Arizona Gov. Doug Ducey is trying to pass a 2.5% flat tax, which is the stuff of Republican dreams. The hang-up is that the GOP controls the state Legislature with the slimmest of margins. The Senate is 16-14. The House is 31-29. So a single Republican holdout in either chamber can kill reform that is sorely needed.
Arizona used to be a relatively low-tax state, with a top rate on personal income of 4.5%. Last year voters narrowly approved a ballot measure to add a 3.5% surtax on residents earning $250,000 or more, in the case of single filers, with the money earmarked for teachers. That means next April the top rate will be 8%, the ninth-highest in the country, beating Connecticut, Illinois, and all of Arizona’s neighbors except California. Not good for the state’s competitiveness.
The Legislature can’t repeal the surtax approved by the public, but Mr. Ducey’s plan would reduce the economic damage: The Legislature is considering a flat tax of 2.5%. That would be a tax cut for everybody, since Arizona’s lowest rate today is 2.59%. There still would effectively be a second bracket, kicking in at $250,000, because of the voter-passed surtax.
Yet the bill would offer help there, too. It says that wealthy Arizonans couldn’t be charged a total income-tax rate above the old 4.5%. In other words, once the teachers collected their surtax of 3.5%, the state would only get to take another 1%. That would put Arizona back into contention: Excluding the states without income taxes, 4.5% is the fifth-lowest top rate in the country.
Two weeks ago the flat tax failed in the House on a tie vote. “We need not mirror the federal government and continue with the borrowing and debt,” said the lone GOP dissenter,
Rep. David Cook.
But Arizona has a $1 billion budget surplus, and a big point of Mr. Ducey’s plan is to undo the new 8% top rate before it can start to drag down the state’s economy. Another sticking point is the proposal’s effect on cities, which receive a 15% cut of the state’s income-tax revenue. The haggling has dragged on, with Republicans on both sides of the negotiation.
The Associated Press on Friday sketched one possible deal, which would delay implementation of the full flat tax, while paying down additional debt and perhaps raising cities’ revenue share to 18%. But a June 30 budget deadline looms, and legislative leaders sound impatient. “We’ve been sitting here all day and twiddling our thumbs,” House Speaker
said. If there’s no deal by Tuesday, he intends to pass a “skinny budget” to keep spending on autopilot while bargaining continues.
The risk is that lawmakers might water down Mr. Ducey’s plan, which aims to restore Arizona’s attractiveness as a destination for people and capital. The U-Hauls are streaming out of California. Nevada has no income tax, but it isn’t for everybody. Texas has no income tax, but it’s much farther from old friends on the West Coast. A 2.5% flat tax, even topped with that nasty surtax, would be Arizona’s way of enticing businesses, Covid expatriates and snowbirds to stop and stay for a year or 20.
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Appeared in the June 21, 2021, print edition.