In the waning days of the 2019 legislative session, the Republican-controlled Arizona Legislature passed a balanced budget that featured a sizeable tax cut for every Arizona taxpayer. The $11.8 billion FY2020 budget, signed into law by Governor Doug Ducey (R) on Friday, will continue to make Arizona a more attractive place to live and operate a small business. Promoting taxpayer interests through low taxation is a philosophy that has aided in Arizona’s economic renaissance, and we commend lawmakers and Governor Ducey for doubling down on this strategy. The fiscally responsible budget is a reflection of Arizona’s dedication to protecting taxpayers and will pay dividends for the state for the foreseeable future.
The most notable change to the state tax code is the elimination of an entire tax bracket. Below is a chart of Arizona’s current income tax brackets compared to the new brackets for both individuals and joint filers:
Individuals Filers | Joint Filers | ||
2.59 percent | >$0 | 2.59 percent | >$0 |
2.88 percent | >$11,047 | 2.88 percent | >$22,090 |
3.36 percent | >$27,614 | 3.36 percent | >$55,226 |
4.24 percent | >$55,226 | 4.24 percent | >$110,450 |
4.54 percent | >$165,674 | 4.54 percent | >$331,346 |
Updated Tax Brackets
Individuals Filers | Joint Filers | ||
2.59 percent | >$0 | 2.59 percent | >$0 |
2.88 percent tax bracket removed | |||
3.34 percent | >$26,501 | 3.34 percent | >$53,001 |
4.17 percent | >$53,001 | 4.17 percent | >$106,001 |
4.50 percent | >$159,001 | 4.50 percent | >$318,001 |
Under the updated tax structure, the entire 2.88 tax bracket is repealed, which means all income earned up to $26,501 (and $53,001 for joint filers) is subject to a tax rate of 2.59 percent. There is also additional tax relief through lower rates in the higher tax brackets. The elimination of an entire bracket is good news for all taxpayers earning over $11,000, as they will pay a .29 percentage point lower rate on their earnings through $27,613. For taxpayers on the lower end of the income scale, these savings will be a significant savings. Additionally, a lower individual income tax rate benefits small businesses, which are typically organized as S-corps and LLCs and file through the individual income tax, not the corporate income tax. These savings for small businesses will help free up more capital for them to invest in new equipment, raise wages, hire new workers, or further expand their business.
It’s also important to note that until Governor Ducey signed the budget, Arizona did not conform to the updated federal tax code that was overhauled as a result of the Tax Cuts and Jobs Act. With Arizona now conformed to the federal code, the standard deduction has more than doubled for individual and joint filers to $12,000 and $24,000, respectively (previously the standard deduction was only $5,535 and $11,059). The increase in the standard deduction gives an additional tax cut for lower income individuals. Additionally, the budget establishes a new child tax credit of $100 per child, providing additional tax relief to families.
While the budget isn’t perfect, as it does spend more than last fiscal year and establishes a tax on products purchased over the internet, on net, it does leave taxpayers better off. For a single filer with an income of $40,000 and one child dependent, their annual tax liability will decrease by $400 - a significant reduction. According to a fact sheet compiled by the Governor’s office, these tax changes are estimated to save taxpayers $325 million annually, a savings of more than $130 per taxpayer.