Fix AZ property tax credit income definition (exclude exemptions)

[policyengine]

Summary

Fixes #6956 by implementing Option 3: creating a new az_property_tax_credit_agi variable that correctly calculates income for property tax credit purposes.

Changes

• Created new variable: az_property_tax_credit_agi.py that calculates AGI per ARS 43-1072(H)(6) and Arizona Admin Code R15-2C-502
  • Uses Federal AGI + Arizona additions - Arizona subtractions
  • Does NOT subtract Arizona exemptions (aged, blind, etc.) unlike az_agi
• Updated parameter: Modified income_sources.yaml to use az_property_tax_credit_agi instead of az_agi
• Added test: Created test case demonstrating the fix for the issue scenario (75-year-old with $3,766.08 AGI)

Why This Fix is Correct

Per ARS 43-1072(H)(6) and Arizona Admin Code R15-2C-502, the property tax credit uses a custom definition of "adjusted gross income" that:

• Starts with Federal AGI
• Adds certain Arizona-specific items
• Subtracts certain Arizona-specific items
• Does NOT subtract Arizona exemptions (the $2,100 aged exemption, blind exemption, etc.)

The previous implementation incorrectly used az_agi, which subtracts exemptions as part of the regular Arizona income tax calculation.

Test Results

• ✅ New test for issue scenario passes (AGI of $3,766.08 correctly calculated, not $1,666.08)
• ✅ All existing property tax credit tests pass

References

• ARS 43-1072
• Arizona Admin Code R15-2C-502

🤖 Generated with Claude Code

[codecov]

Codecov Report

✅ All modified and coverable lines are covered by tests.
✅ Project coverage is 100.00%. Comparing base (5a81d44) to head (3faa5dc).
⚠️ Report is 13 commits behind head on master.

Additional details and impacted files

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Flag	Coverage Δ
unittests	100.00% <100.00%> (ø)

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[DTrim99]

Updated Implementation Based on ITR 12-1 Ruling

After reviewing ARS 43-1072 and ITR 12-1 (Arizona Income Tax Ruling on Property Tax Credit Household Income), I've updated the implementation to correctly calculate property tax credit income.

Key Changes

1. az_property_tax_credit_agi.py

Before: Used az_subtractions which incorrectly excluded:

• Public pension exclusion
• Military retirement subtraction
• Long-term capital gains subtraction
• US Government interest

After: Only subtracts tax_unit_taxable_social_security because:

• Per ITR 12-1 item (9): Pension income IS included (Arizona state/local, US Government, military retirement)
• Per ITR 12-1 item (7): Capital gains ARE included
• Per ITR 12-1 item (2): All interest income IS included (including US Government)
• Per ARS 43-1072(I): Social Security is excluded

2. income_sources.yaml

Before: Added public_pension_income which caused double-counting (taxable pension is already in Federal AGI)

After:

• Replaced with tax_exempt_public_pension_income and tax_exempt_private_pension_income
• Added references to ARS 43-1072 and ITR 12-1

3. Tests

• 6 unit tests in az_property_tax_credit_agi.yaml covering:
  • Basic wages/interest case
  • Social Security exclusion
  • Pension income inclusion
  • Capital gains inclusion
  • Edge cases
• Integration test for original issue AZ Property Tax Credit uses wrong income definition (includes aged exemption) #6956

All 139 Arizona tests pass ✅

References

• ARS 43-1072 - Property Tax Credit
• ITR 12-1 - Income Tax Ruling on Property Tax Credit Household Income

[PavelMakarchuk]

One format suggestion, lgtm after

[DTrim99]

@PolicyEngine implement @PavelMakarchuk's suggestion: policyengine_us/parameters/gov/states/az/tax/income/credits/property_tax/income_sources.yaml
@@ -1,22 +1,34 @@
description: Arizona accounts for the following income sources for the property tax credit.
description: >-
Member
@PavelMakarchuk
PavelMakarchuk
2 minutes ago
make this one sentence

[policyengine]

Done! I've condensed the description to a single sentence as requested. The change has been committed and pushed to the PR branch.