Fiscal Note
BILL # SB 1371 TITLE: income tax; subtraction; retirement distribution
SPONSOR: Mesnard STATUS: Senate Engrossed
PREPARED BY: Benjamin Newcomb
Description
The Senate Engrossed version of SB 1371 would subtract distributions from qualified retirement plans and Individual
Retirement Accounts (IRA) for taxpayers aged 67 and older from the calculation of Arizona gross income (AGI).The value
of the subtraction is limited to the same amount as the standard deduction each year. The bill would become effective
retroactively from Tax Year (TY) 2025, affecting FY 2026 collections.
Estimated Impact
We estimate the bill would reduce General Fund revenue by $(130.4) million annually starting in FY 2026. Our estimate
does not reflect the bill's potential dynamic effects, which are typically secondary to the direct impact. For example, all
else being equal, exempting a large portion of retirement distributions from IIT may serve as an incentive for more
retirees to move to the state, which would increase consumer spending that may result in greater economic output. If
implementation of this bill would require lower state spending, taxpayers may lower their consumption, which may result
in lower economic output.
Given the lower level of liability under the bill, taxpayers may qualify for a lower level of nonrefundable IIT credits.
We have asked the Department of Revenue (DOR) for their estimate of the bill's impact but have not yet received a
response.
Analysis
Distributions from Pensions and Retirement Accounts
According to the most recent data from the Internal Revenue Service (IRS), taxable distributions from qualified retirement
plans, such as an employer-sponsored 401(k) plan, and IRAs in Arizona were $10.37 billion in TY 2022. Based on the 5-year
average annual growth in retirement distributions, which is 4.6%, we estimate this total will grow to $11.87 billion by TY
2025.
The Office of Economic Opportunity (OEO) produces low, medium, and high projections of Arizona's population by year
through 2060 and includes estimates by age group. Based on the medium series, we estimate that of those aged 59.5 and
older (the minimum eligible age to begin receiving distributions), 66.0% are at least 67 years old. Applying this percentage
to the overall level of retirement distributions, we estimate that $7.83 billion of distributions would be eligible for the
subtraction under the bill.
The value of the subtraction is limited to the same amount as the standard deduction each year. In TY 2025, these
amounts are $15,000 for single filers, $22,500 for unmarried heads of household, and $30,000 for those married filing
jointly. Using the most recent data from DOR on the distributions of filers and taxable income by filing status and applying
them to our distribution estimate, we project that of the $7.83 billion of subtraction-eligible distributions, only $5.22
billion would be subtracted from AGI. Since the state's IIT rate is 2.5%, there would be a $(130.4) million annual decrease
in income tax collections beginning in FY 2026. - 2 -
Local Government Impact
Incorporated cities and towns receive 18% of individual and corporate income tax collections from 2 years prior from the
Urban Revenue Sharing (URS) Fund established by A.R.S. ยง 43-206. Since the bill would decrease statewide IIT revenue by
$(130.4) million in FY 2026, overall URS distributions to cities and towns would decrease by $(23.5) million in FY 2028.
3/17/25