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Federal withholding change to cost the state

PHOENIX — State officials trying to determine fiscal and economic opportunities from the federal stimulus program have identified an unwelcome consequence: an automatic reduction in income tax withholding along with additional lost revenue if the state matches other federal changes.

The state, which is in the midst of a budget crisis, will temporarily lose an estimated $73 million in the current fiscal year because state income tax withholdings are keyed to federal reductions. That has legislators considering whether to raise state withholding rates so taxpayers’ actual payments stay the same, one leader said Tuesday.

Also Tuesday, Gov. Jan Brewer’s office disclosed that Brewer earlier this month officially certified that the state would seek stimulus money, which the federal government hopes will create jobs and spur the economy.

Arizona expects to get approximately $4 billion over three years, including $350 million already received in additional money for health care.

Brewer had said March 4 that Arizona would accept stimulus money but her March 5 certification letter to President Barack Obama had not been disclosed before an inquiry Tuesday from The Associated Press. Under the stimulus law, governors must provide certification letters for their states to be eligible for the federal money.

Brewer’s March 5 letter to Obama recounted the state’s budget troubles and said Arizona “will request and use funds provided” by the stimulus law, the American Recovery and Reinvestment Act of 2009.

Brewer said in a major budget address to the Legislature a day before the letter was sent that she intended to have Arizona accept stimulus money. She and her staff say details remain to be decided other than that the state will accept money for child care, highway projects and health care.

While Brewer has decided to pursue several categories of stimulus money, she and her staff are still studying other parts and what strings are attached, Brewer spokesman Paul Senseman said. “The biggest part of the challenge right now is that rulemaking for most of these specific items have not been completed by the federal government.”

The state plans to create a Web site to provide information on the availability of stimulus money.

Brewer is being too slow in committing to use stimulus money, Democratic lawmakers said.

“Arizona’s children and families are looking for leadership during this economic crisis,” said House Minority Leader David Lujan, D-Phoenix.

Arizona bases its income-tax withholding on federal rates that some employers have already reduced to provide savings provided by the stimulus program.

The Arizona Department of Revenue estimates that the federal withholding changes would cost the state $73 million in the current fiscal year that ends June 30 and $37 million in the next one but make it up with $109 million of additional income in the year after that.

To provide an offset under possible legislation now under discussion, “the percentages would go up. It would be the same dollars,” said House Majority Leader John McComish, R-Phoenix.

The Revenue Department said state tax collections also would drop due to other parts of the stimulus law’s tax provisions.

Estimated loses include $2.5 million in the next fiscal year from a new, temporary deduction for purchases of new vehicles, $20 million next year to temporarily exclude unemployment benefits from taxation and $53 million next year and smaller amounts in subsequent years due to tax deferrals on debt cancellations counted as income, the department said.

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