Tucson CitizenTucson Citizen

State considering income tax withholding change

PHOENIX – The state’s biggest business lobby doesn’t have major objections to the possibility of Arizona requiring employers to set new state individual income-tax withholding rates.

The state is considering the change so Arizona doesn’t take a budget hit from tax provisions of the federal stimulus program.

The change would be a percentage rate increase for the state portion of an Arizona worker’s withholding above what was in effect before a new decrease in federal withholding. But it would not change the actual dollar amount.

Arizona withholding consists of a percentage of a taxpayer’s federal withholding, and the problem for the state is that the federal government is lowering its withholding so workers will spend more and boost the economy.

Given the state’s budget troubles, it seems reasonable that the state acts to prevent fiscal damage resulting from the federal changes, said Glen Hamer, Arizona Chamber of Commerce and Industry president.

Arizona stands to lose a projected $73 million in tax collections in the current fiscal year because reduced federal income-tax withholding from paychecks would automatically shrink the state’s withholding.

Despite lower withholding, an individual’s actual state tax liability for the year would not change. Reduced state withholding means a taxpayer would either have to pay more or get a smaller refund when filling a 2009 tax return in April 2010.

The state Department of Revenue said Arizona is the only state to key its withholding to the federal withholding, and legislative leaders said last week they’re giving strong consideration to permanently uncoupling state and federal withholding.

The Revenue Department estimates the stimulus change means the state would lose $73 million through reduced withholding in the current fiscal year, which runs through June 30, and $37 million in the next fiscal year before getting an additional $109 million in the fiscal year after that.

But Arizona is in a budget crisis now, and lawmakers are reluctant to make their job balancing the budget harder.

A state change would not affect a taxpayer’s reduced federal withholding, said Senate Majority Leader Chuck Gray, R-Mesa.

Some legislators have voiced concerns about inconveniencing employers who would have to alter their payroll systems’ withholding soon after changing to accommodate the federal revision.

The Revenue Department said a state withholding change would require legislative action soon on an emergency basis in order for the higher percentages to take effect in time to have an impact in the final months of the fiscal year.

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