By Terri Jo Neff |

The 10-year combined impact of Arizona’s recently enacted 2.5 percent flat rate income tax along with repealing the state’s progressive income tax structure with an 8.0 percent top rate included in 2020’s illegal Proposition 208 would increase Arizona’s GDP by about $11.9 billion with about 58,000 more employed workers.

That’s the conclusion from Common Sense Institute Arizona which took a deep look into the long-term effect of the Arizona Supreme Court’s rejection of Prop 208 and the signing into law of Arizona’s first flat tax.

“Generally, economists agree that high income taxes are economically harmful, particularly when they tax capital gains and other income on savings and investment at the same rate as ordinary income (as in Arizona and most other states),” the CSI report states. “This is because the tax discourages taxpayers from saving or investing ordinary income in the taxing jurisdiction, and instead spending it today on consumption locally or moving their investment to lower taxed jurisdictions.”

Arizona is one of 42 states with an individual income tax. When first enacted in 1933, the state had 11 tax rates ranging from 1.0 percent to 4.5 percent. Over the years, the tax rates have changed, bringing Arizona to its current four rates which range from 2.59 to 4.5 percent, the 40th lowest in the country. 

According to Glenn Farley, CSI-Arizona’s Director of Policy & Research, Arizona is the 11th state to adopt a simplified flat tax structure. And when the state’s 2.5 percent flat rate is transitioned in, it will give Arizonans “the lowest income tax rate in the country” among the states with such a tax.

Farley added that Arizona currently has a happy revenue problem, in that the State has experienced unprecedented annual growth in income and sales tax collections since Fiscal Year 2018.

“Arizona is collecting at least $2.4 billion more per year due to the 2019 Tax

Omnbius, passed by the Arizona state legislature, than it was under the pre-2018 tax base,” the CSI report states. “The problem is best addressed by revisiting the state’s tax structure adopted in 2019, and not by trying to use one-time spending to absorb the excess cash. The 2.50% flat tax plan helps further the intended goal begun back in 2019: a revenue-neutral modernization of the state tax code, and not a permanent tax increase.”

The transition to a flat tax comes as Arizona continues to enjoy unprecedented revenue windfalls. The report notes that by FY2025, current trends and forecasts show the State General Fund adding $5.8 billion in new revenue despite all taxpayers paying in at a lower rate.

Which makes it all the more important that Prop 208 with its surcharge to a 8.0 percent rate was invalidated on constitutional grounds, the report states.

“Economic theory suggests high income taxpayers will relocate income in response to tax and other fiscal policy, without necessarily relocating themselves,” according to the CSI report. “A 77% increase in the states marginal tax rate on its highest earners would have reduced both Arizona’s long-term growth prospects and short-term revenue collections.”