This week Arizona Gov. Doug Ducey will sign a 2.5% flat tax, a moment that will define his legacy. The bill’s passage was worth the political drama and will go far to maintain Arizona’s competitiveness.
Arizona currently taxes income under a progressive rate structure, starting at 2.59% up to 4.5%. The ballot last November carried an initiative to add a 3.5% surtax on earnings above $250,000 for single filers. It narrowly passed, meaning the combined top rate was set to hit 8%, higher than all of Arizona’s neighbors except California. Nevada and Texas have no income tax.
Mr. Ducey’s budget will cut rates for all taxpayers. The Legislature can’t repeal the voter-approved surtax, so above the 2.5% flat rate, there will still be a second bracket on income over $250,000. But the budget also has a provision adjusting the flat tax downward for those Arizonans, so no one will pay a top rate above 4.5%. That’s the same as today.
Republicans control the Legislature by two seats in each chamber, so a single GOP defector could block the bill. The House split 30-30 on an earlier version of the budget, with one Republican voting no and arguing that the state should pay down more debt. A second attempt to pass the flat tax failed when Democrats decided not to show up, leaving the House without an in-person quorum, since some GOP lawmakers planned to dial in remotely.
The bill eventually passed the House last Thursday, after tweaks that won over the GOP holdouts. No Arizonan will have to pay the threatened 8% rate, since the provisions forestalling it are immediate. The 2.5% flat tax will be phased in by 2024, provided state revenue stays strong. Cities, which receive a cut of income-tax proceeds, will get 18% instead of the current 15%.