By ggrado | Arizona Capitol Times
Republican state representatives voted Friday to allow the owners of small businesses — and anyone who organizes their finances for tax purposes as one — to escape paying the voter-approved income tax surcharge on the wealthy to fund education.
And that would cut hundreds of millions of dollars from what is supposed to go to schools.
SB 1783, approved on a 31-25 party-line vote, creates an entirely new alternate tax category for small business, generally those now organized in a way so their income passes through to their owners. That means the owners now compute what they owe the state on their personal income tax forms, after deducting all business expenses.
Proposition 208, approved by voters by a 51.7% margin in November, imposes a 3.5% surcharge on adjusted personal income of amounts above $250,00 for individuals and $500,00 for married couples filing jointly. Under current law, that means the net earnings of the business retained by the owner.
But here’s the thing: That surcharge applies only to tax categories that existed last year when Proposition 208 was approved. And since this new “small business” classification did not exist last year, the surcharge would not apply at all to anyone opting to use that new category.
The tax relief in SB 1783 goes far beyond what the Republican-controlled legislature already did when they voted earlier this week to cap all income taxes at 4.5%.
In that case, unable to overturn what voters approved, lawmakers created a workaround: The wealthiest would still have to pay the 3.5% surcharge. But, with the 4.5% cap, they would have an effective tax rate of just 1% on their earnings.
