As the fifty-fifth Arizona Legislature nears the conclusion of its first regular session, Republican leaders in both the House and the Senate are pursuing momentous personal income tax reform.
Proposition 208, which passed in November of last year, established a personal income tax surcharge for those earning more than $250,000 of taxable income. This new 3.5% surcharge is now bound to fund education, including public schools, charter schools, state schools for the deaf and blind, the Arizona Teachers Academy, and more.
The proposition increased the real marginal rate for state personal income taxation for this bracket of taxpayers to 8%, with the other 4.5% coming from the state’s traditional income tax rates.
A major concern among 208 opponents in 2020 was that the proposition did not exclude revenue from pass-through entities, such as LLCs, from being taxed at this new rate. In short, many Arizona small businesses could be paying nearly double what larger corporations are paying in taxes to the state: Arizona’s corporate income tax is 4.9%.
While 208 faces legal challenges, Republican leaders are acting to preempt the Proposition going into effect.
These concerns about higher taxes have carried over into the fifty-fifth Legislature, with Republican legislators eyeing a legislative “fix”.
Flush with cash
Due to Arizona’s Rainy Day fund (essentially a “savings account” for the state’s funds), and the various stimulus packages passed in Washington in an effort to combat COVID-19 and boost the economy, Arizona has more money than it is used to. As a result, some legislators and state leaders like Gov. Doug Ducey are hopeful that they can cut taxes while increasing public spending.
A plan unveiled recently by the Governor, House Republicans, and Senate Republicans would cut state revenue by approximately $1.5 billion, while also paying down state pensions, paying back other state debts, and increasing Arizona’s current weekly unemployment insurance allowance of $240 to $320. Investments in infrastructure, corrections officers, state troopers, social workers, universities and community colleges, and K-12 education would also be expanded.
This new Republican proposal would establish a 2.5% flat state income tax for Arizona taxpayers, with those making enough to qualify for Proposition 208’s income tax surcharge paying less in regular state income tax. An Arizonan making more than $250,000 in taxable income individually would then pay 3.5% of their income towards the surcharge and 1% towards the general fund.
By capping the percentage of income that any taxpaying Arizonan pays in state income tax at 4.5%, this plan would actually decrease state income tax payments for many taxpayers.
The Arizona Republic, one of Arizona’s most well-known newspapers, claims that such a policy amounts to a “subsidy of wealthier Arizonans’ flat-tax obligation, paid for by tax dollars paid by less-wealthy taxpayers.”
Grover Norquist, the President of Americans for Tax Reform, disagrees: “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.”
Passage and going into effect
While the plan is far from being passed and signed into law, it would be fully implemented by 2024 should it survive the legislative process.