A strong economy is a key piece of the foundation for any society. But while the Biden administration has been busy doing anything it can to destroy the economic climate in America over the past four years, Arizona is set up for success—not just for today, but for decades to come.
Last month, the American Legislative Exchange Council (ALEC) released its latest “Rich States, Poor States” report, and the Grand Canyon State received the number three ranking for economic outlook among all 50 states. Such a high rank is impressive enough on its own, but when you consider that our state was ranked 13 back in 2021, Arizona’s dramatic rise up the chart especially shines. So, how did we get here?
Pro-Growth Policies Have Led the Way
Arizona’s high ranking is a direct result of significant pro-growth income and property tax reform that have supercharged our economy. In just the last decade, we have cut taxes on capital gains and drastically reduced the property tax burden on small businesses. Then, in July 2021, the Free Enterprise Club helped lead the charge as the Republican-led legislature passed a 2.5% flat tax, delivering historic tax cuts for every single Arizona taxpayer. And if that wasn’t enough, Republicans also included tax relief for Arizona’s families in last year’s state budget to help with the growing cost of gas, groceries, housing, and energy under the Biden administration.
Each of these pro-growth policies have set up Arizona as a leader in the country with many other states looking to mirror these reforms, but if the left had gotten its way, we never would have been here.
Push a sympathetic message. Drum up a bunch of misguided support. And then aim for a ridiculous tax increase. That was the strategy from Red4ED after it launched a little over four years ago.
In that spring of 2018, the color red was popping up all over the place—from Facebook profile pictures to protests at the state Capitol. And it was supposedly all about increasing teacher salaries and funding for K-12 education. It was a movement that had great momentum, a sycophant media, and a political class that was terrified to stand up to them. Yet they figured out how to, in four short years, go from a political juggernaut to one of the largest and most expensive failures in Arizona political history.
Of course, defeating this multiyear assault on Arizona by Invest in Ed was a huge win for taxpayers, job creators, and the future prosperity of our state. And it would not have been possible without a combination of political miscalculations and blunders by the Red4ED decision makers and a consistent, sustained opposition from key organizations and elected officials willing to stand up to the bullies behind the movement…
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.”
The State of Arizona has great reason to celebrate. In a case that the Club joined as a plaintiff, Maricopa County Superior Court Judge John Hannah ruled against Prop 208, determining that the money raised from the tax would exceed the constitutional spending limit for education. This decision followed the Arizona Supreme Court’s ruling last August that Prop 208 was unconstitutional. And now, it officially puts the nail in the coffin of the largest tax hike in Arizona history.
This is great news for taxpayers throughout our state, except if you’re House Democrat Minority Leader Reginald Bolding apparently. But while Prop 208 may be dead, the fight is not quite over yet.
The Arizona Department of Revenue announced Tuesday it is working with its tax software vendor to automatically amend any filed 2021 individual income tax returns impacted by the recent overturning of Proposition 208.
The 3.5 percent surcharge on individual income over $250,000 ($500,000 married filing jointly) hit taxpayers starting in 2021, but last week a Maricopa County Superior Court judge struck down Prop 208 as unconstitutional.
Taxpayers who have already filed their Arizona individual income tax returns using current forms and instructions will not need to file an amended return, according to ADOR.
“The Department will hold these returns and process them correctly once it has modified its tax system to remove the surcharge and amend the tax bracket rates,” the statement reads. “At that time, ADOR will automatically adjust the returns to provide for the correct distribution of monies.”
The court ruling which voided Prop 208 will not, however, actually impact an individual’s overall tax liability. The reason, according to ADOR, is legislation signed into law last year by Gov. Doug Ducey which counteracted the surcharge by reducing the state’s top income tax rate for those subjected to the additional tax.
With the Prop 208 surcharge now dropped to 0 percent, the top income tax rate will return to 4.5 percent, ADOR noted.
“Arizona taxpayers will neither owe more tax nor receive a larger refund due to the voiding of the Prop 208 Surcharge,” the statement reads.
Taxpayers who have not yet filed a 2021 individual income tax return are reminded of Arizona’s April 18 filing deadline. ADOR is working as quickly as possible to revise the 2021 tax forms and adjusting the individual income tax brackets to the now proper rates.
State officials are also working with various tax software companies like TurboTax and H&R Block to ensure changes are made to those programs as well.
