Arizona Voters Could Be Asked To Give Up Lower Income Tax Rates

Arizona Voters Could Be Asked To Give Up Lower Income Tax Rates

By Terri Jo Neff |

The Arizona Secretary of State’s Office announced last week that enough valid signatures were turned in to let voters decide next year whether they support substantially reduced income tax rates set to take effect in 2022 or want to maintain the current higher rates.   

But whether voters can actually weigh in on such issues in the November 2022 General Election is something the Arizona Supreme Court will likely be asked to decide.  

In June, Gov. Doug Ducey signed an overhaul of Arizona’s income tax system as part of the $12.8 billion budget packet approved by the Legislature. It changes the state’s current five-tier income tax rates -from 2.59 percent up to a 4.5 percent base- to a two-tier plan with lower rates in 2022.  

The legislation which created the new tax structure could even trigger a single 2.5 percent tax rate as soon as 2023 if Arizona’s revenues meet certain levels.

The flat tax system also addresses the impacts of Prop 208, which voters narrowly passed last year. Known as the Invest in Education Act, Prop 208 imposed an additional 3.5 percent tax surcharge effective 2021 on any income above $250,000 for a single filers or $500,000 for joint filers. The surcharge is on top of the current 4.5 percent base rate.

The revenue from the surcharge is slated to be used for public K-12 schools, but it does so by kicking Arizona’s highest earners to an 8 percent income tax. This put businesses in the state at a competitive disadvantage with Texas and Nevada which have no income tax, while New Mexico has a top rate of 4.9 percent.

Because the 3.5 percent Prop 208 surcharge was put into law by voters, state lawmakers could not directly undo it. Instead, the new flat tax rate plan would top out at 4.5 percent by absorbing the 3.5 percent surcharge.

However, supporters of Invest in Ed, now known as Invest in Arizona, want to void the new tax rate law despite the fact all Arizonans would share in the projected $1 billion savings. The group is trying to kill the flat rate plan by utilizing a provision of the Arizona Constitution which gives citizens 90 days after the legislative sessions ends to attempt to refer new state laws for voter approval.

Last week Invest in Arizona successfully submitted enough valid petition signatures to get the matter on the ballot next November as Proposition 307. In response to the petition drive, Ducey’s spokesman has continued to champion the new income tax structure, which would ultimately be the lowest flat tax in the country if state revenue targets are met. 

“It keeps Arizona competitive,” said C.J. Karamargin. “We are returning tax dollars to the citizens of Arizona.”

Whether new laws dealing with state revenues such as income taxes are eligible for voter referendum has never been ruled on by a state court.

A lawsuit by the Arizona Free Enterprise Club argues that the Arizona Constitution actually prohibits issues related to the support and maintenance of state government to be referred to the ballot. A decision by Judge Katherine Cooper of the Maricopa County Superior Court is expected any day.

Whichever side loses in Cooper’s court is expected to appeal, with the Arizona Supreme Court expected to hear the case eventually.

Another wrinkle in the tax saga is that the Arizona Supreme Court ruled earlier this year that Prop 208 can be challenged on the basis of the state’s constitutional spending limits for K-12 schools. The justices recently sent the matter back to the Maricopa County Superior Court for additional arguments although the case is expected to be back at the Arizona Supreme Court early next year.

Business Groups React Positively To Arizona’s FY2022 Budget

Business Groups React Positively To Arizona’s FY2022 Budget

By Terri Jo Neff |

Positive reactions continue to come in from business groups in response to the Arizona Legislature’s passage this week of a Fiscal Year 2022 budget package which includes more than $1.3 billion in tax cuts, $1 billion in payments toward state debt, and a transition of the state’s multi-tied income tax system to a flat rate.

The nonprofit, nonpartisan Arizona Tax Research Association called passage of the FY2022 budget “a watershed moment” for Arizona, while Scot Mussi, president of the Arizona Free Enterprise Club, commended the Legislature for passing what he called “historic” tax cuts.

“Every single taxpayer in Arizona will now get a tax cut,” Mussi said. “This is great news for the future of our great state!”

The National Federation of Independent Business, which advocates for small and independent businesses across the country, gave a shout out to the Legislature via Twitter for adopting “landmark property & income tax reforms” which support small businesses. “Your work will allow small businesses to grow our state economy and create more jobs #ForArizonans,” the message said.

On Friday, Gov. Doug Ducey issued a video statement celebrating passage of the 11 bills which make up what he calls the state’s “fiscally conservative, forward-looking budget” that starts July 1.

“Here in Arizona our economy is booming,” said Ducey, thanking House Speaker Rusty Bowers, Senate President Karen Fann, and all the legislators. “New people and businesses are moving here every day. And at the state level that’s resulted in record revenue.  With this budget we’re investing those dollars in the things that matter: schools, universities, community colleges, and new roads and bridges, just to name a few.”

Ducey added that “most importantly we’re giving a bulk of the surplus dollars back to the people who earned them.”

A budget signing ceremony must wait until at least Monday when the Senate returns from recess to formally transmit the budget bills to the governor.

Meanwhile, supporters of the voter initiative known as Proposition 208 are promising a court fight over a bill Ducey is also expected to sign next week.

Prop 208 passed last November by a slim margin of 51.75 to 48.25 percent. The purpose of the initiative was to provide additional funding for public and charter school by way of a new 3.5 percent income tax surcharge for many Arizonans.

Among those subject to the new tax surcharge would be thousands of small business owners who currently report business profits on their state personal income tax return. SB1783, however, provides a small business alternate income tax as an option for those who operate as sole proprietors, LLCs, professional partnerships, and S Corporations.

Under the alternate tax, income derived from small business can be reported on a special small business income tax form. This will ensure the income is not added into personal income for purposes of calculating the amount of Prop 208 surcharge a taxpayer owes.

Critics contend SB1783 is a way to unlawfully circumvent the taxation provision of Prop 208. Proponents of the bill point to the many statements made prior to the 2020 General Election which assured business owners that “business income” would not be subject to the surcharge.

We Won The Battle For An Arizona Flat Tax!

We Won The Battle For An Arizona Flat Tax!

By Victor Riches of the Goldwater Institute |

The Arizona Legislature just approved the Goldwater Institute’s plan to dramatically reduce income taxes and simplify the state’s tax code, making Arizona one of the lowest-tax states in the country. This historic reform will restore Arizona’s competitive advantage as a low-tax state and provide a boost for small business owners still struggling to recover from the COVID pandemic.

This plan collapses Arizona’s pre-Prop. 208 tax rates into a single, low 2.5% rate, and it caps the maximum tax rate at 4.5%. This means that no one’s taxes will increase because of Prop. 208. In fact, everyone’s income taxes will go down as a result of this victory.

Additionally, the Goldwater Institute has challenged the constitutionality of Prop. 208, and we’re now awaiting a decision from the Arizona Supreme Court. Fortunately, this new tax reform measure will mitigate the negative effects of Prop. 208—which otherwise would have decimated our economy—and help ensure the state’s future economic success.

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Arizona Voters Could Be Asked To Give Up Lower Income Tax Rates

Arizona Is Only Hurting Itself With High Income Taxes. Why A Flat Rate Is Smarter

By Grover Norquist |

Arizona’s income tax – with a top rate of 8% – is not competitive. Reducing and eventually eliminating the state income tax would be a huge win for all Arizonans.

Individual taxpayers and families would be able to keep more of their hard-earned paychecks. Small businesses would be able to invest more in their employees. And Arizona would be much more attractive to businesses and investment, bringing new jobs and opportunities to the state.

Over the last decade, millions of people and jobs have been fleeing from high-tax states to states that do not impose income taxes. The ability to work remotely will only amplify this trend.

Unfortunately, Arizona’s current income tax puts it on the wrong side of this equation.

Arizona is a high tax state and slipping further

Under the status quo, Arizona’s income tax – with a top rate of 8% – is not competitive. Eight states – including Arizona’s neighbor Nevada and nearby Texas – do not impose individual income taxes of any kind. Thirty-two more states – count Arizona’s neighbors Colorado, New Mexico and Utah, among them – have top rates that are lower than Arizona’s.

Even worse for Arizona, the list of states that do not impose income taxes will continue to grow. Mississippi Gov. Tate Reeves, New Hampshire Gov. Chris Sununu, West Virginia Gov. Jim Justice, and Arkansas Lt. Gov. Tim Griffin are among several key lawmakers that are working to eliminate income taxes in their states.

Unless Arizona begins reducing and phasing out its income tax, it will continue to fall behind.

The good news is Arizona’s leaders refuse to sit back and allow it to fail. Gov. Doug Ducey, Sen. J.D. Mesnard, President Pro Tem Vince Leach, Majority Leader Ben Toma and many others are eager to provide pro-growth income tax relief.

A flat tax is a much better way to go

They are working on a tax plan that would streamline Arizona’s current four-bracket system (five brackets when accounting for the Proposition 208 “surcharge” of 3.5% that will be imposed on certain income, resulting in top rate of 8%) down to a flat tax of 2.5%.

That would be lower than its current bottom rate of 2.59% (with adjustments being made to ensure that even with the Proposition 208 “surcharge,” which would effectively create two brackets, the top rate would not be higher than 4.5%).

Flat taxes protect all taxpayers from tax increases. Under a progressive income tax, taxpayers are divided into small groups, allowing politicians to rob them one by one. Raising a flat tax, on the other hand, is much more difficult because politicians are forced to answer to every single income tax filer.

Making this news even better, there is a serious effort to include a full phase-out of the income tax (excluding the Proposition 208 “surcharge”) over time through the use of revenue triggers, a responsible way for states to cut taxes without getting ahead of their ski tips.

It could bring new jobs, higher wages

If such a provision were included, Arizona would be a model for other states to copy.

In addition to reducing income tax rates, the Republican tax plan would provide even more income tax relief by quadrupling the child tax credit and by coupling the standard deduction to inflation.

The Republican tax plan would be a huge victory for every single Arizonan. Reducing and, ideally, eliminating the income tax would attract businesses looking to expand, investors looking for growing economies with hospitable tax climates and families looking for greater prosperity.

This would bring new jobs and opportunities to current Arizona residents.

Income tax relief would also allow small businesses, which overwhelmingly pay their income taxes on the personal side of the code, to invest in higher wages, and would allow the hardworking people of Arizona to keep more of their paychecks.

Arizona’s future will be brighter if it begins reducing and eliminating the state income tax.

Grover Norquist is president of Americans for Tax Reform, a nonprofit taxpayer advocacy organization that was founded at the request of President Ronald Reagan. Reach him at gnorquist@atr.org.

State’s Rainy Day Fund Eyed As Support For Tax Overhaul

State’s Rainy Day Fund Eyed As Support For Tax Overhaul

By Terri Jo Neff |

What to do with Arizona’s $350 million or so surplus has a lot of legislators pulling out their calculators and trying to figure out how best to spend the money, and whether to implement Gov. Doug Ducey’s proposed permanent tax cuts.

Among the leading contenders for allocating the surplus funds to increase some public health and healthcare spending, increasing funds for higher education, and addressing the state’s unemployment situation. One issue likely to be front and center is what consideration should be given to COVID-19 relief funds received from the federal government in deciding how to divvy up the surplus.

The Finance Advisory Committee will meet Thursday at Noon to discuss this year’s budget process. But two ideas for using the state’s surplus to change Arizona’s tax system are already gaining momentum.

One option is to convert the state to a flat income tax, something that would likely need to be transitioned to over a two to three year period. A sales tax is an example of a flat tax, where everyone pays the same percentage.

It is an idea popular this year among Republican legislators, with heavy support from House Majority Leader Ben Toma, Sen. J.D. Mesnard, and Rep. John Kavanagh. However, coming up with a plan that can receive enough votes will be a challenge, given that legislators have differing ideas of how a flat tax system should work.

Another option for utilizing the surplus is to implement permanent tax cuts, such as the $600 million of income tax cuts proposed by Ducey in his 2021-2022 budget. The governor’s proposal would phase in the cuts over three years starting in 2022.

Other tax cuts could involve reductions in residential and commercial property taxes, although many cities and towns are opposing that idea.

More will be known after Thursday’s meeting as to what consensus House leaders can come up with.