Conformity Summary From the 2019 Legislative Session With Ryan DeMenna

You can also see more details, including a table with tax brackets and deductions at www.ascpa.com/conformity.

On the morning of May 31, 2019, Governor Doug Ducey signed Arizona's 2020 state budget into law. The state's budget is crafted every session and is comprised of a package of roughly nine or ten bills. This year's budget package included the highly anticipated income tax conformity legislation, HB 2757 (tax provisions; omnibus).

As Society members are well aware, Arizona requires taxpayers to use their Federally Adjusted Gross Income as the starting point for state income tax assessment. The state has conformed to the Internal Revenue Code (IRC) each year since 1978 to include federal provisions that became effective in the previous year.

But the political challenges associated with conforming to the changes made by the Tax Cuts and Jobs Act of 2017 stalled legislative efforts to address conformity in a timely manner, leaving taxpayers and tax practitioners with more questions than answers as tax returns are prepared.

This year the Society worked tirelessly to educate legislators, many of whom were newly elected, of the importance of full conformity. Legislative budget analysts produced highly speculative estimates ranging from $50 million to $250 million, and the issue quickly became highly politicized.

Some Republican legislators viewed conforming to the IRC as a tax increase, and an unintended consequence of the Tax Cuts and Jobs Act, which was intended to put money back into the pockets of taxpayers, not state government. Meanwhile most Democrats, and a fair number of Republicans, wanted to use the potential revenue from full conformity as a way to fund budget priorities.

Early in the session Sen. J.D. Mesnard (R – Chandler) introduced SB 1143 (conformity; internal revenue code; rates), which conformed to the IRC as of January 1, 2018, and reduced the state income tax rates by 0.11%, which would have applied retroactively to tax years beginning with 2018. The legislation passed the Senate and House along a party-line vote. Governor Ducey, however, vetoed the measure on February 1, 2019. In his veto message the Governor stated that he vetoed SB 1143 because it was "the wrong policy, and any bill with a fiscal impact should be considered as part of budget discussions agreed to by the Legislature and Executive, just as every budget bill is considered, every session."

The fiscal impact associated with conformity, coupled with the governor's veto message, meant that the conformity negotiations were effectively tied to the state budget negotiations from that point forward. After months of discussions, Governor Ducey and legislative leadership reached a tentative budget deal over the weekend of May 18.

The House began debating the budget package in earnest on Thursday, May 23. After a marathon session of debating, amending, and voting on the proposal, the House adjourned at roughly 4:30 AM on Friday, May 24. The Senate, however, didn't' have the votes necessary to pass the deal, as a handful of Senators were refusing to vote on the budget until their individual priorities were addressed.

The Senate met on Friday and Saturday of Memorial Day weekend, a move that was highly unusual as the legislative workweek is typically Monday through Thursday. Senate President Fann, however, was firm in her resolve to negotiate a budget deal that her members could support and send to the governor.

President Fann was eventually successful in negotiating a budget that her caucus could support, but Sen. Mesnard remained opposed to the conformity-related provisions, and voted against a majority of the budget bills.

HB 2757 (tax provisions; omnibus) ultimately passed the House by a party-line vote of 31-29 and the Senate by a vote of 16-13, with Sen. Mesnard joining the Democrats in opposition.

Governor Ducey signed the legislation on May 31, 2019.