Stellar idea, this flat tax.

29 Jun 2009 12:35 pm
Posted by: Donna

The Daily Star (bless their hearts) has an article by Howie Fischer (bless his heart) up about the possible costs of the supposedly “revenue neutral” flat tax piece of the pending budget and the blatant b.s. peddled by its proponents.

House Speaker Kirk Adams, R-Mesa, said using a different starting point to compute Arizona taxes was the only way to get the overall rate down to 2.8 percent. If Arizona does not tax those items that HB 2653 would eliminate, he said, the rate would have to be higher.

He argued that Arizonans will “absolutely not” be paying higher taxes if the measure becomes law.

Maybe.

“You could certainly find a hypothetical situation that may result in a nominal difference for a particular hypothetical situation,” he said. “But other states have made this transition.”

Like those hypothetical people with their hypothetical 401ks seeing a nominal difference in their hypothetical taxes. Hypothetically.

The flat-tax legislation, which would take effect in 2012, would scrap existing laws that use an individual’s federal adjusted gross income as the starting point for computing state income. Instead, it uses the total gross income as a base.

The difference? A lot.

For example, contributions made by individuals to qualified retirement plans, such as 401(k) plans and individual retirement accounts, are subtracted before computing taxable income. That is based on the idea that these contributions should be tax-deferred.

If HB 2653 becomes law, that deferral would disappear.

What that means is that Arizonans would pay tax when they earn the money in the first place — and be taxed again when they withdraw the funds.

Gee, that sounds revenue-neutral for middle class people with retirement accounts. Divorced people paying alimony get shafted too. They get to pay state taxes on payments they previously deducted. The people who really get the bums rush are the self-employed folk:

It also has a particular hit on those who are self-employed.

These people pay both the employer and the employee halfs of federal Social Security taxes. But to make up for that, the individuals get to deduct that other half from their federal taxable income.

HB 2653 would make that subject to state taxes.

Similarly, the deduction that now exists for the health-insurance costs of a self-employed person also would disappear.

Hypothetically!

The Dem legislators I spoke with say it doesn’t violate the state constitution’s requirement of a 2/3 majority because it doesn’t add to the state’s revenue (projections are that it will cost the state about 1/2 a billion). But it’s sure fiddling with the revenues of what are bound to be some mightily ticked off voters when they find out they’re getting an income tax increase on top of the property tax increase.

UPDATE: In the comments section to the Daily Star piece people are pointing out how badly the elderly may be hurt by this. They may have to pay taxes on some of their SS benefits and will lose medical expense deductions. Commenter Ross J. brings up a very dire hypothetical:

Elderly widow with Alzheimers who has $50,000 annual income and $60,000 annual expense for a skilled nursing facility.

Current Arizona income tax: Zero

Tax under the Republican plan: at least $1,000.

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