations providing for the
payment of life, sick, accident or other
benefits to the members of such
organizations or their dependents,
providing certain requirements are
met (A.R.S. §43-1201.09).
• Teachers' or public employees'
retirement fund organizations of a
purely local character, provided
certain requirements are met (A.R.S.
§43-1201.10).
• Religious or apostolic
organizations or corporations, if such
organizations or corporations have a
common treasury or community
treasury, even if such corporations or
organizations engage in business for
the common benefit of the members,
but only if the members thereof
include, at the time of filing their
returns, in their Arizona gross income
their pro rata shares, whether
distributed or not, of the net income of
the organizations or corporations for
such year (A.R.S. ��43-1201.11).
• Voluntary employees' beneficiary
organizations providing for the
payment of life, sick, accident or other
benefits to the members of such
organization, their dependents or their
designated beneficiaries, provided
certain requirements are met (A.R.S.
§43-1201.12).
• Corporations classified as
diversified management companies
under §5 of the Federal Investment
Company Act of 1940 and registered
as provided in that act (A.R.S. §43-
1201.13).
• Insurance companies paying to the
state tax upon premium income
derived from sources within this state
(A.R.S. §43-1201.14).
• Mutual ditch, irrigation or water
companies or similar nonprofit
organizations if 85% or more of the
income consists of amounts collected
from members for the sole purpose of
meeting losses and expenses (A.R.S.
§43-1201.15).
• Workers’ compensation pools
established pursuant to §23-961.01
(A.R.S. §43-1201.16).
• A small business corporation
which makes an election for a taxable
year pursuant to subtitle A, chapter 1,
subchapter S of the Internal Revenue
Code is not subject to corporate taxes
for such year but only to the extent
such corporation is not subject to
federal income taxes (A.R.S. §43-
1126).
Three of these organizations - religious or
apostolic organizations, insurance
companies and Subchapter S corporations
- are exempt from corporate tax but their
income does not escape taxation. In the
case of the religious or apostolic
corporations and the Subchapter S
corporations, the income is taxed at the
individual income tax level. Insurance
companies are required to pay insurance
premium tax rather than corporate
income tax.
It is not possible to calculate the
corporate tax which would be collected if
all exempt organizations were subject to
corporate taxation. That calculation
would require completion of federal and
state tax forms by the exempt
organizations.
28
29
ARIZONA SUBTRACTIONS FROM
FEDERAL TAXABLE INCOME
Arizona statute sets out certain amounts
which can be subtracted from federal
taxable income to reach adjusted income
attributable to Arizona. The tax value of
these subtractions, as mentioned in the
opening paragraphs of this section,
cannot be determined because these are
subtracted from federal taxable income
prior to apportionment of income to
Arizona. It is impossible to isolate those
subtractions attributable to Arizona only.
• Annuity income included pursuant
to §72 of the Internal Revenue Code if
the first payment with respect to such
annuity was received prior to 12/31/78
(A.R.S. §43-1122.01).
• The excess of a partner's share of
income required to be included under
§702(a)(8) of the Internal Revenue
Code over the income required to be
included under chapter 14, article 2 of
Title 43 (A.R.S. §43-1122.01).
• The excess of a partner's share of
partnership losses determined
pursuant to chapter 14, article 2 of
Title 43 over the losses allowable
under §702(a)(8) of the Internal
Revenue Code (§43-1122.01).
• The amount by which the adjusted
basis of all property which is held for
the production of income and which is
sold or otherwise disposed of during
the taxable year other than
depreciable property used in a trade
or business, computed pursuant to
Title 43 and the income tax act of
1954, as amended, exceeds the
adjusted basis of such property
computed pursuant to the Internal
Revenue Code (A.R.S. §43-1122.01).
• The amount allowed by A.R.S. §43-
1024 for amortization by a qualified
defense contractor certified by the
Department of Commerce under §41-
1508, of a capital investment for
private commercial activities (A.R.S.
§43-1122.01).
• Gain included on the sale or other
disposition of a capital investment that
a qualified defense contractor has
elected to amortize pursuant to A.R.S.
§43-1024 (A.R.S. §43-1122.01).
• The amount allowed by §43-1025
for contributions during the taxable
year of agricultural crops to
charitable organizations (A.R.S. §43-
1122.01).
• The portion of any wages or
salaries paid or incurred by the
taxpayer for the taxable year that is
equal to the amount of the federal
work opportunity credit, the
empowerment zone employment credit,
the credit for employer paid social
security taxes on employee cash tips,
and the Indian employment credit that
the taxpayer received under §§45A,
45B, 51(a) and 1396 of the IRC
(A.R.S. §43-1122.01).
• Dividend income received from
Arizona corporations (A.R.S. §43-
1122.02).
• Arizona capital loss carryover in
an amount not to exceed $1,000 from
tax years beginning prior to 1/1/88
(A.R.S. §43-1122.03).
• Expenses and interest relating to
tax-exempt income disallowed
pursuant to §265 of the Internal
Revenue Code (A.R.S. §43-1122.04).
• Dividends received from another
corporation owned or controlled
directly or indirectly by a recipient
corporation (A.R.S. §43-1122.05).
• Interest income received on
obligations of the U.S. (A.R.S. §43-
1122.06).
30
• Dividend income from foreign
corporations (A.R.S. §43-1122.07).
• State income tax refunds received
which were included as income in
computing federal taxable income
(A.R.S. §43-1122.09).
• Expense recapture included in
income pursuant to §617 of the
Internal Revenue Code for mine
exploration expenses (A.R.S. §43-
1122.10).
• Deferred exploration expenses
allowed by A.R.S. §43-1127 (A.R.S.
§43-1122.11).
• Exploration expenses related to the
exploration of oil, gas or geothermal
resources (A.R.S. §43-1122.12).
• Amortization of pollution control
devices (A.R.S. §43-1122.13).
• Amortization of the cost of child
care facilities (A.R.S. §43-1122.14).
• Income from a domestic
international sales corporation
required to be included in the income
of its shareholders pursuant to §995 of
the Internal Revenue Code (A.R.S.
§43-1122.15).
• The amount authorized by A.R.S
§43-1128.01 for the taxable year for
purchases of alternative fuel vehicles
(A.R.S. §43-1122.16).
�� The income of an insurance
company that is exempt under A.R.S.
§43-1201 to the extent that it is
included in computing Arizona gross
income on a consolidated return
(A.R.S. §43-1122.17).
• The amount of contributions by the
taxpayer during the taxable year to
individual medical savings accounts
pursuant to A.R.S. §43-1028 (A.R.S.
§43-1122.18) to the extent not already
deducted in computing federal taxable
income.
• The amount by which capital loss
carryover allowable per A.R.S. §43-
1130.01 F exceeds the capital loss
carryover allowable per section
13410(b)(5) of the internal revenue
code.
ARIZONA NET OPERATING
LOSSES
All corporate taxpayers are allowed to
subtract from their Arizona taxable
income the amount of unused net
operating losses attributable to Arizona
for the last five years (A.R.S. §43-
1122.08). Corporations claimed Arizona-based
net operating losses totaling $7.624
billion for tax year 1996. In many cases
these losses exceeded taxable income,
meaning that the amount claimed is
greater than the amount actually used to
offset taxable income. To calculate the
tax value of this $7.624 billion, the loss
was multiplied by 9% for those
businesses with positive taxable income.
For those with negative taxable income,
that portion of loss that was larger than
the taxable income was multiplied by
9%.8
The result of these calculations was
a maximum tax value of $138,425,900.
Approximately 25% of the 50,900
corporations in Arizona (filing Arizona
corporate income tax returns) had net
operating losses in 1996. The table
below shows the number of corporations
by size of net operating loss and by
positive or negative taxable income.
8For example, if the net operating loss was
$10,000 and the negative taxable income was
$9,000, adding back the loss would result in a
positive taxable income of $1,000. The tax rate
was applied against the $1,000 to arrive at the
taxable value of the operating loss.
31
1996 --Size of NOL # with Liability # w/o Liability Total
$1 to $99 144 253 397
$100 to $999 489 1,032 1,521
$1,000 to $9,999 1,261 3,078 4,339
$10,000 to $49,999 885 2,795 3,680
$50,000 to $99,999 180 845 1,025
$100,000 to $499,999 198 1,063 1,261
$500,000 to $999,999 26 216 242
Over $1,000,000 38 455 493
Total 3,221 9,737 12,958
$ Value $252,365,988 $7,371,885,421 $7,624,251,409
COMMERCIAL TAX CREDITS
A tax credit directly reduces a
corporation's tax liability, as opposed to a
subtraction which reduces taxable
income. The tax credits which currently
exist in Arizona corporate tax law are
nonrefundable credits; therefore, any
credit amount greater than a firm's tax
liability will not be refunded. A
corporation receives a credit for
expenditures in the following areas:
• for increased employment in
enterprise zones (A.R.S. §43-1161).
• for investment or employment in
qualified property on the grounds of
an Arizona correctional facility
(A.R.S. §43-1162).
• for the purchase of recycling
equipment (A.R.S. §43-1164).
• for employment by a qualified
defense contractor (A.R.S. §43-1165).
• for property taxes paid by a
qualified defense contractor (A.R.S.
§43-1166).
• for increased employment in
military reuse zones (A.R.S. §43-
1167).
• for research and development
expenses (A.R.S. §43-1168).
• for expenses incurred in
constructing a qualified
environmental technology
manufacturing, producing or
processing facility (A.R.S. §43-1169).
• for expenses incurred to purchase
property used to control or prevent
pollution (A.R.S. §43-1170).
• for construction materials
incorporated into a qualifying facility
(A.R.S. §43-1171).
• for an agricultural water
conservation system (A.R.S. §43-
1172).
• for corrective action costs for
underground storage tanks
(A.R.S. §43-1173).
• for alternative fuel vehicles and
equipment (A.R.S. §43-1174).
• for employment of TANF
recipients (A.R.S. §43-1175).
• for solar hot water heater
plumbing stub outs and electric
vehicle recharge outlets installed
(A.R.S. §43-1176).
• for wages paid by an employer to
students (in grade 12 and under)
enrolled in the summer school and
jobs program established by the
Department of Economic Security
(Chapter 236, First Regular Session,
1995)
Prior to discussing the cost of the
corporate income tax credits, it is
important to mention two points. First,
corporate tax information for a given tax
year changes over time. Late returns are
31
filed, corporations are audited, amended
returns are filed, retroactive legislation is
enacted, etc. Therefore, any figures
stated here will probably change next
year and figures cited in previous years
will probably not match what is said
here. Second, information cannot be
revealed about certain credits claimed
without breaching confidentiality. If
fewer than four firms claim a credit or if
one firm claims more than 90% of the
total credit amount claimed or if
providing statistics on one credit would
result in information being divulged
about other credits (which is
confidential), then that information
cannot legally be released.
In tax year 1996, 135 corporations filed
for $20,433,472 in commercial tax
credits. Eleven types of credits were
claimed, as summarized on the table
below. Asterisks indicate instances in
which release of information would
breach confidentiality laws.
TYPE OF 1993 1994 1995 1996
CREDIT # $ USED # $ USED # $ USED # $ USED
Enterprise Zone 17 $1,453,899 21 $791,101 21 $1,776,264 22 $2,215,647
Corrections
Dependent Day Care 7 $18,311 5 6,839 No longer
available
No longer
available
Recycling
Equipment
** ** 5 14,851 4 11,167
Defense
Restructuring
** ** ** ** ** ** 4 $4,544,146
Military Reuse ** **
Research &
Development
21 301,091 77 2,197,471 70 5,233,254 82 7,475,059
Environmental
Technology
** ** 4 2,329,787 6 15,821,497 5 2,552,462
Construction
Materials
** ** 6 4,849,737 9 990,729
Agricultural Water 5 8,321 ** ** ** **
Underground
Storage Tanks
** ** ** **
Alternative Fuel
Vehicles
** ** ** ** ** **
Pollution Control 15 2,367,936 18 2,601,850
Summer School &
Jobs
** **
Total 48 $2,029,683 120 $5,911,203 136 $31,415,432 152 $20,433,472
32
SUMMARY OF CORPORATE INCOME TAX EXPENDITURES
Revenue Gain
Subtractions Allowed in Calculation of Federal Taxable Income:
Compensation of Officers ....................................................................................... NIA*
Exempt Organizations:
Salaries and wages ................................................................................................... NIA
Incidental repairs adding no value to property ......................................................... NIA
Debts becoming worthless during the tax year ........................................................ NIA
Expenses of renting or leasing a vehicle .................................................................. NIA
Charitable or governmental organization contributions ........................................... NIA
Depreciation ............................................................................................................. NIA
Certain percentage depletion rates applicable to natural deposits ............................ NIA
Pension, profit-sharing, etc. contributions ............................................................... NIA
Contributions to employee benefit programs ........................................................... NIA
Amortization of certain items................................................................................... NIA
Political subdivisions or units of the state or federal government ........................... NIA
Labor, agricultural or horticultural organizations .................................................... NIA
Qualifying fraternal beneficiary societies................................................................. NIA
Cemetery companies not for profit ........................................................................... NIA
Qualifying religious, charitable, scientific, etc., corporations .................................. NIA
Nonprofit business leagues ...................................................................................... NIA
Nonprofit qualifying civic leagues ........................................................................... NIA
Clubs organized for pleasure, recreation or other nonprofit purposes ..................... NIA
Corporations organized to hold title to property for exempt organization ............... NIA
Voluntary employee's beneficiary organizations ...................................................... NIA
Teachers' or public employees' retirement fund organization .................................. NIA
Religious or apostolic organizations which pass through income ........................... NIA
Voluntary employee's beneficiary organizations with a twist .................................. NIA
Diversified management companies ........................................................................ NIA
Insurance companies subject to the insurance premium tax .................................... NIA
Mutual ditch, irrigation or water companies ............................................................ NIA
Subchapter S corporations ........................................................................................ NIA
Arizona Subtractions from Federal Taxable Income:
Annuity income included pursuant to §72 of the IRC.............................................. NIA
Excess of a partner's share of income under §702(a)(8) of IRC .............................. NIA
Excess of a partner's share of partnership losses ..................................................... NIA
Excess of adjusted basis of property held for income production ............................ NIA
* No Information Available.
33
Amortization by a qualified defense contractor of a capital investment for private
commercial activities .......................................................................................... NIA*
Gain on amortized capital investment by a qualified defense contractor ................. NIA
Dividend income received from Arizona corporations ............................................ NIA
Arizona capital loss carryover not to exceed $1,000 prior to 1/1/88 ....................... NIA
Expenses/interest relating to tax-exempt income disallowed per IRC ..................... NIA
Dividends received from controlled corporation ..................................................... NIA
Interest income received on obligations of the U.S.................................................. NIA
Dividend income from foreign corporations ............................................................ NIA
Income tax refunds from states other than Arizona included as income in
computing federal taxable income ....................................................................... NIA
Expense recapture for mine exploration expenses ................................................... NIA
Deferred exploration expenses allowed by §43-1127 .............................................. NIA
Exploration expenses related to oil, gas or geothermal exploration ........................ NIA
Amortization of pollution control devices ............................................................... NIA
Amortization of the cost of child care facilities ....................................................... NIA
Income from domestic international sales corporation ............................................ NIA
Net Operating L osses .............................................................................. $138,426,000
Commercial Tax Credits:
Enterprise zone employment ......................................................................... $2,216,000
Investment or employment at Arizona correctional facility .......................................... 0
Purchase of recycling equipment ......................................................................... 11,000
Employment by qualified defense contractor .................................................. 4,544,000
Property taxes paid by qualified defense contractor ...................................................... 0
Increased employment in military reuse zones ......................................................... ??10
Research and development expenses .............................................................. 7,475,000
Environmental technology manufacturing facility construction ..................... 2,553,000
Construction materials ....................................................................................... 991,000
Agricultural water conservation ................................................................................ ??10
Underground Storage Tanks ...................................................................................... ??10
Alternative Fuel Vehicles ........................................................................................... ??9
TOTAL QUANTIFIABLE CORPORATE INCOME TAX
EXPENDITURES
Pollution Control ............................................................................................. 2,602,000
Total Commercial Tax Credits ................................................................ $20,434,000
10
................................................................................................ $158,860,000
* No Information Available.
9These question marks ("??") indicate that release of this information would result in a violation of Arizona
confidentiality laws.
10These expenditures represent foregone revenues to the state general fund and to the urban revenue sharing
fund, which is distributed to incorporated cities and towns.
34
35
ESTATE TAX
EXPENDITURES
36
37
ESTATE TAX EXPENDITURES
The Arizona estate tax is a tax on the
transfer of property or interest in property
that takes effect upon the owner's death.
The estate tax is an amount equal to the
federal credit for state death taxes. Estate
taxes are deposited into the general fund.
If the decedent owned realty or tangible
personal property located in another state,
the Arizona tax is reduced by the smaller
of the amount of death tax paid to the
other state or the federal credit times the
percentage of total real or tangible
personal property located in another
state.
Information on this reduction is
unavailable for the current year.
However, the average percentage of total
collections allowed as a deduction over
the past three years is approximately
1.68%. Total collections in Fiscal Year
1997/98 was $62,902,974, and an
estimated deduction for this year would
be roughly 1.68% of this total, or
$1,055,028. This deduction is a dollar-for-
dollar reduction in the estate tax
liability.
38
SUMMARY OF ESTATE TAX EXPENDITURES
Revenue Gain
Deduction from federal credit for state death taxes ...................................... $1,055,000
TOTAL QUANTIFIABLE ESTATE TAX EXPENDITURES11
.................................................................................................... $1,055,000
11These expenditures represent foregone revenues to the state general fund.
39
FIDUCIARY INCOME TAX
EXPENDITURES
40
41
FIDUCIARY INCOME TAX EXPENDITURES
Fiduciary income tax is the income tax on
estates or trusts, based on the residence of
the fiduciaries or beneficiaries. For
estates, all income received by the estate
after the death of the taxpayer is reported
on a fiduciary income tax return. Upon
creation of a trust, the trust becomes a
taxable entity and income to the trust
must be reported on a fiduciary income
tax return.
Net income tax (corporate, individual and
fiduciary) collections are deposited into
the general fund after 15.8% of net
income tax collections received two years
prior is disbursed to cities and towns. In
other words, 15.8% of net individual plus
corporate plus fiduciary income tax
received in Fiscal Year 1997/98 will be
distributed to incorporated cities/towns in
Fiscal Year 1999/2000. When reviewing
the tax value of the fiduciary tax
expenditures, therefore, the assumption
can be made that 84.2% of the tax value
is general fund revenue, although the
remaining 15.8% is not actually disbursed
for two years in the future.
Calculation of fiduciary income tax
begins with federal taxable income from
the federal form 1041 (U.S. Fiduciary
Income Tax Return). Therefore, any
subtractions allowed in the calculation of
federal taxable income are allowed under
Arizona law by the act of conforming to
the Internal Revenue Code definition of
federal taxable income. From federal
taxable income, certain subtractions and
exemptions are allowed to reach Arizona
taxable income. After calculation of
Arizona tax liability, a credit for taxes
paid to other states or countries is
allowed.
SUBTRACTIONS ALLOWED IN
THE CALCULATION
OF FEDERAL TAXABLE INCOME
The starting point for the calculation of
Arizona fiduciary income tax liability is
federal taxable income, as calculated on
the federal form 1041 (U.S. Fiduciary
Income Tax Return). The Arizona
legislature must choose to approve
legislation annually to conform to the
definition of federal taxable income as of
January of the current year. In
conforming to the definition of federal
taxable income, Arizona accepts the
subtractions from gross income allowed
by the federal government. These
subtractions include:
• Deduction for interest paid by the
estate or trust on amounts borrowed
by the estate or trust or on debt
acquired by the estate or trust. This
includes any investment interest
(subject to limitations), qualified
residence interest and any interest
payable on any unpaid portion of the
estate tax attributable to the value of a
reversionary or remainder interest in
property.
• Deductible taxes, including state
and local income or real property tax
and generation-skipping transfer tax
imposed on income distributions.
• Deductible fees paid to the
fiduciary for administering the estate
or trust during the tax year.
42
• Charitable contributions less tax-exempt
income allocable to charitable
contributions.
�� Deductible attorney, accountant,
and return preparation fees paid by
the estate or trust.
• Other deductions, such as
amortizable bond premiums, casualty
and theft losses, net operating loss
deduction and fiduciary's share of
amortization, depreciation and
depletion not claimed elsewhere.
• Miscellaneous itemized deductions
in excess of 2% AGI.
• Income Distribution Deduction.
• Estate tax paid.
• $600 exemption for estates. $300
exemption for trusts in which all
income must be distributed currently.
$100 exemption for all other trusts
unless the trust is filing for the final
year (in which case no exemption is
allowed).
It is not possible to calculate the tax value
of these subtractions. Information from
the Internal Revenue Service would be
required to determine the value and this
information is not readily available.
ARIZONA SUBTRACTIONS FROM
FEDERAL TAXABLE INCOME
Arizona statute sets out certain amounts
which can be subtracted from federal
taxable income to reach adjusted gross
income attributable to Arizona.
• Interest received on U.S.
obligations. Interest income received
on obligations of the United States
(less any interest on indebtedness, or
other related expenses, and deducted
in arriving at Arizona gross income)
which were incurred or continued to
purchase or carry such obligation can
be subtracted (A.R.S. §43-1332.1).
• Federal income from other
fiduciaries. When the estate or trust is
the beneficiary of another estate or
trust, the beneficiary's share of the
trust or estate income recognized
under the Internal Revenue Code may
be subtracted (A.R.S. §43-1332.1).
• Arizona estate tax deduction. The
apportionate share of the Arizona
estate tax that related to the income of
the estate and which was included in
federal taxable income may be
subtracted from federal taxable income
(A.R.S. §43-1332.5).
• Arizona distribution to
beneficiaries. The income of the
estate or trust which is to be
distributed or credited during the year
to any legatee, heir or beneficiary is
allowed as a subtraction from federal
taxable income (A.R.S. §43-1332.3 &
.4).
• Medical savings accounts. In the
case of a trust that is established as a
medical savings account pursuant to
A.R.S. §43-1028, income earned by
the trust, to the extent that the income
is included in the trust's Arizona gross
income (A.R.S. §43-1332.5).
Other Subtractions. The remaining
subtractions are entered in aggregate on
the line "Other Subtractions from federal
taxable income." The following is a list
of "Other Subtractions":
• Benefits, annuities and pensions in
an amount totaling not more than
$2500 received from: U.S.
government service retirement and
disability fund, retired or retainer pay
of the U.S. uniformed services, the
U.S. foreign service retirement and
disability system, any other retirement
43
system or plan established by federal
law, the state retirement system, the
state retirement plan, the corrections
officer retirement plan, the public
safety personnel retirement system, the
elected officials' retirement plan, an
optional retirement program
established by the AZ board of regents
under A.R.S. §15-1628, or a
retirement plan established for
employees of a county, city or town in
this state. (A.R.S. §43-1332.1)
• The amount of any distributions
from an individual retirement account
as provided for in §408 of the IRC or
from a qualified retirement plan of a
self-employed individual as provided
for in §401 of the IRC to the extent
that total adjustments made pursuant
to this paragraph in all tax years do
not exceed the total of all
contributions made by the taxpayer to
such plans prior to 12/31/75, which
were included in computing Arizona
taxable income. (A.R.S. §43-1332.1)
• The amount of income on an
installment receivable which is
recognized pursuant to the IRC and
which has already been recognized on
the death of the taxpayer for purposes
of this title for tax years ending before
1/1/90. (A.R.S. §43-1332.1)
• The amount of any income tax
refunds which were received from
states other than Arizona and which
were included as income. (A.R.S.
§43-1332.1)
• Annuity income included pursuant
to §72 of the IRC if the first payment
with respect to such annuity was
received prior to 12/31/78. (A.R.S.
§43-1332.1)
• The excess of a partner's share of
income required to be included under
§702(a)(8) of the IRC over the income
required to be included under chapter
14, article 2 of title 43. (A.R.S. §43-
1332.1)
• The excess of a partner's share of
partnership losses determined
pursuant to chapter 14, article 2 of
title 43 over the losses allowable
under §702(a)(8) of the IRC. (A.R.S.
§43-1332.1)
• The amount by which the adjusted
basis of all property which is held for
the production of income and which is
sold or otherwise disposed of during
the taxable year other than
depreciable property used in a trade
or business, computed pursuant to title
43 and the income tax act of 1954, as
amended, exceeds the adjusted basis of
such property computed pursuant to
the IRC. (A.R.S. §43-1332.1)
• The amount allowed by §43-1024
for amortization, by a qualified
defense contractor certified by the
department of commerce under §41-
1508, of a capital investment for
private commercial activities. (A.R.S.
§43-1332.1)
• The amount of gain included on
the sale or other disposition of a
capital investment that a qualified
defense contractor has elected to
amortize pursuant to §43-1024. (§43-
1332.1)
• The amount allowed by A.R.S. §43-
1025 for contributions of agricultural
crops to charitable organizations
(A.R.S. §43-1332.1).
• The amount of winnings less than
$5000 in a single taxable year from
any of the state lotteries established
and operated pursuant to title 5,
chapter 5, article 1, except that all
such winnings before 3/22/83,
including periodic distributions from
such winnings made after 3/22/83,
may be subtracted. (A.R.S. §43-
1332.1)
44
• The amount of mining exploration
expenses determined pursuant to §617
of the IRC which have been deferred in
a taxable year ending bef ore 1/1/90
and for which a subtraction has not
been previously made. (A.R.S. §43-
1332.1)
• The amount included pursuant to
§86 of the IRC, relating to taxation of
social security and railroad retirement
benefits. (A.R.S. §43-1332.1)
• To the extent not already excluded
from Arizona gross income under
§112 of the IRC, compensation
received for active service as a
member of the armed forces of the U.S.
for any month during any part of
which the member served in a combat
zone. (A.R.S. §43-1332.1)
• The amount of nonreimbursed
medical and hospital costs, adoption
counseling, legal and agency fees and
other nonrecurring costs of adoption
not to exceed three thousand dollars
(A.R.S. §43-1332.1).
• The amount authorized by A.R.S.
§43-1026 for the purchases of and
equipment relating to, alternative fuel
vehicles (A.R.S. §43-1332.1).
• The amount authorized by A.R.S.
§43-1027 for the purchases of, and
nonoptional equipment directly related
to the operation of, qualified wood
stoves, wood fireplaces or gas fired
fireplaces (A.R.S. §43-1332.1).
• With respect to individual medical
savings accounts established pursuant
to A.R.S. §43-1028, the account holder
may subtract the amount of
contributions made by the employer, to
the extent that these contributions are
included in the taxpayer's federal
adjusted gross income, and the amount
deposited by the taxpayer in the
account during the year. The
employer may subtract the amount of
contributions made to an employee's
account to the extent that the
contributions are not deductible under
the internal revenue code (A.R.S. §43-
1332.1).
• The amount by which an operating
loss carryover or capital loss
carryover, allowable pursuant to
A.R.S. §43-1029 F, exceeds the net
operating loss carryover or capital
loss carryover allowable pursuant to
section 1341(b)(5) of the internal
revenue code (A.R.S. §43-1332.1).
The values associated with the total
subtractions were found in the 1996
Arizona Fiduciary Income Tax Abstract.
Average tax rates were applied to this
total value to reach the tax value of the
subtraction. The total amount of
subtractions on Fiduciary tax returns for
estates for tax year 1996 was $53.44
million. Fiduciary returns for trusts
showed a total subtraction amount of
$608.192 million for tax year 1996.
Using an effective tax rate of 1.6% of
gross income for estates and trusts results
in a tax value of these subtractions of
$10.586 million.
EXEMPTIONS FROM ARIZONA
ADJUSTED GROSS INCOME
Estates and trusts are allowed exemptions
from Arizona adjusted gross income
(A.R.S. §43-1332.A2). Estates are
allowed $1,000 exemptions; trusts are
allowed $100 exemptions. The total
amount of exemptions claimed by estates
and trusts in 1996 was $7.91 million.
However, a large portion of these
exemptions were claimed by filers with
negative adjusted gross income.
Exemptions claimed by taxpayers with
positive taxable income were $2.05
million. Using an average tax rate of
45
4.6% (tax rates based on Arizona taxable
income) for estates and trusts, the
exemptions had a tax value of $0.094
million. This excludes returns with
negative adjusted gross income.
46
PREFERENTIAL TAX RATES
Fiduciary income tax for tax year 1996
was calculated according to a graduated
tax rate schedule as presented below:
at least but less than
$0 $10,000 3.0% of the amount
10,000 25,000 $300, plus 3.5% of the excess over $10,000
25,000 50,000 $825, plus 4.2% of the excess over $25,0000
50,000 150,000 $1,875, plus 5.2% of the excess over $50,000
150,000 and over $7,075, plus 5.6% of the excess over $150,000
Lower taxable incomes are taxed at a
lower level, or, in other words, are treated
preferentially. If all taxpayers were
treated identically, the same tax rate
would be applied regardless of the level
of taxable income. A question arises,
however, as to what tax rate should be
applied to determine the revenue impact
of treating all taxpayers identically. One
argument may be that since the highest
tax rate is 5.6%, determining the impact
of taxing all income at 5.6% would seem
appropriate. Using this reasoning, an
additional $3.3 million would have been
collected from fiduciary income tax if a
flat 5.6% tax rate had been used.
However, no taxpayer is currently taxed
solely at 5.6%; only that income greater
than $150,000 is taxed at 5.6%.
Therefore, everyone would experience a
tax increase.
If a flat tax rate were applied to fiduciary
income, the logical tax rate applied would
be the effective tax rate of all fiduciary
taxpayers. Applying an effective tax rate
to all taxpayers will result in the same
fiduciary tax collections as with the
graduated tax rate structure, but the
burden of the tax will change. In this
example, an effective tax rate of 4.6% of
taxable income for estates and trusts was
used, excluding the negative income
bracket.
As can be seen from the table below,
changing the graduated tax rates to a
single tax rate (equal to the current
effective tax rate for all taxpayers) results
in taxpayers with lower taxable incomes
paying more tax and taxpayers with
higher taxable incomes paying less tax.
In the $0.01 to $1,999 FAGI bracket, the
total tax paid under the current tax
schedule is $95,697; changing to one tax
rate equal to the current effective tax rate
increases this group's tax liability by
$50,166 or a 52.42% increase. For
FAGIs of $2,000 to $99,999, the tax
burden would increase because the new
effective tax rate is greater than the
current effective tax rate for these groups.
46
CREDITS
Once fiduciary tax liability is calculated,
one credit is allowed to be subtracted
from the tax liability. If the estate or trust
is considered to be a resident of Arizona
and also a resident of another state or
country, the estate or trust will be allowed
a tax credit against the Arizona income
tax liability for taxes paid to the other
state or country. In 1996, $0.72 million
was claimed as credit for taxes paid to
other states or countries. This is a direct
reduction of tax liability.
Federal Adjusted
Gr oss Income
Or iginal Tax
Collections
New Tax
Collections
Differ ence
%
Change
$0.01-1,999
$95,697
$145,863
$50,166
52.42%
$2,000-3,999
$160,203
$238,683
$78,480
48.99%
$4,000-5,999
$170,695 $259,985 $89,290 52.31%
$6,000-7,999
$174,091
$265,471
$91,380
52.49%
$8,000-9,999
$161,409
$247,288
$85,879
53.21%
$10,000-11,999
$169,646
$256,125
$86,479
50.98%
$12,000-13,999
$188,195
$259,938
$71,743
38.12%
$14,000-15,999
$183,367
$266,694
$83,327
45.44%
$16,000-17,999
$171,569
$245,937
$74,368
43.35%
$18,000-19,999
$167,747
$238,180
$70,433
41.99%
$20,000-24,999
$370,080
$516,595
$146,515
39.59%
$25,000-29,999 $328,678 $447,745 $119,067 36.23%
$30,000-39,999
$631,247
$816,131
$184,884
29.29%
$40,000-49,999
$534,185
$663,352
$129,167
24.18%
$50,000-74,999
$929,739
$1,060,838
$131,099
14.10%
$75,000-99,999
$769,945
$812,290 $42,345 5.50%
$100,000-199,999
$1,585,696
$1,563,101
($22,595)
-1.42%
$200,000-499,999
$1,633,083
$1,459,880
($173,203)
-
$500,000-999,999
$1,538,488
$1,311,505
($226,983)
-
$1,000,000 and
$4,892,429 $3,780,590 ($1,111,839) -22.73%
Total
$14,856,189
$14,856,189
$0
47
SUMMARY OF FIDUCIARY INCOME TAX EXPENDITURES
Revenue Gain
Arizona Subtractions in Calculation of Federal Taxable Income:
Deduction for interest paid ...................................................................................... NIA*
Subtractions from Federal Taxable Income:
Deductible taxes ....................................................................................................... NIA
Deductible fiduciary fees.......................................................................................... NIA
Charitable contributions ........................................................................................... NIA
Deductible attorney, accountant fees ........................................................................ NIA
Other miscellaneous deductions ............................................................................... NIA
Miscellaneous itemized deductions in excess of 2% AGI ....................................... NIA
Income distribution deduction .................................................................................. NIA
Estate tax paid .......................................................................................................... NIA
$600/$300/$100 estate/trust exemption ................................................................... NIA
Interest received on U.S. obligation
Federal income from other fiduciaries
Arizona estate tax deduction
Arizona distribution to beneficiaries
Other subtractions:
U.S./state pensions not over $2500
Certain IRA distributions or 401Ks
Installment income recognized pursuant to IRC
Income tax refunds from other states
Annuity income included pursuant to §72 of the IRC
Excess of a partner's share of income
Excess of a partner's share of losses
Excess of adjusted basis of property held for income production
Amortization by a qualified defense contractor
Gain on sale of capital investment by qualified defense contractor
Lottery winnings, up to $5,000
Mining exploration expenses
Social security and railroad retirement benefits
Active military pay
Total Subtractions from Federal Taxable Income ................................. $10,586,000
$1,000/$100 exemptions for estates/trusts ..................................................... $94,000
Preferential tax rates (raising average tax rate to 5.6% for all taxpayers) $3,300,000
Credit for taxes paid to other states or countries ....................................... $720,000
* No Information Available.
48
TOTAL QUANTI FIABLE FIDUCIARY INCOME TAX
EXPENDITURES12
................................................................................................. $14,700,000
12These expenditures represent foregone revenues to the state general fund and to the urban revenue sharing
fund, which is distributed to incorporated cities and towns.
49
FLIGHT PROPERTY TAX
EXPENDITURES
50
51
FLIGHT PROPERTY TAX EXPENDITURES
The airline companies in Arizona pay a
tax on the flight property within the state.
The taxable value, or net assessed value,
of the flight property is determined by
multiplying the full cash value of the
property by an assessment ratio. The tax
rate that is applied to the net assessed
value is equal to the statewide average
tax rate, which is $12.70 in 1997.
EXEMPTIONS
If an airline operating in Arizona has a
system wide average passenger capacity
of less than 56 seats or a system wide
average payload capacity of less than
18,000 pounds, this small airline's taxable
value is determined by 30% of its original
cost less depreciation multiplied by the
assessment ratio (A.R.S. §42-704). Had
the taxable value been 100%, the state
would have raised $1,198,000 more in
FY98.
PREFERENTIAL
ASSESSMENT RATIO
Arizona statutes set out the assessment
ratios to be used in determining the net
assessed values of the various classes of
property. These assessment ratios range
from 27% to 1%. For flight property, the
assessment ratio is equal to the ratio
which the total net assessed valuation of
all taxable property in classes 1 (mines
and timber), 2 (utilities) and 3
(commercial and industrial) and personal
property in class 4 (agricultural and
vacant land) bears to the total full cash
value of such property (A.R.S. §42-
705A). For tax year 1997, the assessment
ratio used for flight property was 23%.
This is considered to be a preferential
assessment ratio because it is an average
of the assessment ratios in several other
classes of property. If flight property had
an assessment ratio equal to the highest
assessment ratio imposed, 27%, tax
collections would have increased by
$2,719,319.
52
SUMMARY OF FLIGHT PROPERTY TAX EXPENDITURES
Revenue Gain
EXEMPTION
Tax value at 30% for small airplanes ...................................................... $1,198,000
PREFERENTIAL ASSESSMENT RATIOS:
Preferential assessment ratio at 27% ....................................................... $2,719,000
........................... TOTAL QUANTIFIABLE FLIGHT PROPERTY TAX
EXPENDITURES13
13These expenditures represent foregone revenues to the state aviation fund.
.................................................................................................... $3,917,000
53
IN L IEU PROPERTY TAX
EXPENDITURES
54
55
IN LIEU PROPERTY TAX EXPENDITURES
Irrigation districts, power districts,
electrical districts or agricultural
improvement districts directly engaged in
the sale of electric power or energy other
than for irrigation purposes may elect to
make voluntary contributions to Arizona
and the political subdivisions thereof for
property taxes. These districts are not
legally liable for property taxes imposed
by the state and the political subdivisions,
so these voluntary contributions are
known as in lieu property taxes.
(However, according to A.R.S. §9-432B,
water may not be transported from
remote municipal property by a city, town
or political subdivision, unless voluntary
contributions have been paid.)
The Department of Revenue determines
the full cash value of the district electing
to make in lieu property tax payments.
The county assessor of each county where
district electric facilities are located
computes the gross contribution to be
made. The district may subtract certain
amounts from this gross contribution
figure. A subtraction is allowed for the
contribution related to that portion of the
electric system related to pumping water
(A.R.S. §48-242C1). A deduction of
$10,000 is allowed from the gross
contribution (A.R.S. §48-242C2).
Certain taxes or assessments paid to any
political subdivision during the preceding
calendar year may be deducted from the
gross contribution (A.R.S. §48-242C3).
The annual average of the total water
costs devoted to municipal use during the
last three calendar years is also deductible
from the gross contribution (A.R.S. §48-
242C4).
The effect of these deductions from the
gross contribution amount is that the
district in question pays a certain
percentage of the gross contribution. The
primary contributor, Salt River Project,
paid 84.44% of the tax that would have
been levied in Fiscal Year 1998 had they
been legally bound to pay property tax.
Given the repeal of the state rate, the
dollar expenditure previously appeared in
this report is no longer applicable.
However, because the exemptions filter
through to the tax base at the local level,
descriptions of the exemptions remain.
56
57
INDIVIDUAL INCOME TAX
EXPENDITURES
58
59
For tax year 1996 filed in calendar year
1997, the Arizona Department of
Revenue collected nearly $1.5 billion in
resident individual income taxes, before
credits. Against the same tax year, the
state allowed exemptions, deductions,
exclusions, credits and preferential rates
worth as much as $1.7 billion in tax
liability. This report details the value of
each of these exemptions, deductions,
exclusions, credits and preferential rates
to Arizonans.
The figures presented in this report were
determined using the Individual Income
Tax Simulation Model, containing a 1996
database. This Model contains 36,087
resident returns, selected using stratified
sampling techniques. The information on
the back of Arizona Individual Income
Tax Form 140 and on Schedule A was
data-entered for the sample returns,
making the detailed information
presented below available. Please
remember these figures are for tax
year 1996. All of the tax expenditures
discussed in this report refer to tax law in
existence in 1996, filed in 1997.
Examination of the detail presented in
this section reveals that summing the tax
value of certain tax expenditures
individually does not produce the total
value of removing all of those same tax
expenditures at one time. (The sum of
the parts is less than the whole.)
Disallowing exemptions, subtractions or
deductions can have the effect of
changing the tax rate applied to a portion
of a taxpayer's taxable income. For
example, the taxpayer may have had
taxable income of $40,000 prior to the
removal of the tax exemption device,
resulting in a tax rate of 4.2% on part of
this income. Removal of deductions may
result in pushing the taxpayer's taxable
income to $55,000, resulting in a tax rate
of 5.2% on part of this income. Removal
of all exemptions, subtractions and
deductions may make taxable income
high enough to hit the 5.6% tax rate.
Therefore, adding back large pieces of
income that were previously untaxed can
push the taxpayer into two or three higher
tax brackets.
In other areas of this report, you may
notice that adding the impacts of
individual deductions together results in a
larger impact than what the figure for
removal of the entire section indicates.
(The sum of the parts is greater than the
whole.) For example, if the components
of the Taxes Paid Deduction on the
Schedule A were added together, the total
would be $98 million. However, removal
of the entire Taxes Paid Deduction
section results in a value of $95 million.
In this case, removal of individual pieces
may lower the Schedule A total and may
or may not push the taxpayer into a
higher tax bracket. Removal of the entire
section, however, may push the Schedule
A total below the standard deduction
level. If this happens, the standard
deduction amount is substituted for the
Schedule A amount. Therefore, there is a
constant deduction level (equal to the
standard deduction) below which the
taxpayer will not fall, regardless of how
much of the Schedule A is removed.
This constant deduction level serves to
buffer the impact of losing the Schedule
A deductions and could potentially keep
the taxpayer from moving into a higher
tax bracket.
Net income tax (corporate, individual and
fiduciary) collections are deposited in the
general fund after 15.8% of net income
60
tax collections received two years prior is
disbursed to cities and towns. In other
words, 15.8% of net individual plus
corporate plus fiduciary income tax
received in Fiscal Year 1997/98 will be
distributed to incorporated cities/towns in
Fiscal Year 1999/00. When reviewing
the tax value of the individual income tax
expenditures, therefore, the assumption
can be made that 84.2% of the tax value
is general fund revenue, although the
remaining 15.8% is not actually disbursed
for two years in the future.
SUBTRACTIONS ALLOWED
IN THE CALCULATION OF
FEDERAL ADJUSTED GROSS
INCOME
The starting point for the calculation of
Arizona individual income tax liability is
federal adjusted gross income, as
calculated on the federal form 1040,
1040A and 1040EZ U.S. Individual
Income Tax returns. The Arizona
legislature must approve legislation
annually to conform to the definition of
federal adjusted gross income as of
January of the current year. In
conforming to the definition of federal
adjusted gross income, Arizona accepts
the subtractions from gross income
allowed by the federal government.
These subtractions include:
• Welfare benefits.
• Disability retirement payments and
other benefits paid by the Department
of Veterans' Affairs.
• Workers' compensation benefits,
insurance, damages, etc., for injury or
sickness.
• Child support.
• Money or property that was
inherited, willed to you or received as
a gift.
• Dividends on veterans' life
insurance.
• Life insurance proceeds received
because of a person's death.
• Amounts you received from
insurance because you lost the use of
your home due to fire or other
casualty to the extent the amounts
were more than the cost of your
normal expenses while living in your
home.
• Certain amounts received as a
scholarship grant.
• Cancellation of certain student
loans if, under the terms of the loan,
the student performs certain
professional services for any of a
broad class of employers.
• Interest earned on series EE U.S.
savings bonds issued after 1989 for
filers with qualified higher education
expenses.
• Up to $62,500 ($125,000 if
married) in capital gains from the sale
of a personal residence if over 55.
• Soil and water conservation
expenses, up to 25% of gross farming
income.
• Individual Retirement Account
contributions for individuals with
qualifying incomes.
• One-half of self-employment tax
paid.
• Up to 50% of self-employed health
insurance payments.
• Keogh payments or simplified
employee pension payments if you are
self-employed.
• Penalty on early withdrawal of
savings.
• Alimony paid.
It is only possible to estimate the tax
value of those subtractions that appear on
the front of the federal 1040 tax return as
subtractions to gross income.
61
1996
SUBTRACTION (Millions)
Individual Retirement Account for qualifying individuals $4.57
One-half of self-employment tax 5.21
Self-employed health insurance deduction 1.14
Keogh retirement plan and self-employed SEP deduction 6.41
Penalty on early withdrawal of savings 0.07
Alimony paid 2.74
TOTAL VALUE OF SUBTRACTIONS $20.57
EXEMPTIONS
Like the federal government, Arizona
grants exemptions for taxpayers meeting
certain conditions. For 1996, the federal
government allowed $2,550 for personal
and dependent exemptions. In Arizona,
the amount of exemption varies
according to type.
Personal Exemption
The personal exemption is the most
broad-based of all exemptions: every
taxpayer (and spouse) is eligible for one
(A.R.S. §43-1043). Single taxpayers and
those who are married but filing
separately were allowed exemptions of
$2,100 for tax year 1996. Married
couples filing jointly and unmarried head
of household taxpayers were allowed
$4,200 exemptions. The higher personal
exemption allowed unmarried head of
household filers is a preferential personal
exemption amount, double the amount
normally allowed for one person.
Age 65 or Older Exemption
Taxpayers age 65 or older were eligible
for an additional exemption equal to
$2,100 for primary filer and for eligible
spouse in 1996 (A.R.S. §43-1023B).
Dependent Exemption
Arizona taxpayers may claim a dependent
exemption for children and certain other
relatives for whom they provide more
than 50% support (A.R.S. §43-1023D).
The dependent exemption was $2,300 in
1996.
Blind Exemption
Taxpayers who have corrected vision of
no better than 20/200 or have a field of
vision no wider than 20 degrees are
eligible for a blind exemption (A.R.S.
§43-1023A1). The exemption amount
was $1,500 in 1996.
1996
TYPE OF EXEMPTION (Millions)
Personal Exemption $147.44
Preferential Personal Exemption for Unmarried Head of
Household filers 7.49
Age 65 Or Older Exemption 19.14
Dependent Exemption 68.67
Blind Exemption 0.30
TOTAL VALUE OF EXEMPTIONS $248.63
62
ARIZONA SUBTRACTIONS
FROM INCOME
Arizona taxpayers can subtract certain
amounts from their gross income. The
largest subtraction in 1996 was for Social
Security or Railroad Retirement benefits
included on the federal Form 1040
(A.R.S. §43-1022.18). Arizona also
allowed these amounts to be subtracted:
the first $2,500 of a federal or Arizona
state or local retirement annuity (A.R.S.
§43-1022.2), the first $5,000 in Arizona
lottery winnings (A.R.S. §43-1022.16),
interest on US obligations (A.R.S. §43-
1022.6), which cannot be taxed by states
per federal law, and Agricultural crops
contributed to Arizona charitable
organizations (A.R.S. §43-1022.14). In
addition, there were a myriad of "other
subtractions" including, but not limited
to:
• A beneficiary's share of trust or
estate income recognized pursuant to
the internal revenue code (A.R.S. §43-
1022.3).
• The amount of any distributions
from an individual retirement account
as provided for in §408 of the internal
revenue code or from a qualified
retirement plan of a self-employed
individual (A.R.S. §43-1022.4).
• The amount of income on an
installment receivable which is
recognizable pursuant to the internal
revenue code and which has already
been recognized on the death of the
taxpayer for purposes of this title for
tax years ending before 1/90 (A.R.S.
§43-1022.5).
• The amount of any income tax
refunds which were received from
states other than Arizona and which
were included as income (A.R.S. §43-
1022.7).
• Annuity income included in income
pursuant to §72 of the internal revenue
code if the first payment with respect
to such annuity was received prior to
12/31/78 (A.R.S. §43-1022.8).
• The excess of a partner's share of
income required to be included under
§702(a)(8) of the internal revenue
code over the income required to be
included under Chapter 14, article 2
of title 43 (A.R.S. §43-1022.9).
• The excess of a partner's share of
partnership losses determined
pursuant to chapter 14, article 2 of
title 43 over the losses allowable
under §702(a)(8) of the internal
revenue code (A.R.S. §43-1022.10).
• The amount by which the adjusted
basis of all property which is held for
the production of income and which is
sold or otherwise disposed of during
the taxable year other than
depreciable property used in a trade
or business, computed pursuant to title
43 and the income tax act of 1954, as
amended, exceeds the adjusted basis of
such property computed pursuant to
the internal revenue code (A.R.S. §43-
1022.11).
• The amount of exploration
expenses determined pursuant to §617
of the internal revenue code which
have been deferred in a taxable year
ending before 1/90 and for which a
subtraction has not been previously
made (A.R.S. §43-1022.17).
• To the extent not already excluded
from Arizona gross income under
§112 of the internal revenue code,
compensation received for active
service as a member of the armed
forces of the U.S. for any month
during any part of which the member
served in a combat zone (A.R.S. §43-
1022.19).
63
1996
TYPE OF ARIZONA SUBTRACTION (Millions)
Interest on US Obligations $16.34
Exclusion for Federal, Arizona State or Local Pensions 8.28
Exempt Arizona State Lottery Winnings 0.25
Social Security or Railroad Retirement Benefits included
on federal Form 1040 31.80
Agricultural Crop Contributions 0.37
Income Tax Refund from Other States 0.44
Other Subtractions 6.41
TOTAL VALUE OF ARIZONA SUBTRACTIONS $64.78
DEDUCTIONS
All taxpayers in Arizona could deduct the
part of their income used to pay for
certain expenses, such as taxes or medical
bills, in 1996 by either listing (itemizing)
the deductions or taking the standard
deduction. Arizona allowed the same
itemized deductions as the federal
government, with three exceptions.
Medical deductions are more generous in
Arizona than at the federal level,
gambling losses are adjusted to take the
lottery subtraction into consideration, and
a property tax adjustment is made to
offset a property tax credit claimed.
These adjustments are explained more
fully below.
Standard Deduction
In 1996, the standard deduction was
$3,600 for single and married filing
separate filers and $7,200 for married
filing joint and unmarried head of
household filers (A.R.S. §43-1041). The
higher standard deduction amount
allowed for unmarried head of household
filers is a preferential deduction amount,
double the amount normally allowed one
person (A.R.S. §43-1041A2).
I temized Deductions (Schedule A):
The provisions allowed on the Schedule
A are mentioned in statute at A.R.S. §43-
1042 and described below. When
calculating the impact of disallowing
portions of the Schedule A and the entire
Schedule A, the standard deduction
replaced the Schedule A total if the
Schedule A total dropped below the
amount allowed for the standard
deduction. In other words, if the
Schedule A total dropped below $3,600
or $7,200 (the standard deduction
amounts based on filing status as
described in the previous paragraph) the
standard deduction amount was used.
Medical Deduction
The medical deduction on the federal
Schedule A equaled any medical
expenses greater than 7.5% of the
taxpayer's Federal Adjusted Gross
Income. This deduction was adjusted on
the Arizona return to allow medical
expenses incurred during the tax year.
The value of the 1996 medical deductions
was $43.1 million.
Taxes Paid Deduction
Deductions allowed for taxes included
state and local income taxes, real estate
taxes and other taxes, including personal
property taxes.
63
1996
TYPE OF TAX DEDUCTION (Millions)
State and Local Income Taxes $65.14
Real Estate Taxes 24.89
Other Taxes 8.03
VALUE OF TAXES PAID DEDUCTION $94.86
I nterest Expense Deduction
The interest expense deduction is the
largest of all the itemized deductions.
Deductible interest includes home
mortgage interest, points paid on the
purchase of a home and some investment
interest.
1996
TYPE OF INTEREST EXPENSE DEDUCTION (Millions)
Home Mortgage Interest and points $123.02
Deductible Points 0.85
Deductible Investment Interest 9.85
VALUE OF INTEREST EXPENSE DEDUCTION $133.43
Charitable Contribution Deduction
Deductions were allowed for
contributions made to religious,
charitable, educational, scientific or
literary organizations. The contributions
could be cash, property or out-or-pocket
expenses incurred while doing volunteer
work.
1996
TYPE OF CHARITABLE CONTRIBUTION DEDUCTION (Millions)
Cash Contribution $32.36
Contributions Other Than Cash 9.49
Carryover from Prior Year 2.27
VALUE OF CHARITABLE CONTRIBUTION DEDUCTION $44.12
Casualty and Theft Losses
Losses on non-business property arising
from theft, vandalism, fire, storm, and
car, boat and other accidents or similar
causes are deductible. Money kept in a
financial institution that was lost because
of insolvency or bankruptcy of the
institution was also deductible in some
cases. However, only those losses that
exceeded 10% of Federal Adjusted Gross
Income were deductible. The value of
this type of deduction was $0.08 million.
Job Expenses and Most Other
Miscellaneous Deductions
This deduction includes unreimbursed
job expenses, tax return preparation fees,
safe deposit box rental, certain legal and
accounting fees, etc., which exceed 2% of
Federal Adjusted Gross Income. The
value of this deduction in 1996 was
$16.86 million.
Other Miscellaneous Deductions
These fully deductible miscellaneous
deductions include gambling losses to the
extent of gambling winnings, federal
estate tax on income in respect of a
decedent, amortizable bond premiums on
bonds acquired before 10/23/86, etc.
64
Any gambling losses taken on the federal
Schedule A were adjusted for Arizona to
offset the subtraction for Arizona lottery
winnings. Without this adjustment, a
double deduction could have been
allowed for gambling losses associated
with the Arizona lottery. An adjustment
is also made to the Arizona itemized
deductions for the amount of property
taxes included on the federal Schedule A
for those qualified defense contractors
who claimed a credit. This deduction
category was worth $4.30 million in
1996.
1996
TYPE OF DEDUCTION (Millions)
Standard Deduction $127.25
Preferential Standard Deduction for Unmarried Head of
Household filers $9.53
I temized Deductions:
Medical & Dental Expenses $43.11
Taxes Paid 94.86
Interest Expense 133.43
Charitable Contributions 44.12
Casualty or Theft Losses 0.08
Job Expenses & Most Other Miscellaneous Deductions 16.86
Other Miscellaneous Deductions 4.30
Value of All I temized Deductions $228.94
VALUE OF STANDARD & ITEMIZED DEDUCTIONS $500.25
PREFERENTIAL TAX RATES
Individual income tax for single and
married filing separate filers is calculated
according to a graduated tax rate schedule
as presented below (double this for
married filing joint and unmarried head
of household filers):
at least but less than
$0 $10,000 3.0% of the amount
10,000 25,000 $300, plus 3.5% of the excess over $10,000
25,000 50,000 $825, plus 4.2% of the excess over $25,000
50,000 150,000 $1,875, plus 5.2% of the excess over $50,000
150,000 and over $7,075, plus 5.6% of the excess over $150,000
Lower taxable incomes are taxed at a
lower level, or, in other words, are treated
preferentially. If all taxpayers were
treated identically, the same tax rate
would be applied regardless of the level
of taxable income. A question arises,
however, as to what tax rate should be
applied to determine the revenue impact
of treating all taxpayers identically. One
argument may be that since the highest
tax rate is 5.6%, determining the impact
of taxing all income at 5.6% would be
appropriate. Using this reasoning, an
additional $715.57 million would have
been collected from individual income
tax if a flat 5.6% tax rate had been used.
However, no taxpayer is currently taxed
solely at 5.6%; only that income greater
than $150,000 is taxed at this rate. If a
65
flat tax rate were applied to individual
income, the logical tax rate applied
would be the effective tax rate of all
individual income taxpayers. Dividing
total tax liability on individual income
tax returns by the total Arizona taxable
income for individual income returns
results in an effective tax rate of 3.79%.
Applying this tax rate to all taxpayers will
result in the same individual income tax
collections as with the graduated tax rate
structure, but the burden of the tax will
change. As can be seen from the table
below, taxpayers with lower Federal
Adjusted Gross Incomes will pay more
tax and taxpayers with higher Federal
Adjusted Gross Incomes will pay less tax.
Federal Adjusted Original Tax New Tax
Gross I ncome Collections Collections Difference
Negative $60,861 $63,267 $2,406
$0-$10,000 $3,350,220 $4,793,453 $1,443,233
$10,000-$20,000 $45,963,663 $58,284,492 $12,320,829
$20,000-$30,000 $98,298,133 $119,130,192 $20,832,059
$30,000-$50,000 $227,995,104 $268,539,502 $40,544,398
$50,000-$75,000 $270,583,004 $307,339,143 $36,756,139
$75,000-$100,000 $162,446,318 $174,895,057 $12,448,739
$100,000-$500,000 $409,268,330 $366,789,830 ($42,478,500)
$500,000+ $279,181,011 $195,564,195 ($83,616,816)
Total $1,497,146,644 $1,495,399,131 ($1,747,513)
CREDITS
A tax credit differs from an exemption,
subtraction or deduction, in that it
directly reduces tax liability, not taxable
income. A $100 deduction, for example,
would reduce tax liability by, at most,
$5.60 ($100 times the maximum tax rate
of 5.6%). On the other hand a $100
credit reduces tax liability by the full
$100.
Family Tax Credit
Effective tax year 1995, single and
married filing separately filers with a
Federal Adjusted Gross Income (FAGI)
of $10,000 or less, and married filing
jointly and head of household filers with
an FAGI of $20,000 or less, may claim
the family tax credit (A.R.S. §43-1073).
The amount of the credit is set at $30 per
person in the household, and is capped at
$120 for married filing jointly and head
of household filers, and $60 for single
and married filing separately filers.
Property Tax Credit
In 1977, the Legislature instituted the
property tax credit program in order to
provide tax relief to the state's low-income
elderly. Under this program, full-year
residents age 65 or older with a
household income of less than $5,500 are
eligible for credits ranging from $56 to
$502 (A.R.S. §43-1072). The property
tax credit is refundable, meaning that
those eligible for the credit receive
money even if they had no income tax
liability.
Other Credits
Other credits are filed on a separate
Schedule CR. In many instances, the
credit claimed exceeds the tax liability on
the return. Since these credits are non-refundable,
the unused portion of the
67
credit is superfluous. For this reason, in
order to generate the true expenditure
associated with credits, each credit claim
must be reviewed.
Credit for Taxes Paid to Other States
or Countries
In the past, the majority of the credits
claimed on the Schedule CR, in terms of
dollars and volume, were for taxes paid
to other states or countries (A.R.S. §43-
1071).
Defense Contracting Credit
Defense contracting credits are provided
to qualified defense contractors for net
increases in full-time employment
positions under the United States
Department of Defense contracts and for
net increases in private commercial full-time
employment within Arizona by a
qualified defense contractor (A.R.S. §43-
1077). An income tax credit is also
allowed equal to a portion of the amount
paid as property taxes during the taxable
year by a qualified defense contractor on
property that is classified as Class 3
(A.R.S. §43-1078).
Enterprise Zone Credits
Enterprise zone credits are income tax
credits provided for businesses located in
an enterprise zone established under
Arizona law who have a net increase in
employment of qualified employees
(A.R.S. §43-1074). A maximum of
$1,000 per each net new employee can be
claimed in the first or partial year of
employment. In the second year of
continuous employment, a maximum of
$1,500 per net new employee can be
claimed. The limit in the third year of
continuous employment is $2,500 per net
new employee.
Environmental Technology Credit
An income tax credit is provided for
expenses incurred in constructing a
qualified environmental technology
manufacturing, producing or processing
facility (A.R.S. §43-1080). The amount
of the credit is equal to 10% of the
amount spent during the taxable year to
construct the facility.
Military Reuse Zone Credit
The military reuse zone credit is a tax
credit for net increases in employment by
the taxpayer of full-time employees
working in a military reuse zone who are
primarily engaged in manufacturing,
assembling or fabricating aviation or
aerospace products (A.R.S. §43-1079).
The amount of the credit is determined by
a dollar amount allowed for net new
employee positions other than dislocated
military base employees and by a dollar
amount allowed for net new dislocated
military base employee positions.
Recycling Equipment Credit
The recycling equipment credit is an
income tax credit for businesses or
individuals who acquire and place in
service recycling equipment in the state
(A.R.S. §43-1076). This credit is equal
to 10% of the installed cost of the
recycling equipment but not to exceed the
lessor of 25% of the tax liability for that
tax year or $5,000.
Summer School and Jobs Credit
Establishes a credit for income taxes for
hiring high school students for summer
jobs if the student also attends summer
school (First Regular Session 1995,
Chapter 236). This provision is only
effective for the summer of 1996. The
credit is equal to one half of the wages
paid to the student.
68
Agricultural Water Conservation
System Credit
A credit is allowed against income taxes
imposed for expenses that the taxpayer
incurred to purchase and install an
agricultural water conservation system in
the state (A.R.S. §43-1084). The amount
of this credit is equal to 75% of the
qualifying expenses incurred during the
taxable year.
Alternative Fuel Vehicles and
Equipment Credit
An income tax credit is provided for one
or more new alternative fuel vehicles
purchased for use in this state, for
expenses incurred for converting one or
more conventional vehicles to operate on
alternative fuel, or purchase of an
alternative fuel delivery system (A.R.S.
§43-1086). This credit is equal to $1,000
per purchase or conversion.
Underground Storage Tanks Credit
A credit is allowed against income taxes
imposed for expenses incurred for
corrective actions taken with respect to
the release of a regulated substance from
an underground storage tank (A.R.S.
§43-1085). The amount of this credit is
equal to 10% of the total amount spent to
take the required corrective action.
Solar Energy Devices Credit
A credit is allowed against income taxes
imposed for installing a solar energy
device (A.R.S. §43-1083). This credit is
equal to 25% of the cost of the device but
may not exceed $1,000.
Pollution Control Equipment Credit
An income tax credit is provided for
expenses incurred to purchase real or
personal property used in a trade or
business to control or prevent pollution
(A.R.S. §43-1081). The amount of this
credit is equal to 10% of the purchase
price.
Construction Materials Credit
An income tax credit is provided for new
construction materials incorporated into
a qualifying facility located entirely
within this state, construction of which is
begun on or after January 1, 1994 and
completed on or before December 31,
1999 (A.R.S. §43-1082). The credit is
equal to 5% of the purchase price of the
materials and is claimed in the taxable
year in which the facility receives a
certificate of occupancy.
1996
TYPE OF CREDIT (Millions)
Family Tax Credit $6.63
Property Tax Credit 5.83
Other Tax Credits:
Credit for Taxes Paid to Other States 40.57
Defense Contracting Credit 0
Enterprise Zone Credit 0.30
Environmental Technology Credit 0
Military Reuse Zone Credit ??14
14 These question marks (“??” ) indicate that release of this information would result in violation of Arizona
confidentiality laws. Fewer than six taxpayers claimed this credit.
Recycling Equipment Credit ??
69
Summer School and Jobs Credit ??
70
1996
TYPE OF CREDIT (Millions)
Agricultural Water Conservation System Credit $0.71
Alternative Fuel Vehicles and Equipment Credit 0.02
Underground Storage Tanks Credit 0
Solar Energy Devices Credit 0.52
Pollution Control Equipment Credit ??15
Construction Materials Credit ??
Total Other Credits 42.1316
15 These question marks (“??” ) indicate that release of this information would result in violation of Arizona
confidentiality laws. Fewer than six taxpayers claimed this credit
VALUE OF CREDITS $54.59
16 Total Other Credits includes those credits claimed that cannot be released due to confidentiality laws.
71
INDIVIDUAL INCOME TAX EXPENDITURES
1996
FEDERAL SUBTRACTIONS FROM INCOME:
Individual Retirement Account for qualifying individuals .......................... $4,571,000
One-half of Self-Employment tax .................................................................. 5,212,000
Self-Employed Health Insurance Deduction .................................................. 1,144,000
Keogh Retirement Plan and Self-Employed SEP Deduction ......................... 6,414,000
Penalty on Early Withdrawal of Savings ............................................................ 66,000
Alimony Paid ................................................................................................. 2,741,000
Total Value of Federal Subtractions from Income ............................... $20,572,000
EXEMPTIONS:
Personal Exemptions ................................................................................ $147,442,000
Preferential Personal Exemption for Unmarried Head of Household ............ 7,489,000
Age 65 or Over Exemptions ......................................................................... 19,135,000
Dependent Exemptions ................................................................................ 68,665,000
Blind Exemptions ........................................................................................ 301,000
Total Value of Exemptions .................................................................... $248,631,000
SUBTRACTIONS FROM INCOME:
Interest on US Obligations ......................................................................... $16,337,000
Exclusion for Federal, Arizona State or Local Pensions ................................ 8,282,000
Exempt Arizona State Lottery Winnings .......................................................... 252,000
Social Security or Railroad Retirement Benefits included on federal
Form 1040 ................................................................................................ 31,800,000
Agricultural Crops ............................................................................................. 370,000
Income Tax Refund from Other States ............................................................. 438,000
Other Subtractions ....................................................................................... 6,412,000
Total Value of Subtractions .................................................................... $64,781,000
DEDUCTIONS:
Standard Deduction .................................................................................. $127,254,000
Preferential Standard Deduction for Unmarried Head of Household ............ 9,534,000
Itemized Deductions:
Medical & Dental Expenses ......................................................................... 43,105,000
Taxes Paid:
State and Local Income Taxes ....................................... 65,138,000
Real Estate Taxes ........................................................... 24,891,000
Other Taxes ................................................................... 8,029,000
Total Value of Taxes Paid Deduction .................................................... $94,857,000
Interest Expense:
Home Mortgage Interest .............................................. 123,024,000
Deductible Points ................................................................ 848,000
Deductible Investment Interest .................................... 9,850,000
72
1996
Total Value of Interest Expense ........................................................... $133,432,000
Charitable Contributions:
Cash Contribution .......................................................... 32,358,000
Contributions Other Than Cash ....................................... 9,493,000
Carryover From Prior Year ........................................... 2,267,000
Total Value of Charitable Contributions ................................................ $44,123,000
Casualty & Theft Losses ...................................................................................... 83,000
Job Expenses and Most Other Miscellaneous Deductions ............................ 16,855,000
Other Miscellaneous Deductions .................................................................... 4,296,000
Total Value of Itemized Deductions ......................................................... $228,936,000
Total Value of Deductions ...................................................................... $500,249,000
PREFERENTIAL TAX RATES ..................................................... $0 - $715,568,000
CREDITS:
Family Tax Credit ......................................................................................... $6,626,000
Property Tax Credit ......................................................................................... 5,830,000
Other Credits:
Credit for Taxes Paid to Other States or Countries ..... $40,571,000
Defense Contracting Credit ....................................................... 0
Enterprise Zone Credit ................................................... 303,000
Environmental Technology Credit ............................................ 0
Military Reuse Zone Credit ................................................... ??17
Total Other Credits .............................................................................. $42,134,000
Recycling Equipment Credit .................................................... ??
Summer School and Jobs Credit .............................................. ??
Agricultural Water Conservation System Credit ........... 708,000
Alternative Fuel Vehicles and Equipment Credit ............ 24,000
Underground Storage Tanks Credit ........................................... 0
Solar Energy Devices Credit .......................................... 520,000
Pollution Control Equipment Credit ........................................ ??
Construction Materials Credit .................................................. ??
18
Value of Credits ......................................................................................... $54,590,000
VALUE OF INDIVIDUAL INCOME TAX EXPENDITURES19
................................................................... $949,152,000 - $1,664,720,000
17 These question marks (“??” ) indicate that release of this information would result in violation of Arizona
confidentiality laws. Fewer than six taxpayers claimed this credit.
18 Total Other Credits includes those credits claimed that cannot be released due to confidentiality laws.
19These expenditures represent foregone revenues to the state general fund and to the urban revenue sharing
fund, which is distributed to incorporated cities and towns.
73
74
INSURANCE PREMIUM TAX
EXPENDITURES
75
76
INSURANCE PREMIUM TAX
EXPENDITURES20
20Any figures presented for Insurance Premium Tax Expenditures were provided by the Department of
Insurance.
Each insurer in the state is required to file
a report with the Arizona Department of
Insurance annually, showing total direct
premium income (A.R.S. §20-224).
Total direct premium income does not
include "applicable cancellations,
returned premiums, the amount of
reduction in or refund of premiums
allowed to industrial life policyholders
for payment of premiums direct to an
office of the insurer, all policy dividends,
refunds, savings coupons and other
similar returns paid or credited to
policyholders within this state and not
reapplied as premiums for new,
additional or extended insurance."
Direct premium income also excludes
“ considerations received on annuity
contracts,” as well as the “ unabsorbed
portion of any premium deposit.” No
information is available on the value of
these exclusions from direct premium
income, because this information is not
required to be reported to the Department
of Insurance. However, there is data
available for "considerations received on
annuity contracts." Insurance companies
have reported $746.3 million in these
considerations which, if taxed at a two
percent rate, would have resulted in $14.9
million in revenues to the state.
Insurers which are assessed by the Life
and Disability Insurance Guaranty Fund
or the Property and Casualty Insurance
Guaranty Fund are permitted to offset
their premium tax liabilities "in the
amount of 20% of the assessment for the
year of assessment and 20% of the
assessment in each of the succeeding four
years" [A.R.S. §20-674(B) and §20-
692(B)]. Insurers were able to offset
their calendar year 1997 insurance tax
liabilities by an aggregate of $27.5
million. This had a dual effect on
General Fund revenues. First, General
Fund revenues accompanying tax returns
were reduced by $27.5 million. Second,
insurance premium tax installment
payments in the subsequent calendar year
are reduced. Insurers "which paid or
[were] required to pay a tax of $2,000 or
more on net premiums received during
the preceding calendar year must file
[ installment payments and reports] on or
before the 15th day of each month from
March through August." Installment
payments are "equal to 15% of the
[premium taxes] paid or required to be
paid during the preceding calendar
year." Because four installment
payments based on 1997 tax liability are
required in Fiscal Year 1998 (from March
through June 1998), and two installment
payments based on 1996 tax liability
were required in Fiscal Year 1998 (July
and August 1997), the effects of the
Guaranty Fund Credits on Fiscal Year
1998 installment tax payments are $24.8
million, as follows:
(4 * 0.15 * $27.5 million) + (2 * 0.15 *
$27.6 million) = $24.8 million
77
The benefit from increased installment
tax revenue would be realized only once.
Increasing installment tax revenues
directly decreases the amount of tax paid
with tax returns (or directly increases the
amount refunded to insurers for
overpayments of tax). Thus, the benefit
of eliminating the tax credit would
essentially have been limited to the
amount by which credits would have
been decreased, or $27.5 million in Fiscal
Year 1998. The effect of eliminating tax
credits would be mitigated by retaliatory
tax, described later.
Surplus line brokers are not required to
collect and remit insurance premium tax
on "...reinsurance, ocean marine and
foreign trade insurance, insurance on
subjects located, resident or to be
performed wholly outside this state,
insurance on vehicles or aircraft owned
and principally garaged outside this
state, or insurance on property or
operations of railroads engaged in
interstate commerce " [A.R.S. §20-
420(A)]. No information is available on
the value of these exemptions.
Insurers are required to pay a 2.2% tax on
fire insurance premiums "...except that
the tax on fire insurance premiums on
property located in [qualified locations
including] incorporated cities or towns
which procure the services of private fire
companies..." is 0.66% [A.R.S. §20-
224(B)]. Eighty-five percent of fire
insurance premium taxes are deposited
into the Insurance Premium Tax Clearing
Account Fund for apportionment to fire
districts and municipalities for the
retirement plans of firefighters [A.R.S.
§§20-224(C), 9-951, 9-952, 9-972]. The
remaining 15% of fire insurance premium
taxes are deposited into the General Fund
(A.R.S. §20-227). In calendar year 1997,
insurers wrote $14.0 million of taxable
fire insurance premium for risks in
qualified locations resulting in $92,400 in
insurance premium tax paid for those
risks. If risks in qualified locations were
subject to the 2.2% tax, insurers would
have paid $308,000 in Fiscal Year 1998,
a difference of $215,600. The portion of
the difference allocable to the General
Fund (15%) would have been $32,300.
The effect of the tax rate difference may
be mitigated by retaliatory tax, described
later.
Hospital, medical, dental and optometric
service corporations are considered to be
nonprofit institutions, thus, they are
exempt from insurance premium taxes
"...except on premiums received to effect
or maintain its subscription contracts
other than coverage concerning which
the corporation's relationship is as
administrative or fiscal agent for
national, state or municipal government
or any political subdivision body
thereof...", or any premiums charged
thereto (A.R.S. §20-837). The total of
exempted net premiums in calendar year
1997 was $201.5 million. If the State
were able to apply the 2% tax rate which
would apply without the exemption, the
State would have collected $4.0 million
in Fiscal Year 1998.
Life and health insurance premiums paid
by the Federal Employee Health Benefits
(FEHB) Fund are exempt from taxation
by the states [5 U.S.C. §§ 8714 &
8909(f)]. In calendar year 1997, FEHB
premiums collected for life and health
coverage procured by the FEHB Fund to
provide life and health coverage for
Federal employees in Arizona totaled
$211.2 million. If Arizona were able to
tax those premiums at a 2% rate, the state
78
would have collected $4.2 million in
Fiscal Year 1998.
"Payments received by health care
services organizations from the United
States secretary of health and human
services pursuant to a contract issued
pursuant to 40 United States Code
§1395mm(g) are not taxable." [A.R.S.
§20-1060(C)]. No information is
available on this exemption.
Premiums written by the Federal Crop
Insurance Corporation (FCIC) to
"...insure, or provide reinsurance for
insurers of, producers of agricultural
commodities grown in the United
States...." (7 U.S.C.§1508), are exempt
from state insurance premium taxation (7
U.S.C.§1511). In calendar year 1997,
insurers collected $5.1 million in
insurance premiums written to the FCIC
which, if taxable, would have resulted in
an additional $102,000 being collected by
the state in Fiscal Year 1998.
In 1993, the Legislature enacted Laws
1993, Chapter 231 (A.R.S. §§ 20-2301 et
seq.) to ensure the availability of small
group health insurance in Arizona. Part
of this legislation [A.R.S. § 20-2304(E)]
reduces the premium tax rate applied to
small group health insurance policies
written by accountable health plans.
... [B] eginning July 1, 1996, accountable
health plans shall pay a premium tax of
one per cent of the net premiums received
for health benefits plans issued to small
employers. Beginning July 1, 1997,
accountable health plans are exempt
from the premium taxes that are required
by § 20-224, subsection B, § 20-837, 20-
1010 and 20-1060, for the net premiums
received for health benefits plans issued
to small employers....
Between January 1 and June 30, 1997,
aggregate net premiums received for
health benefits plans issued to small
employers was $130.6 million. Had the
tax rate on these premiums remained at
two percent (instead of decreasing to one
percent), an additional $1.3 million
would have been deposited to the General
Fund in Fiscal Year 1998. Between July
1 and December 31, 1997, aggregate net
premiums received for health benefit
plans issued to small employers was
$144.9 million. Had the tax rate on these
premiums remained at 2% (instead of
becoming exempt from taxation), an
additional $2.9 million would have been
deposited to the General Fund in Fiscal
Year 1998.
A.R.S. §20-230 allows the Department of
Insurance to charge foreign and alien
insurers the same taxes, fees, fines,
penalties, licenses, deposits and other
obligations that the laws of their state or
country will impose upon Arizona
insurers doing business in their state or
country. This retaliatory tax, as it is
commonly known, guarantees that
insurers headquartered in state "X," pay
the same rates of taxes and fees in
Arizona as Arizona-based insurers pay in
state "X." Therefore, while domestic
insurers may pay the tax rates mentioned
above, foreign or alien insurers will pay
the tax rates above plus the retaliatory tax
if the combination of taxes and fees paid
in the home state would be greater than
the taxes and fees levied by Arizona. This
is common practice among most states.
Because the amount of retaliatory tax
paid by foreign and alien insurers relies
on the tax rates, fees and assessments
charged by the insurers' states of
domicile, it is impossible to calculate the
exact effect Arizona would realize if the
79
above-described qualification and
exemption of insurance premium taxes
were not in place. Therefore, the
estimates provided do not include
consideration for the possible effect of
retaliation.
80
SUMMARY OF INSURANCE PREMIUM TAX EXPENDITURES
Revenue Gain
SUBTRACTIONS FROM TOTAL PREMIUM INCOME:
Applicable cancellations ......................................................................................... NIA*
Returned premiums .................................................................................................. NIA
Reduction or refund for direct payment of industrial life insurance ........................ NIA
Policy dividends ....................................................................................................... NIA
Refunds .................................................................................................................... NIA
Savings coupons ....................................................................................................... NIA
Other similar returns paid or credited to policyholders not reapplied
as premiums ...................................................................................................... NIA
Considerations received on annuity contracts ............................................. $14,926,000
Unabsorbed portion of any premium deposit ........................................................... NIA
TOTAL SUBTRACTIONS FROM PREMIUM INCOME .................. $14,926,000
INSURANCE GUARANTY FUND CREDITS ...................................... $27,534,000
EXEMPTIONS FOR SURPLUS L INE INSURANCE:
Reinsurance .............................................................................................................. NIA
Ocean marine and foreign trade insurance ............................................................... NIA
Insurance on subjects located, resident or to be wholly performed outside
the state............................................................................................................... NIA
Insurance on vehicles or aircraft owned and principally garaged
outside the state .................................................................................................. NIA
Insurance on property or operations of railroads engaged in
interstate commerce ........................................................................................... NIA
TOTAL EXEMPTIONS FOR SURPLUS L INE INSURANCE ........................ NIA
PREFERENTIAL RATE ON QUALIFIED FIRE INSURANCE ............ $216,000
GOVERNMENT PROGRAM EXEMPTIONS:
Hospital, medical, dental and optometric service corporation premiums
paid by federal, state and municipal governments .................................. $4,030,000
Health care services organization premiums received from the U.S.
Secretary of Health and Human Services ........................................................... NIA
Life and health insurance premiums paid by FEHB Fund .............................. 4,224,000
Premiums written by the FCIC ........................................................................... 103,000
Accountable Health Plan Group Health Insurance to Small Employers ......... 4,203,000
TOTAL GOVERNMENT PROGRAM EXEMPTIONS ...................... $12,560,000
*NIA No information available.
81
TOTAL QUANTI FIABLE INSURANCE PREMIUM TAX
EXPENDITURES21
21These expenditures represent foregone revenues to the state general fund.
.................................................................................................. $55,236,000
82
83
JET FUEL EXCISE AND USE
TAX EXPENDITURES
84
85
JET FUEL EXCISE AND USE TAX
EXPENDITURES
Arizona imposes a tax of 3.05¢ per gallon
on the first ten million gallons of jet fuel
sold. Jet fuel is defined as being
expressly manufactured and blended for
operating jet or turbine powered aircraft.
The jet fuel use tax rate is also 3.05¢ per
gallon and is levied on the first ten
million gallons of jet fuel stored, used or
consumed. The use tax applies to
purchasers who originally purchased jet
fuel for resale but instead used or
consumed the jet fuel and on which
excise tax has not been paid. The excise
tax does not apply to the sale or use of jet
fuel that has already been taxed by
another state unless the tax imposed by
another state is less than Arizona's tax
rate. The difference between Arizona's
rate and the rate of the other state is what
will be levied and collected.
PREFERENTIAL JET FUEL
TAX RATES
Amounts of jet fuel sold over ten million
gallons are not subject to the excise or
use tax. Fiscal Year 1993/94 was the last
year that amounts over ten million
gallons were taxed. In that year,
179,413,000 gallons were taxed at the
over ten million gallon tax rate of 1.05¢
per gallon. Using the same growth rate
that has been experienced with jet fuel of
less than ten million gallons, an
additional $7.9 million would have been
collected in Fiscal Year 1997/98 if sales
of jet fuel over ten million gallons were
taxed at 3.05¢ per gallon.
JET FUEL TAX EXEMPTIONS
Jet fuel sold to commercial airlines and
used on flights that originate in Arizona
and whose first outbound destination is
outside of the United States is exempt
from the jet fuel excise tax (A.R.S. §42-
1574). Information is not available on
this tax exemption.
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SUMMARY OF JET FUEL EXCISE AND USE TAX EXPENDITURES
Revenue Gain
PREFERENTIAL TAX RATES:
Jet fuel over 10 million gallons ............................................................... $7,900,000
EXEMPTIONS:
International flights which originated within the state ...................................... NIA*
TOTAL QUANTI FIABLE JET FUEL EXCISE AND USE TAX
EXPENDITURES22
.................................................................................................... $7,900,000
* No Information Available.
22These expenditures represent foregone revenues to the state general fund, counties and incorporated cities
and towns.
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LUXURY TAX
EXPENDITURES
86
87
LUXURY TAX EXPENDITURES
Luxury tax collected by the Arizona
Department of Revenue totaled
$210,899,000 for Fiscal Year 1997/98.
The potential for additional luxury tax
collections would have been
$373,892,000 with the elimination of
exemptions currently allowed, and with
the adoption of a standard liquor tax rate.
Repeal of exemptions currently in place
would have resulted in an additional $8.1
million. The remaining $365.8 million
would be the result of standardizing the
liquor tax rate to $3.00 per gallon in
exchange for the current rates.
ITEMS TAXED AT A
PREFERENTIAL RATE
Current Arizona law (A.R.S. §42-1204A)
provides for liquor to be taxed at three
different rates: spirituous liquor at $3.00
per gallon; malt liquor or cider at $0.16
per gallon; and, vinous liquor with an
alcohol content of less than or equal to
24% by volume at $0.84 per gallon23
. By
applying the standard $3.00 per gallon
rate across all liquor types, the resulting
revenues would have been:
FY 97/98
Vinous
At $3/gallon $28,190,000
Actual $7,893,000
Difference $20,297,000
Malt
At $3/gallon $364,938,000
Actual $19,463,000
Difference $345,475,00
Total $365,772,000
23Vinous tax is also assessed on vinous liquor
with an alcohol content of greater than 24%;
however the department has received no tax
collections for this liquor type.
This analysis ignores any decrease in
demand