Revenue impact of Arizona's tax expenditures

              THE REVENUE IMPACT OF
ARIZONA’S TAX
EXPENDITURES
FY 2004/05
PREPARED FOR: THE GOVERNOR AND THE LEGISLATURE
BY: THE OFFICE OF ECONOMIC RESEARCH & ANALYSIS
Janice K. Brewer Gale Garriott
Governor Director
A R I Z O N A D E PA RT M E N T O F R E V E N U E
November 15, 2005, Preliminary
June 2009, Final
The following report on Arizona's Tax Expenditures was prepared for the Governor and the
Legislature in compliance with A.R.S. §42-1005.
The fiscal year 2004/2005 report provides a broad range of information. The report contains sections
for all taxes imposed by the state. The preliminary report, released November 15, 2005 did not include
information on tax expenditures from Individual Income Tax. The individual income tax information
included in this final report was made available through the 2003 Individual Income Tax Simulation
Model.
If you have any questions or comments regarding this report, please contact the Arizona Department of
Revenue at (602) 716-6090.
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 33
FIDUCIARY INCOME TAX EXPENDITURES ................................................Page 37
FLIGHT PROPERTY TAX EXPENDITURES ...................................................Page 47
IN LIEU PROPERTY TAX EXPENDITURES ...................................................Page 51
INDIVIDUAL INCOME TAX EXPENDITURES .............................................Page 55
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 115
TRANSACTION PRIVILEGE AND USE TAX EXPENDITURES.............Page 119
UNDERGROUND STORAGE TANK TAX EXPENDITURES..................Page 141
UNEMPLOYMENT INSURANCE TAX EXPENDITURES.........................Page 145
USE FUEL TAX EXPENDITURES .....................................................................Page 151
VEHICLE LICENSE TAX EXPENDITURES...................................................Page 155
WATERCRAFT LICENSE TAX EXPENDITURES ........................................Page 161
WORKERS’ COMPENSATION PREMIUM LIEU
TAX EXPENDITURES......................................................................................Page 167
1
THE 2005 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. §42-1005.
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 1993 to $2,100. From tax
years 1993 through 2003, the age 65 and over
exemption has 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 or
calendar 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
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.
2
3
AIRCRAFT LICENSE 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 LICENSE 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.
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). The average fair market value of aircraft
owned by the federal government and operated
in Arizona is unknown. It is known that there
were 109 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 2004/05. The average fair market
value of each aircraft is approximately
$131,100, which equates to a tax value of
$71,450 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 72
aircraft of this type registered by bona fide
aircraft dealers in Arizona in fiscal year
2004/05. The tax value of these aircraft was
approximately $402,607.
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 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. In fiscal year 2004/05, there
were 37 nonresident aircraft based in Arizona.
The total aircraft license tax paid by
nonresidents falling into this category in fiscal
year 2004/05 was $15,635. The value of this
expenditure can be calculated by multiplying
this figure by four, which yields the foregone
tax collections allowed by this preferential rate,
or $62,542.
Aircraft in storage or being repaired is charged a
license tax of $20 (A.R.S. §28-8337). There are
279 aircraft, which have been granted this
license tax rate with a fair market value of
approximately $ 494.8 million. The tax value of
this preferential license tax is $2.5 million 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 84 aircraft registered under
this provision. Assuming no market value for
salvage aircraft, the tax value of this tax
6
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 $1,260.
A.R.S. §28-8339 allows a $20 license tax for an
antique, classic, warbird, glider, experimental,
homebuilt, or balloon aircraft. There are 3,109
aircraft registered in Arizona under this
provision, with a total market value of $ 12.4
million. 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 $0.
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 11 nonresident-owned
maintenance aircraft and 18 manufacturer's
aircraft registered in Arizona, for a total market
value of $142.9 million. 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 $713,875.
7
SUMMARY OF AIRCRAFT LICENSE TAX
EXPENDITURES
Revenue Gain
AIRCRAFT LICENSE TAX EXEMPTIONS:
Aircraft operated for the primary purpose of carrying persons or
property for hire ..................................................................................................................NIA*
Nonresident-owned aircraft in the state for less than 90 days..........................................NIA
Aircraft owned by a government or by the civil air patrol .......................................... $71,450
Aircraft owned by an aircraft dealer for sale ................................................................. 402,607
PREFERENTIAL TAX RATES
Preferential rate for nonresidents with aircraft in the state from 90
to 210 days........................................................................................................................ $62,542
Preferential rate for aircraft in storage or being repaired..........................................2,468,634
Preferential rate for salvage aircraft in storage or being repaired................................... 1,260
Preferential rate for antique, classic, warbird, etc., aircraft......................................................0
Preferential rate for maintenance aircraft...................................................................................0
Preferential rate for manufacturer's aircraft................................................................... 713,875
TOTAL QUANTIFIABLE AIRCRAFT LICENSE TAX EXPENDITURES2
................................................................................................ $3,720,367
*No Information Available.
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. 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. §28-5610. Aviation fuel moving in
interstate or foreign commerce, not destined or diverted to
a point within this state is exempt from aviation
fuel tax. There is no requirement for reporting
this information, 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.
§28-5610). 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-
5611A). If such fuel were subject to taxation in
fiscal year 2004/05, an additional $842 would
have been received.
Aviation fuel, which is exported from the state, is
exempt from aviation fuel tax (A.R.S. §28-
5611A). The taxpayer must apply for a refund.
If such fuel were subject to taxation in fiscal
year 2004/05, an additional $5,933 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. §28-5611A). No requests
for refunds were made in fiscal year 2004/05.
12
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.............................................................$842
Exported aviation fuel ...............................................................................................................................5,933
Aviation fuel lost due to fire, theft or other accident................................................................................... 0
TOTAL QUANTIFIABLE AVIATION FUEL TAX EXPENDITURES4
..................................................................................................................... $6,775
* No Information Available.
4The tax expenditures represent foregone revenues to the state aviation fund.
13
BINGO
TAX EXPENDITURES
14
15
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 fiscal year 2004/05,
this group of taxpayers subtracted $3.1 million
from gross receipts. 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 $77,121. 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 0.31%. (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 0.32% results in
potential collections of $9,914.
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
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 (recipients of less than $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. However, the tax rate of 0.32%
mentioned previously, is considered to be the
effective tax rate for Class A. This would make
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 $145,756. (The calculation for Class A
involves 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 1.60%. 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.
16
Class
Original Tax
Collections*
New Tax
Collections
Difference
A $ 9,915 $ 49,614 $39,699
B $241,023 $269,390 $28,367
C $351,391 $283,326 ($68,066)
Total $602,329 $602,329 $ 0
*This amount reflects collections for tax only,
and does not include penalty and interest.
17
SUMMARY OF BINGO TAX EXPENDITURES
Revenue Gain
Subtraction from Gross Receipts for Class A Licensees
Option 1..................................................................................................................................................$77,000
Option 2......................................................................................................................................................9,900
Preferential Tax Rates for Class A and Class B Licensees
Option 1............................................................................................................................................... $145,700
Option 2............................................................................................................................................................. 0
TOTAL QUANTIFIABLE BINGO TAX EXPENDITURES5
RANGES FROM .........................................................................$9,900 -$145,700
5These tax expenditures represent foregone revenues to the state general fund.
18
19
BOXING
TAX EXPENDITURES
20
21
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 fiscal
year 2004/05, 40 boxing contests were held. At
each event, 75 complimentary tickets were
issued with an average price of $25 each. Had
the value of these tickets been taxable, an
additional $3,000 in boxing taxes would have
been received.
22
SUMMARY OF BOXING TAX EXPENDITURES
Revenue Gain
Complimentary tickets issued .................................................................................................................$3,000
TOTAL QUANTIFIABLE BOXING TAX EXPENDITURES7 ............. $3,000
7These tax expenditures represent foregone revenues to the state general fund.
23
CORPORATE INCOME
TAX EXPENDITURES
24
25
CORPORATE INCOME TAX EXPENDITURES
The Department of Revenue collected over $700
million in net corporate income taxes during
fiscal year 2004/05. Net corporate income tax is
deposited into the general fund. However, 15%
of the tax is distributed to cities and towns two
years after the year in which it was collected. For
example, 15% of tax collected in fiscal year
2004/05 will be distributed to incorporated cities
and towns in fiscal year 2006/07. Therefore,
only 85% of the tax collected is actually available
for the state’s use. This fact should be kept in
mind when reviewing the reported tax value of
subtractions and credits. The assumption can be
made that 85% of the tax value is general fund
revenue, with the remaining 15% distributed to
cities and towns two years after collection.
Arizona corporate taxable income is calculated
beginning with federal taxable income.
Therefore, by conforming Arizona law to the
Internal Revenue Code, any subtractions
allowed under federal law in the calculation of
federal taxable income are allowed under
Arizona law. From federal taxable income,
certain additions and subtractions are allowed
to reach Arizona taxable income. After
calculating tax liability, corporate taxpayers may
take advantage of a number of 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 return. The Arizona legislature
must approve legislation to conform to the
definition of federal taxable income as of
January of each 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.
• 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 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.
• Certain taxes paid or accrued during the tax
year.
• Interest paid on certain debts.
26
• Other deductions including amortization of
organizational expenses, losses from partnership
trade or business activities, travel and meal
expenses, membership dues, etc.
It is not possible to estimate the tax value of
these subtractions. While the Department of
Revenue receives information from the Internal
Revenue Service from federal tax returns for
corporations with an Arizona address, data 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(1)].
• Qualifying fraternal beneficiary societies, orders
or organizations [A.R.S. §43-1201(2)].
• Cemetery companies owned and operated
exclusively for the benefit of their members or
which are not operated for profit [A.R.S. §43-
1201(3)].
• 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(4)].
• Nonprofit business leagues, chambers of
commerce, real estate boards or boards of trade
[A.R.S. §43-1201(5)].
• Nonprofit qualifying civic leagues or
organizations operated exclusively for the
promotion of social welfare, or local
organizations of employees [A.R.S. §43-
1201(6)].
• Clubs organized and operated exclusively for
pleasure, recreation and other non-profit making
purposes [A.R.S. §43-1201(7)].
• 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(8)].
• 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(9)].
• 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 membership is
limited to officers or employees of the U.S.
government [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)].
27
• 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
that 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.
ARIZONA SUBTRACTIONS FROM
FEDERAL TAXABLE INCOME
Arizona statutes set out certain items that can
be subtracted from federal taxable income to
reach adjusted income attributable to Arizona.
The tax value of these subtractions 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. §43-1022(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 [§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 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. §43-1022(12)].
• 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. §43-1022(13)].
• The amount allowed by §43-1025 for
contributions during the taxable year of
agricultural crops to charitable organizations
[A.R.S. §43-1022(14)].
• 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. §43-1022(15)].
• An adjustment for federal bonus depreciation
[A.R.S. §43-1022(28, 29)].
28
• Arizona capital loss carryover in an amount not
to exceed $1,000 for tax years beginning prior
to 1/1/88 [A.R.S. §43-1122(2)].
• Expenses and interest relating to tax-exempt
income disallowed pursuant to §265 of the
Internal Revenue Code [A.R.S. §43-1122(3)].
• Dividends received from another corporation
owned or controlled directly or indirectly by a
recipient corporation [A.R.S. §43-1122(4)].
• Interest income received on obligations of the
U.S. [A.R.S. §43-1122(5)].
• Dividend income from foreign corporations
[A.R.S. §43-1122(6)].
• The amount of net operating loss allowed by
A.R.S. §43-1123 [A.R.S. §43-1122(7)].
• State income tax refunds received which were
included as income in computing federal taxable
income [A.R.S. §43-1122(8)].
• Expense recapture included in income pursuant
to §617 of the Internal Revenue Code for mine
exploration expenses [A.R.S. §43-1122(9)].
• Deferred exploration expenses allowed by
A.R.S. §43-1127 [A.R.S. §43-1122(10)].
• Exploration expenses related to the exploration
of oil, gas or geothermal resources [A.R.S. §43-
1122(11)].
• Amortization of pollution control devices
[A.R.S. §43-1122(12)].
• Amortization of the cost of child care facilities
[A.R.S. §43-1122(13)].
• 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(14)].
• 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(15)].
• 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(16)].
• 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
[A.R.S. §43-1122(17)].
ARIZONA NET OPERATING LOSSES
All corporate taxpayers are allowed to subtract
from their Arizona adjusted gross 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 $6.3 billion in tax
year 2003. In many cases a corporation’s
reported net operating loss exceeded its
Arizona adjusted gross income. Subtracting the
net operating loss in these cases resulted in
negative taxable income. To calculate the tax
value of the net operating losses, the loss was
multiplied by 6.968% for those businesses with
positive taxable income. For those businesses
with negative taxable income, that portion of
net operating loss that was used to reduce
taxable income to zero was multiplied by
6.968%8. These calculations result in a
maximum tax value of $64 million.
About 24.8% of the 48,317 corporations that
filed Arizona corporate income tax returns for
tax year 2003 reported net operating losses.
The table below shows the number of
corporations by size of net operating loss and
by whether or not there was enough taxable
income to generate a tax liability other than the
minimum $50 tax.
8For example, if the net operating loss was $10,000
and the negative taxable income was $9,000, adding
back the loss results in $1,000 of net operating loss
being used to reduce taxable income to zero. The tax
rate was applied against the $1,000 to arrive at the tax
value of the operating loss.
29
2003 - Size of NOL # with Tax Liability
greater than $50
# with Tax Liability
less than or equal to $50
Total
$1 to $99 59 608 667
$100 to $999 273 1,130 1,403
$1,000 to $9,999 974 2,911 3,885
$10,000 to $49,999 775 2,466 3,241
$50,000 to $99,999 191 754 945
$100,000 to $499,999 233 927 1,160
$500,000 to $999,999 33 197 230
$1,000,000 to $9,999,999 37 314 351
Over $9,999,999 4 88 92
Total 2,579 9,395 11,974
NOL $ Value $292,096,345 $6,042,699,718 $6,334,796,063
COMMERCIAL TAX CREDITS
A tax credit reduces corporate tax liability, as
opposed to a subtraction, which reduces taxable
income. Most tax credits that currently exist in
Arizona corporate tax law are nonrefundable;
any credit amount greater than a firm's tax
liability will not be refunded. The unused credit
is then carried forward for use in future tax
years. A corporation receives a credit for
expenditures in the following areas:
• for increased employment in enterprise zones
(A.R.S. §43-1161).
• for the purchase of recycling equipment (A.R.S.
§43-1164).
• for employment and for property taxes paid by a
qualified defense contractor (A.R.S. §43-1165,
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 costs in constructing a qualified environmental
technology manufacturing, producing or processing
facility (A.R.S. §43-1169).
• 1for expenses to purchase property used to control
or prevent pollution (A.R.S. §43-1170).
• for expenses incurred for tangible personal
property used to control or prevent pollution,
relating to agriculture (A.R.S. §43-1170.01).
• 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 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 the fair market value of a vehicle, up to
$1500, donated to the wheels to work program
(A.R.S. §43-1177).
• for coal consumed in generating electric power
(A.R.S. §43-1178).
• a refundable credit for providing technological
skills training to not more than 20 employees
(A.R.S. §43-1179).
• a refundable credit for conveying ownership or
development rights of agricultural property to an
agricultural preservation district (A.R.S. §43-
1180)
• for donating real property or improvements to a
school district (A.R.S. §43-1181)
• for donations made directly to the Clean Elections
Fund ( A.R.S. §16-954B)
• for corporations that elected to file consolidated
returns in Arizona and amended their 1986
through 1993 tax returns, thus creating a credit
that could be taken over ten years.
When reviewing the credit data, it is important
to mention two points. First, corporate tax
information for a given tax year changes over
time. Late returns are filed, corporations are
30
audited, amended returns are filed, retroactive
legislation is enacted, etc. Therefore, figures
stated here will change next year and figures
cited in previous years will not match what is
presented here. Second, information cannot
be revealed about certain credits claimed
without breaching confidentiality. If less than
three 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 confidential information being
divulged about other credits, then that
information cannot legally be released.
Data for tax year 2003 is shown below, but it
is preliminary. For tax year 2002,
corporations claimed 477 commercial tax
credits and used a total of $25.3 million in
credits to offset taxes and get refunds where
allowed. Asterisks indicate instances in which
release of information would breach
confidentiality laws.
TYPE OF 2001 2002 2003
CREDIT # $ USED # $ USED # $ USED
Enterprise zone 128 $6,456,049 127 $5,944,633 67 $3,047,546
Recycling equipment 4 21,442 4 5,145 4 3,426
Defense contracting 0 0 ** ** ** **
Military reuse zone 3 109,373 ** ** ** **
Research & development 123 9,301,385 124 10,901,624 79 21,592,007
Environmental technology facility 3 1.084,588 ** ** 0 0
Pollution control device 29 2,173,882 28 1,386,455 18 1,739,959
Agricultural pollution control equip’t ** ** ** ** 0 0
Construction materials 3 100 3 100 ** **
Agricultural water conservation system ** ** ** ** ** **
Underground storage tanks 0 0 ** ** 0 0
Alternative fuel vehicles (Nonref) ** ** 8 32,969 5 1,726
Alternative fuel vehicles (Refundable) 12 218,560
Neighborhood electric vehicles 20 69,701 16 31,172 8 19,026
Vehicle refueling apparatus &
infrastructure (Nonref)
** ** ** ** ** **
Vehicle refueling apparatus &
infrastructure (Refundable)
0 0
Alternative fuel delivery systems
(Nonref)
3 184,431 3 1,039 ** **
Alternative fuel delivery systems
(Refundable)
0 0
Employment of TANF recipients 6 57,851 7 173,550 5 461,980
Solar hot water plumbing stub outs &
electric vehicle recharge outlets
0 0 0 0 0 0
Donation of motor vehicle to wheels
to work program
0 0 0 0
School site donation ** ** ** ** ** **
Agricultural preservation district 0 0 0 0 0 0
Taxes paid for coal consumed in
generating electrical power
** ** ** ** 0 0
Technology training 10 40,595 4 41,083 ** **
Clean election 97 2,913 102 646 111 1,563
Consolidated filer 35 3,492,320 30 2,196,494 32 2,335,704
Total 498 $24,207,863 477 $25,310,248 345 $29,902,588
31
SUMMARY OF CORPORATE INCOME TAX
EXPENDITURES
Revenue Gain
Subtractions Allowed in Calculation of Federal Taxable Income:
Compensation of Officers.......................................................................................................................NIA*
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
Certain taxes paid or accrued during the tax year ...................................................................................NIA
Interest paid on certain debts.....................................................................................................................NIA
Other miscellaneous deductions................................................................................................................NIA
Exempt Organizations:
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
Amortization by a qualified defense contractor......................................................................................NIA
Gain on amortized capital investment by a qualified defense contractor ...........................................NIA
Dividend income received from Arizona corporations ....................................................................... NIA*
* No Information Available.
32
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
State income tax refunds ............................................................................................................................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
Contributions to individual medical savings accounts ...........................................................................NIA
Excess capital loss carryover......................................................................................................................NIA
Net Operating Losses.................................................................................................................$64,022,000
Commercial Tax Credits:
Enterprise zone employment.......................................................................................................... $3,048,000
Recycling equipment .................................................................................................................................3,000
Defense contracting ...................................................................................................................................NR9
Military reuse zone........................................................................................................................................NR
Research & Development ............................................................................................................... 21,592,000
Environmental technology facility .................................................................................................................. 0
Pollution control devices................................................................................................................... 1,740,000
Agricultural pollution control equipment ...................................................................................................... 0
Construction materials .................................................................................................................................NR
Agriculture water conservation system.......................................................................................................NR
Underground storage tanks............................................................................................................................. 0
Alternative fuel vehicles............................................................................................................................2,000
Neighborhood electric vehicles ..............................................................................................................19,000
Vehicle refueling apparatus and infrastructure..........................................................................................NR
Alternative fuel delivery systems .................................................................................................................NR
Employment of TANF recipients........................................................................................................462,000
Solar hot water plumbing stub outs and electric vehicle recharge outlets ................................................ 0
Donation of motor vehicles to wheels to work program ............................................................................ 0
Taxes paid for coal consumed in generating electrical power..................................................................... 0
Agricultural preservation district ..................................................................................................................... 0
Technology training......................................................................................................................................NR
School site donation.....................................................................................................................................NR
Clean election .............................................................................................................................................2,000
Consolidated filer............................................................................................................................... 2,336,000
Total Commercial Tax Credits ................................................................................................$29,903,000
TOTAL QUANTIFIABLE CORPORATE INCOME TAX EXPENDITURES10
............................................................................................................. $93,925,000
* No Information Available.
9 NR indicates that the information is not releasable due to Arizona confidentiality laws. Fewer than ten license holders
took advantage of this refund.
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.
33
ESTATE
TAX EXPENDITURES
34
35
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. Estate tax collections totaled
$31.2 million in fiscal year 2004/05.
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.
The total deductions allowed from the federal
credit in fiscal year 2003/04 was $1.5 million.
This deduction is a dollar-for-dollar reduction
in the estate tax liability.
SUMMARY OF ESTATE TAX EXPENDITURES
Revenue Gain
Deduction from federal credit for state death taxes.................................................................... $1,458,721
TOTAL QUANTIFIABLE ESTATE TAX EXPENDITURES11
............................................................................................................... $1,458,721
11These expenditures represent foregone revenues to the state general fund.
36
37
FIDUCIARY INCOME
TAX EXPENDITURES
38
39
FIDUCIARY INCOME TAX EXPENDITURES
Arizona imposes fiduciary income tax on trusts
and estates. The taxability of the income is
determined by the residence of the fiduciary,
beneficiary or deceased taxpayer. For estates,
the tax applies to the entire taxable income if
the deceased taxpayer was an Arizona resident.
The fiduciary or beneficiary residence is
immaterial. In contrast, for trusts, the tax
applies to the entire taxable income when the
fiduciary or beneficiary is an Arizona resident.
Arizona taxable income is calculated beginning
with federal taxable income. By conforming
Arizona law to the Internal Revenue Code,
subtractions allowed under federal law in
calculating federal taxable income are allowed
under Arizona law. From federal taxable
income, certain additions, subtractions and
exemptions are allowed to reach Arizona
taxable income. After calculating tax liability,
fiduciary taxpayers may reduce their tax liability
by using a credit for taxes paid to other states
or countries or a credit for clean elections.
Fiduciary income tax is deposited into the
general fund. However, 15% of the tax is
distributed to cities and towns two years after
the year in which it was collected. For example,
15% of tax collected in fiscal year 2004/05 will
be distributed to incorporated cities and towns
in fiscal year 2006/07. Therefore, only 85% of
the tax collected, or of the tax value of any
expenditure, is actually available for the state’s
use. This fact should be kept in mind when
reviewing the reported tax value of the various
subtractions, exemptions and credits.
SUBTRACTIONS ALLOWED IN THE
CALCULATION OF FEDERAL
TAXABLE INCOME
The starting point for calculating 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 approve legislation to
conform to the definition of federal taxable
income by January of each 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 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.
• 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.
40
ARIZONA SUBTRACTIONS FROM
FEDERAL TAXABLE INCOME
The Arizona fiduciary income tax return lists
the following specific items that can be
subtracted from federal taxable income to reach
adjusted gross income attributable to Arizona:
• Negative Arizona fiduciary adjustment from
another trust or estate. This adjustment is
used if the Schedule K-1 indicates a
difference between the federal and state
distributable income. [A.R.S. §43-
1332(1)].
• Interest income on U.S. obligations. Interest
income received on U.S. obligations, 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 obligations. [A.R.S. §43-
1022(6)]
• Energy efficient residence. The amount
authorized by A.R.S. §43-1031 for
constructing an energy efficient
residence. [A.R.S. §43-1022(27)]
The remaining subtractions on the Arizona
fiduciary tax form 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. Benefits,
annuities and pensions totaling not more
than $2,500 received from any of the
following: 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 system or plan
established by federal law; the state
retirement system or 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;
an optional retirement program
established by a community college
district board; or a retirement plan
established for employees of a county,
city or town in Arizona. [A.R.S. §43-
1022(2)]
• Refunds from other states. The amount of
any income tax refunds received from
states other than Arizona and included as
income. [A.R.S. §43-1022(7)]
• Annuity income. 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.
§43-1022(8)]
• Wood stoves and fireplaces. The amount
authorized by A.R.S. §43-1027 for the
purchases of qualified wood stoves,
wood fireplaces or gas fired fireplaces.
[A.R.S. §43-1022(21)]
• Operating loss carryover. 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. §43-1022(23)]
• Federal credits. The portion of any wages
or salaries paid or incurred by the
taxpayer 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-
1022(15)]
• Individual medical savings accounts. 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,
41
and the amount deposited by the
taxpayer in the account during the year.
[A.R.S. §43-1022(22)]
• Contribution of agricultural crops. The
amount allowed by A.R.S. §43-1025 for
contributions of agricultural crops to
charitable organizations [A.R.S. §43-
1022(14)].
• Installment income. 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. §43-1022(5)]
• Holocaust survivors. The amount authorized
by A.R.S. §43-1030 relating to holocaust
survivors. [A.R.S. §43-1022(26)]
• Adjustment for bonus depreciation allowed under
IRC §168(k) added to Arizona gross income.
This adjustment relates to the 30%
and/or 50% bonus depreciation allowed
at the federal level. [A.R.S. §43-1022(28)]
• 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-
1022(3)].
• Exemptions for blind persons, persons over 65,
dependents and qualifying ancestors.
Exemptions are allowed for blind
persons ($1,500), persons over 65 years
($2,100), dependents ($2,300) and
qualifying ancestors that live with the
taxpayer and requires assistance with
activities of daily living ($10,000) [A.R.S.
§43-1022(1)].
• Distributions from individual retirement
accounts. 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. §43-1022(4)]
• Partner’s share of income. 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. §43-1022(9)]
• Partner’s share of losses. 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. §43-1022(10)]
• Sale of income producing property. 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. §43-1022(11)]
• Amortization of capital investment. 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. §43-1022(12)]
• Gain on capital investment. 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-
1022(13)]
• State lottery winnings. The amount of
winnings less than $5000 in a taxable
42
year from any of the state lotteries,
except that all such winnings before
3/22/83, including periodic distributions
from such winnings made after 3/2/83,
may be subtracted. [A.R.S. §43-
1022(16)]
• Mining exploration expenses. The amount
of mining exploration expenses
determined pursuant to §617 of the IRC
which have been deferred in a taxable
year ending before 1/1/90 and for
which a subtraction has not been
previously made. [A.R.S. §43-1022(17)]
• Social security benefits. The amount
included pursuant to §86 of the IRC,
relating to taxation of social security and
railroad retirement benefits. [A.R.S. §43-
1022(18)]
• Compensation for armed forces active service.
To the extent not already excluded,
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)
• Adoption costs. The amount of
unreimbursed 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. §43-1022(20)]
• Qualified educational expenses. Any amount
of qualified educational expenses
distributed from a qualified state tuition
program determined pursuant to §529 of
the Internal Revenue Code and that is
included in income. [A.R.S. §43-1022(24)]
• Installment sale subject to tax in another state.
Any item of income resulting from an
installment sale that has been properly
subject to tax in another state in a
previous year and is included in Arizona
gross income in the current taxable year.
[A.R.S. §43-1022(25)].
• Income from a trust established as a medical
savings accounts In the cast of a trust that
is established as a medical savings
account pursuant to A.R.S. §43-1028,
income earned by the trust is included in
the trsut’s Arizona gross income. [A.R.S.
§43-1332(2)].
• 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. §§43-1333].
In tax year 2003, all subtractions on fiduciary
tax returns were reported in aggregate with the
exception of “Income from a trust established
as a medical savings account.” Income of
$73,199 was reported. Using an effective tax
rate of 4.38%, the tax value of this subtraction
was $3,203.
All other subtractions that reduced tax liability
totaled $95.6 million. (This does not include
subtractions that were greater than income.
Those subtractions would have no tax value
because they didn’t actually offset any income.)
Using the effective tax rate of 4.38%, the tax
value of these subtractions was $4,134 million.
PREFERENTIAL TAX RATES
Fiduciary income tax is calculated according to a graduated tax rate schedule as shown below:
at least but less than
$0 $10,000 2.87% of taxable income
10,000 25,000 3.20% of taxable income, minus $33
25,000 50,000 3.74% of taxable income, minus $168
50,000 150,000 4.72% of taxable income, minus $658
150,000 and over 5.04% of taxable income, minus $1,138
43
As can be seen from the table, lower taxable
incomes are taxed at a lower rate. If all
taxpayers were treated identically, the same tax
rate would be applied regardless of the amount
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 5.04%, determining the
impact of taxing all income at 5.04% would seem
appropriate. However, no taxpayer currently
pays 5.04% tax on all taxable income. If a flat
tax rate of 5.04% was applied regardless of
income level, all taxpayers would experience a
tax increase.
A more reasonable approach to a flat tax rate
would be to apply the effective tax rate on
taxable income for all fiduciary taxpayers.
Applying this effective tax rate to all fiduciary
taxpayers will result in the same tax collections
as with the graduated tax rate structure;
however, the burden of the tax will shift.
Taxpayers with lower Federal Adjusted Gross
Income would pay more tax and taxpayers with
higher Federal Adjusted Gross Income would
pay less tax.
CREDITS
After fiduciary income tax liability is calculated,
two credits can 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 2003, $2.5 million was
claimed as credit for taxes paid to other states
or countries. Additionally, if the trust or estate
makes a contribution to the Clean Elections
Fund, a credit may be claimed for those
contributions. The total clean elections credit
claimed in 2002 by estates and trusts was $56.
Both credits are a direct reduction to tax
liability.
44
SUMMARY OF FIDUCIARY INCOME TAX
EXPENDITURES
Revenue Gain
SUBTRACTIONS IN CALCULATION OF FEDERAL TAXABLE INCOME:
Deduction for interest paid ......................................................................................................................NIA*
Deductible taxes..........................................................................................................................................NIA
Deductible fiduciary 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
SUBTRACTIONS FROM FEDERAL TAXABLE INCOME:
Negative Arizona fiduciary adjustment from another trust or estate
Interest income on U.S. obligations
Energy efficient residence
U.S./state pensions not over $2,500
Income tax refunds from other states
Annuity income included pursuant to §72 of the IRC
Certain IRA distributions or 401Ks
Qualified wood stoves and fireplaces
Installment income recognized pursuant to IRC
Excess operating loss carryover
Certain federal credits
Medical savings accounts
Contribution of agricultural crops
Installment income
Holocaust survivors
Adjustment for bonus depreciation
Federal income from other fiduciaries
Exemptions for blind persons, persons over 65 years of age, dependents and qualifying ancestors
Distributions from individual retirement accounts
Partner’s share of income
Partner’s share of losses
Sale of income producing property
Amortization of capital investment
Gain on capital investment
State lottery winnings
Mining explorations expenses
Social security benefits
* No Information Available.
45
Compensation for armed forces active service
Adoption costs
Qualified educational expenses
Installment sale subject to tax in another state
Income from a trust established as a medical savings account..........................................................$3,000
Arizona distribution to beneficiaries
Value of subtractions other than medical savings account trusts ................................... $4,184,000
TOTAL TAX VALUE OF SUBTRACTIONS FROM FEDERAL
TAXABLE INCOME................................................................................................................... $4,187,000
CREDIT FOR TAXES PAID TO OTHER STATES/COUNTRIES.......................... $2,461,000
CREDIT FOR CONTRIBUTIONS TO THE CLEAN ELECTION FUND....................$56
TOTAL QUANTIFIABLE FIDUCIARY INCOME TAX EXPENDITURES12
...............................................................................................................$6,648,000
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.
46
47
FLIGHT PROPERTY
TAX EXPENDITURES
48
49
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 was $11.81 in tax year 2004.
EXEMPTIONS
If an airline is operating in Arizona with a maximum
passenger capacity of less than 56 seats and a maximum
pay load capacity of less than 18,000 pounds (A.R.S.
§42-14251.10), this small flight property shall be
valued at 30% of its original cost less depreciation
multiplied by the assessment ratio (A.R.S. §42-
14254C). Had the taxable value been 100%,
the state would have raised $2.6 million more in
fiscal year 2004/05.
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 25% to 5%. For
flight property, the assessment ratio is equal to the
ratio which the total net assessed valuation of all taxable
property in class 1, class 6 paragraph 3 and personal
property in class 2 bears to the total full cash value of
such property (A.R.S. §42-14255). For tax year
2004, the assessment ratio used for flight
property was 21%. 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, 25%, tax collections
would have increased by $5.6 million.
SUMMARY OF FLIGHT PROPERTY TAX
EXPENDITURES
Revenue Gain
EXEMPTION
Tax value at 30% for small airplanes ...................................................................................... $2,567,719
PREFERENTIAL ASSESSMENT RATIOS:
Preferential assessment ratio at 25%....................................................................................... $5,633,995
TOTAL QUANTIFIABLE FLIGHT PROPERTY TAX EXPENDITURES13
............................................................................................................... $8,201,715
13These expenditures represent foregone revenues to the state aviation fund.
50
51
IN LIEU PROPERTY
TAX EXPENDITURES
52
53
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 approximately 81.9% of the
tax that would have been levied in fiscal year
2004/05 had they been legally bound to pay
property tax. Given the repeal of the state rate,
the dollar expenditure that 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.
54
55
INDIVIDUAL INCOME
TAX EXPENDITURES
56
57
INDIVIDUAL INCOME TAX
EXPENDITURES
For tax year 2003 tax returns filed in
calendar year 2004, the Arizona
Department of Revenue collected over
$2.16 billion in resident individual income
taxes before credits. In the same tax year,
the state allowed exemptions, deductions,
exclusions, and credits worth as much as
$1.73 billion in tax liability. This report
details the value of each of these
exemptions, deductions, exclusions, credits
and preferential rates.
The figures presented in this report were
determined using the Individual Income
Tax Simulation Model, containing a 2003
database. This model contains 48,525
resident returns, selected using stratified
sampling techniques. The information on
the back of Arizona Individual Income
Tax Form 140 and on Schedule A was
entered for the sample returns, making the
detailed information presented below
available. Please remember these
figures are for tax year 2003. All tax
expenditures in this report refer to tax law
in existence in 2003, filed in 2004.
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 3.74% 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 4.72% on part of
this income. Removal of all exemptions,
subtractions and deductions may make
taxable income high enough to hit the
5.04% tax rate. Therefore, adding back
income that was previously untaxed can
push the taxpayer into two or three higher
tax brackets.
In other areas of this report, it can be seen
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 $148
million. However, removal of the entire
Taxes Paid Deduction section results in a
value of $145 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% of net income tax
collections received two years prior is
disbursed to cities and towns. In other
58
words, 15% of net individual plus
corporate plus fiduciary income tax
received in Fiscal Year 2004/05 will be
distributed to incorporated cities/towns in
Fiscal Year 2006/07. When reviewing the
tax value of individual income tax
expenditures, therefore, the assumption
can be made that 85% of the tax value is
general fund revenue, although the
remaining 15% is not actually disbursed for
two years in the future.
SUBTRACTIONS ALLOWED
IN CALCULATING 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:
• Qualified expenses for eligible educators of
up to $250.
• Qualified tuition and fees of up to $3,000
under certain conditions.
• Individual Retirement Account
contributions for individuals with
qualifying incomes.
• Interest paid on student loans for qualified
higher education expenses for individuals
with qualifying incomes.
• Moving expenses in connection with a job
or business, with certain requirements.
• One-half of self-employment tax paid.
• Self-employed health insurance payments.
• Self-employed SEP, SIMPLE, and
Qualified Plans.
• Penalty on early withdrawal of savings.
• Alimony paid.
• Archer MSA deduction.
• Performing arts-related expenses that meet
certain conditions.
• Jury duty pay given to your employer.
• Deductible expenses related to income from
the rental of personal property.
• Reforestation amortization.
• Repayment of supplemental unemployment
benefits under the Trade Act of 1974.
• Contributions to section 501(c)(18)
pension plans.
• Deduction for clean-fuel vehicles.
• Contributions by certain chaplains to section
403(b) plans.
• Employee business expenses of fee-basis for
state or local government officials.
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.
59
SUBTRACTION
2003
(Millions)
Educator expense/tuition fees subtraction $2.71
Individual Retirement Account for qualifying individuals 5.11
Student loan interest deduction 2.07
Moving expenses 0.48
One-half of self-employment tax 8.25
Self-employed health insurance deduction 8.36
KEOGH retirement plan and self-employed SEP deduction 10.31
Penalty on early withdrawal of savings 0.03
Alimony paid 6.17
TOTAL VALUE OF SUBTRACTIONS $43.86
EXEMPTIONS
Like the federal government, Arizona
grants exemptions for taxpayers meeting
certain conditions. 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 2003.
Married couples filing jointly with no
children 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.
Married couples filing jointly with at least
one dependent are allowed a personal
exemption of $6,300; married filing
separate taxpayers with at least one
dependent are allowed an exemption of
half this amount, $3,150. This higher
personal exemption for married couples
with children is also a preferential personal
exemption.
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
2003 (A.R.S. §43-1023E)..
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. §43-1023B). The
dependent exemption was $2,300 in 2003.
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 2003.
60
Qualifying Parents and Ancestors
Exemption
Arizona residents may claim a $10,000
exemption for each qualifying parent and
ancestor. (A.R.S. §43-1023C) A qualifying
parent or ancestor may be a parent, a
parent's ancestor or a spouse's parent or
spouse's parent ancestor. The qualifying
parent or ancestor must have lived in the
taxpayer's residence for the entire taxable
year, was 65 years old or older and the
taxpayer paid more than one-half of the
support and maintenance costs of the
parent or ancestor during the taxable year.
Additionally, the parent or ancestor must
have required assistance with activities of
daily living.
TYPE OF EXEMPTION
2003
(Millions)
Personal exemption $200.24
Preferential personal exemption for Unmarried Head of Household filers 11.21
Preferential personal exemption for married filers claiming at least one dependent 26.75
Age 65 or older exemption 19.10
Dependent exemption 81.83
Blind exemption 0.20
Qualifying parent or ancestor exemption 1.59
TOTAL VALUE OF EXEMPTIONS $350.70
ARIZONA SUBTRACTIONS
FROM INCOME
Arizona taxpayers can subtract certain
amounts from their gross income. The
largest subtraction in 2003 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, 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 U.S. obligations
(A.R.S. §43-1022.6), agricultural crops
contributed to Arizona charitable
organizations (A.R.S. §43-1022.14),
deposits or employee contributions into
medical savings accounts (A.R.S. §43-
1022.22), the amount of income tax
refunds received from states other than
Arizona and which were included as
income in computing federal adjusted
gross income (A.R.S. §43-1022.7) and an
amount equal to the “bonus” depreciation
allowable pursuant to the internal revenue
code (A.R.S. §43-1022.28, 29, 30).. In
addition, there were a myriad of "other
subtractions" including, but not limited to:
• A beneficiary's share of the fiduciary
adjustment to the extent that the amount
decreases the beneficiary’s Arizona gross
income (A.R.S. §43-1022.3).
• 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).
• 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).
• 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).
61
• 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 allowed for amortization, by a
qualified defense contractor, of a capital
investment for private commercial activities
or the amount of gain included in income on
the sale or disposition of a capital investment
that a qualified contractor has elected to
amortize (A.R.S. §43-1022.12, 13)
• Any wages paid 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
(A.R.S. §43-1022.15).
• 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
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).
• Unreimbursed medical and hospital costs,
adoption counseling, legal and agency fees
and other nonrecurring costs of adoption,
not to exceed $3,000 (A.R.S. §43-
1022.20).
• Authorized amounts for purchase of, and
nonoptional equipment directly related to
the operation of, qualified wood stoves,
wood fireplaces or gas fired fireplaces
(A.R.S. §43-1022.21).
• Excess net operating loss carryover or
capital loss carryover (A.R.S. §43-
1022.23).
• Qualified educational expenses distributed
from a qualified state tuition program that
is included in income (A.R.S. §43-
1022.24).
• Income resulting from an installment sale
properly subjected to income tax in another
state (A.R.S. §43-1022.25).
• An amount authorized relating to
holocaust survivors (A.R.S. §43-
1022.26).
• An amount authorized relating to
constructing an energy efficient residence
(A.R.S. §43-1022.27).
62
TYPE OF ARIZONA SUBTRACTION 2003
(Millions)
Interest on U.S. obligations $7.35
Exclusion for federal, Arizona or local pensions 7.19
Exempt Arizona lottery winnings 0.09
Social Security or Railroad Retirement benefits included in income 59.97
Adjustment for bonus depreciation 2.67
Certain wages of Native Americans 14.43
Income tax refunds from other states 0.75
Construction of an energy efficient residence 0.04
Other subtractions (from back of 140) 6.41
Deposits and employee contributions into medical savings accounts 0.15
Elective subtraction of 2003 federal retirement contributions 0.40
TOTAL VALUE OF ARIZONA SUBTRACTIONS $100.19
DEDUCTIONS
Arizona taxpayers can deduct the part of
their income used to pay for certain
expenses, such as taxes or medical bills, by
either listing (itemizing) deductions or
taking a standard deduction. Arizona
allows the same itemized deductions as the
federal government, with three exceptions.
Medical deductions are fully deductible in
Arizona; gambling losses are adjusted to
consider the lottery subtraction; and a
property tax adjustment is made to offset a
property tax credit claimed.
Standard Deduction
In 2003, the standard deduction was $4,050
for single and married filing separate filers
and $8,100 for married filing joint and
unmarried head of household filers (A.R.S.
§43-1041). Removing the standard
deduction would result in additional tax
revenue of $161.82 million. 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). The value of this
preferential standard deduction was $15.12
million in 2003.
Itemized Deductions (Schedule A):
The provisions allowed on the Schedule A
are in A.R.S. §43-1042 as described below.
When calculating the impact of disallowing
portions of the Schedule A and the entire
Schedule A, the standard deduction
replaces the Schedule A total if the
Schedule A total drops below the standard
deduction amount. In other words, if the
Schedule A total dropped below $4,050 or
$8,100 (the standard deduction amounts
based on filing status) the standard
deduction amount was used.
Medical Deduction
The medical deduction on the federal
Schedule A equals medical expenses
greater than 7.5% of the taxpayer's federal
adjusted gross income. This deduction is
adjusted on the Arizona return to allow all
medical expenses incurred. The value of
the 2003 medical deductions was $85.77
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
TYPE OF TAX DEDUCTION 2003
(Millions)
State and local income taxes $91.77
Real estate taxes 43.92
Personal property taxes and Other taxes 11.99
VALUE OF TAXES PAID DEDUCTIONS $145.03
Interest 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.
TYPE OF INTEREST EXPENSE DEDUCTION
2003
(Millions)
Home mortgage interest $206.57
Deductible points 2.13
Deductible investment interest 9.82
VALUE OF INTEREST EXPENSE DEDUCTION $217.93
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.
TYPE OF CHARITABLE CONTRIBUTION DEDUCTION
2003
(Millions)
Cash contributions $59.68
Contributions other than cash 17.56
Carryover from prior year 4.83
VALUE OF CHARITABLE CONTRIBUTION DEDUCTION $82.02
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
$0.78 million in 2003.
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 2003 was $34.37 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. Any gambling losses taken on the
64
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 claim a credit. This
deduction was worth $15.28 million in
2003.
TYPE OF DEDUCTION
2003
(Millions)
Standard Deduction $161.82
Preferential standard deduction for unmarried head of household filers 15.12
Itemized Deductions:
Medical and dental expenses 85.77
Taxes paid 145.03
Interest expense 217.93
Charitable contributions 82.02
Casualty or theft losses 0.78
Job expenses and most other miscellaneous deductions 34.37
Other miscellaneous deductions (nonlimited) 15.28
Value of All Itemized Deductions $421.85
VALUE OF STANDARD AND ITEMIZED DEDUCTIONS $788.03
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 2.87% of the amount
10,000 25,000 3.2% of the amount, less $33
25,000 50,000 3.74% of the amount, less $168
50,000 150,000 4.72% of the amount, less $658
150,000 and over 5.04% of the amount, less $1,138
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 5.04%,
determining the impact of taxing all income at
5.04% would be appropriate. Using this
reasoning, an additional $871.6 million
would have been collected from individual
income tax if a flat 5.04% tax rate had been
used.
65
However, no taxpayer is currently taxed
solely at 5.04%; only that income greater
than $150,000 is taxed at this rate. If a 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 results in an
effective tax rate 3.57%. Applying this tax
rate to all taxpayers results in the same
individual income tax collections as with
the graduated tax rate structure, but the
burden of the tax will change. Taxpayers
with lower Federal Adjusted Gross Income
will pay more tax and taxpayers with higher
Federal Adjusted Gross Income would pay
less tax.
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, $5.04 ($100 times
the maximum tax rate of 5.04%). On the
other hand a $100 credit reduces tax
liability by the full $100.
Family Tax Credit
Single and married filing separately filers
with a federal adjusted gross income of
$10,000 or less, and married filing jointly
filers with a federal adjusted gross income
of $31,000 or less with dependents, may
claim the family tax credit (A.R.S. §43-
1073). The amount of the credit is set at
$40 per person in the household, and is
capped at $240 for married filing jointly
and unmarried head of household filers,
and $120 for single and married filing
separately filers.
Property Tax Credit
The property tax credit program provides
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.
Clean Elections Credit
A credit is allowed for donations made directly
to the Clean Elections Fund or a clean election
donation made on the individual income tax
return. The credit is not to exceed 20% of
the tax liability or $550 for single filers
($1,100 for married filing jointly)
whichever is greater. The maximum credit
is adjusted biennially (A.R.S. §16-954B).
Credit for Increased Excise Taxes Paid
A refundable credit is allowed against
income tax to mitigate the increase in transaction
privilege tax rates for education (A.R.S. §43-
1072.01). To qualify, claimants must have
federal adjusted gross income of $25,000
or less for married filing jointly or $12,500
or less for single filers. The credit shall not
exceed $25 for each person who is a
resident and for whom a personal or
dependent exemption is allowed with a
maximum credit of $100 per household.
Other Credits
Other credits are filed on a separate
Schedule CR. In many instances, the credit
claimed exceeds the tax liability on the
return. With those credits that are non-refundable,
the unused portion of the
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).
Enterprise Zone Credits
Enterprise zone credits are income tax
credits provided for non-retail businesses located in
an enterprise zone established under Arizona law
who have a net increase in employment of qualified
66
employees (A.R.S. §43-1074). A maximum
of $500 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
$1,000 per net new employee can be
claimed. The limit in the third year of
continuous employment is $1,500 per net
new employee.
Research and Development Credit
A.R.S. §43-1074.01 provides a tax credit
for research and development expenses. The
amount of credit is computed based on the
excess of the qualified research expenses
for the taxable year over the base amount.
Recycling Equipment Credit
The recycling equipment credit is an
income tax credit for businesses or individuals
that 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 25% of the tax liability for that tax
year or $5,000. This credit is now only
available to the extent that the taxpayer
had unused carry forward from prior years.
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).
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.
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.
Pollution Control Device Credit
The pollution control device credit is a tax
credit for expenses incurred to purchase real or
personal property that is used in Arizona in the
taxpayer's trade or business to control or prevent
pollution (A.R.S. §43-1081). The amount of
the credit is equal to the lesser of 10% of
the purchase price or $500,000.
Agricultural Pollution Control
Equipment Credit
A credit is allowed for expenses that a
taxpayer (involved in the commercial production of
livestock, livestock products or agricultural,
horticultural, viticultural or floricultural corps or
products) incurs to purchase tangible personal
property that is primarily used in the taxpayer’s
trade or business in the state to control or prevent
pollution (A.R.S. §43-1081.01).
Construction Materials Credit
A.R.S. §43-1082 provides a tax credit of
5% of the purchase price of new construction
materials incorporated into a qualifying facility
located in Arizona if the facility has a total cost of
$5 million. This credit is now only available
to the extent that the taxpayer had unused
carry forward from prior years.
Solar Energy Device Credit
A solar energy credit is provided for an
individual who installs a solar energy device in
his or her residence in Arizona. The credit for
buying or installing such a device is 25% of
the cost, including installation, or $1,000,
whichever is less (A.R.S. §43-1083).
67
Agricultural Water Conservation
System Credit
A credit is allowed for expenses incurred
by a taxpayer to purchase and install an
agricultural water conservation system (A.R.S.
§43-1084). The agricultural water
conservation system must be primarily
designed to substantially conserve water on
land that is used to produce agricultural
products, raise, harvest or grow trees, or
sustain livestock. The amount of the credit
is 75% of the qualifying expenses.
Underground Storage Tanks Credit
Taxpayers that incur expenses for corrective
actions taken with respect to the release of a
regulated substance from an underground storage
tank are allowed an income tax credit. The
credit is 10% of the amount spent for
corrective actions during the taxable year,
if certified by the Department of
Environmental Quality. (A.R.S. §43-1085)
Alternative Fuel Vehicles Credit
An income tax credit was provided for the
purchase of one or more new alternative fuel
vehicles for use in this state or for expense incurred
for converting one or more conventional vehicles to
operate on alternative fuel (A.R.S. §43-1086).
This credit is now only available to the
extent that the taxpayer had unused carry
forward from prior years.
Vehicle Refueling Apparatus Credit
A.R.S. §43-1086.01 provided a credit for
the purchase of a vehicle refueling apparatus
including storage tanks, for installation on one or
more properties in Arizona. This credit is now
only available to the extent that the
taxpayer had unused carry forward from
prior years.
Alternative Fuel Delivery System Credit
A credit was allowed for construction costs or
operating costs for constructing or operating an
alternative fuel delivery system in Arizona
(A.R.S. §43-1086.02). This credit is now
only available to the extent that the
taxpayer had unused carry forward from
prior years.
Employment of TANF Recipients
Credit
A.R.S. §43-1087 provides for an income
tax credit for net increases in qualified
employment of recipients of temporary assistance for
needy families who are Arizona residents. A
maximum of $500 per each net new
employee can be claimed in the first year
of employment, $1,000 in second year of
employment and $1,500 in the third year.
Contributions to Charities that Provide
Assistance to the Working Poor Credit
Up to $200 in voluntary cash contributions to a
charitable organization that spends at least 50%
of its budget on services to Arizona residents who
receive TANF benefits or low income Arizona
residents (income of less than 150% of the
federal poverty level) can be taken as an
income tax credit (A.R.S. §43-1088).
Private School Tuition Organization
Credit
The private school tuition organization
credit is allowed for cash contributions to a
school tuition organization, up to $500 for
single/married filing separate and $625 for
married filing joint/unmarried head of
household filers. (A.R.S. §43-1089).
Public School Extra Curricular Activity
Fee Credit
A.R.S. §43-1089.01 allows an income tax
credit for the amount of fees paid to a public
school located in Arizona for the support of extra
curricular activities, up to $200 for
single/married filing separate and $250 for
married filing joint/unmarried head of
household filers.
School Site Donation Credit
A.R.S. §43-1089.02 provides a credit for
donation of real property and improvements to a
school district or charter school for use as a school
or a site for the construction of a school. The
amount of the credit is 30% of the value of
real property and improvements donated.
68
Solar Hot Water Heater Plumbing Stub
Outs and Electric Vehicle Recharge
Outlets Credit
A credit is allowed for costs incurred of
installing an electric vehicle recharge outlet and for
including solar hot water heater plumbing stub outs
in one or more houses in Arizona constructed by
the taxpayer. (A.R.S. §43-1090)
Agricultural Preservation District
Credit
A refundable credit is allowed for a taxpayer
who conveys ownership or development rights of
Class Two property to an agricultural preservation
district (A.R.S. §43-1081.02). The amount
of the credit is either the appraised value of
the property or the difference between the
appraised value of the undeveloped land
and the appraised value of the land for
development purposes. The credit cannot
exceed $33,000 in a calendar year.
Technology Training Credit
A refundable credit is allowed for providing
technological skills training to employees (A.R.S.
§43-1088.01). The credit is equal to 50%
of the cost of training in taxable year, not
to exceed $1,500 per employee, for a
maximum of 20 employees.
TYPE OF CREDIT
# of
claimants
2003
(Millions)
Family tax credit 417,451 $7.45
Property tax credit 15,028 5.30
Clean elections credit 32,042 0.73
Credit for increased excise taxes paid 548,831 29.58
Credit for taxes paid to other states or countries 25,722 62.48
Enterprise zone credit 202 1.71
Research and development credit 121 1.10
Recycling equipment credit 4 0.00
Defense contracting credit 0 0.00
Military reuse zone credit 0 0.00
Environmental technology credit 0 0.00
Pollution control device credit 9 0.03
Agricultural pollution control equipment credit NR14 NR
Construction materials credit NR NR
Solar energy device credit 1,171 0.48
Agricultural water conservation system credit 154 1.61
Underground storage tanks credit 0 0.00
Alternative fuel vehicles credit 50 0.06
Alternative fuel vehicle credit – neighborhood electric
vehicle portion 1,203 1.58
Vehicle refueling apparatus credit 5 0.01
Alternative fuel delivery system credit 0 $0.00
Employment of TANF recipients credit NR15 NR
Contributions to charities that provide assistance to the
working poor credit 17,467 3.26
14 Too few taxpayers have claimed this credit to allow for a release of data without violating confidentiality
laws.
15 Too few taxpayers have claimed this credit to allow for a release of data without violating confidentiality
laws.
69
TYPE OF CREDIT
# of
claimants
2003
(Millions)
Private school tuition organization credit 58,122 29.45
Public school extra curricular activity credit 201,407 27.75
School site donation credit 45 2.05
Solar hot water heater plumbing stub outs and electric
vehicle recharge outlets credit NR NR
Agricultural preservation district credit (refundable) 0 0.00
Technology training credit (refundable) 0 0.00
TOTAL VALUE OF ALL CREDITS (credit used and
refunded) 16
1,319,043 $174.66
16 Figures for all credits shown here are subject to change due to the verification process.
70
SUMMARY OF INDIVIDUAL INCOME
TAX EXPENDITURES
Tax Year 2003
FEDERAL SUBTRACTIONS FROM INCOME:
Educator expenses/tuition fees deduction ............................................................. $2,713,000
Individual Retirement Account for qualifying individuals...................................... 5,108,000
Student Loan Interest deduction................................................................................ 2,068,000
Moving expenses ............................................................................................................. 480,000
One-half of self-employment tax ............................................................................... 8,249,000
Self-employed health insurance deduction ............................................................... 8,359,000
Keogh retirement plan and self-employed SEP deduction .................................. 10,307,000
Penalty on early withdrawal of savings........................................................................... 30,000
Alimony paid ............................................................................................................ 6,166,000
TOTAL VALUE OF FEDERAL SUBTRACTIONS
FROM INCOME....................................................................................$43,861,000
EXEMPTIONS:
Personal exemptions ..............................................................................................$200,236,000
Preferential personal exemption for unmarried head of household ................... 11,206,000
Preferential personal exemption for married filers with one or more
dependents.................................................................................................................. 26,753,000
Age 65 or over exemptions ....................................................................................... 19,104,000
Dependent exemptions.............................................................................................. 81,828,000
Blind exemptions ............................................................................................................. 197,000
Qualifying parent or ancestor exemption........................................................... 1,587,000
TOTAL VALUE OF EXEMPTIONS.......................................................... $350,697,000
SUBTRACTIONS FROM INCOME:
Interest on US obligations......................................................................................... $7,349,000
Exclusion for federal, Arizona state or local pensions............................................ 7,186,000
Exempt Arizona state lottery winnings .......................................................................... 87,000
Social Security or Railroad Retirement benefits included on federal
form 1040 ............................................................................................................... 59,974,000
Bonus depreciation adjustment .................................................................................. 2,667,000
Certain wages of Native Americans......................................................................... 14,434,000
Income tax refunds from other states .......................................................................... 753,000
Constructing energy efficient residences........................................................................ 39,000
Other Subtractions ....................................................................................................... 6,413,000
Deposits and employee contributions into medical savings accounts..................... 149,000
Elective subtraction of 2003 federal retirement contributions ....................... 397,000
TOTAL VALUE OF SUBTRACTIONS...................................................... $100,188,000
71
DEDUCTIONS:
Standard deduction.................................................................................................$161,815,000
Preferential standard deduction for unmarried head of household .................... 15,116,000
Itemized deductions:
Medical & dental expenses ........................................................................................ 85,768,000
Taxes paid:
State and local income taxes ................................................... 91,772,000
Real estate taxes ........................................................................ 43,924,000
Personal property and Other Taxes....................................... 11,996,000
Total value of taxes paid deduction ................................................................$145,027,000
Interest Expense:
Home Mortgage Interest .......................................................206,570,000
Deductible Points ....................................................................... 2,130,000
Deductible Investment Interest............................................ 9,821,000
Total Value of Interest Expense .....................................................................$217,933,000
Charitable Contributions:
Cash Contribution .................................................................... 59,684,000
Contributions Other Than Cash ............................................ 17,563,000
Carryover From Prior Year..................................................... 4,831,000
Total Value of Charitable Contributions ...........................................................$82,016,000
Casualty & Theft Losses................................................................................................... 784,000
Job Expenses and Most Other Miscellaneous Deductions ....................................34,368,000
Nonlimited Miscellaneous Deductions ................................................................ 15,276,000
Total Value of Itemized Deductions .....................................................................$421,849,000
TOTAL VALUE OF STANDARD
AND ITEMIZED DEDUCTIONS................................................................ $788,025,000
CREDITS:
Family tax credit............................................................................................................$7,446,000
Property tax credit ..........................................................................................................5,302,000
Clean elections fund credit............................................................................................... 727,000
Credit for increased excise taxes paid........................................................................29,582,000
Credit for taxes paid to other states or countries.....................................................62,485,000
Enterprise zone credit....................................................................................................1,714,000
Research and development credit ................................................................................1,109,000
Recycling equipment credit .................................................................................................. 2,000
Defense contracting credit ...........................................................................................................0
Military reuse zone credit .............................................................................................................0
Environmental technology credit................................................................................................0
Pollution control device credit........................................................................................... 31,000
Agricultural pollution control equipment credit ................................................................NR17
Construction materials credit...................................................................................................NR
Solar energy device credit ................................................................................................. 480,000
Agricultural water conservation system credit............................................................1,611,000
Underground storage tanks credit...............................................................................................0
Alternative fuel vehicles credit........................................................................................... 61,000
17 Too few taxpayers have claimed this credit to allow for a release of data without violating confidentiality laws.
72
Neighborhood electric vehicle credit.........................................................................$1,583,000
Vehicle refueling apparatus credit ....................................................................................... 9,000
Alternative fuel delivery system credit........................................................................................0
Employment of TANF recipients credit.............................................................................NR18
Contributions to charities providing assistance to working poor credit.................3,259,000
Private school tuition organization credit .................................................................29,445,000
Public school extra curricular activity fee credit ......................................................27,754,000
School site donation credit............................................................................................2,049,000
Solar water heater plumbing stub outs and electric vehicle recharge
outlets credit............................................................................................................................NR
Agricultural preservation district credit (refundable) ...............................................................0
Technology training credit (refundable)............................................................... 0
TOTAL VALUE OF CREDITS....................................................................... $174,664,000
VALUE OF INDIVIDUAL INCOME TAX EXPENDITURES19
............................................................................................................$1,727,012,000
18 Too few taxpayers have claimed this credit to allow for a release of the cost without violating 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
INSURANCE PREMIUM
TAX EXPENDITURES
74
75
INSURANCE PREMIUM TAX
EXPENDITURES20
20Any figures presented for Insurance Premium Tax Expenditures were provided by the Department of Insurance.
Each admitted insurer doing business in the state
is required to annually report its total direct
premium income to the Arizona Department of
Insurance (A.R.S. § 20-224). Total direct
premium income excludes “...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