In the Midst of Economic Uncertainty, Arizona Voters Shouldn’t Raise Income Taxes

With the news media and pundits actively documenting what is sure to be a close presidential and U.S. Senate contest in Arizona, voters should be aware that they will have another important choice on the ballot in 2020: a tax hike. That’s right, activists and unions have successfully placed a near-billion dollar tax increase on the ballot that could significantly affect taxpayers and the future prosperity of Arizonans. Voters should be cautious about this tax hike proposal; if it goes through, the state will have sacrificed its edge in attracting new residents and businesses.

The ballot measure in question is Proposition 208, a proposal to raise taxes by $827 million annually and use all of that money to generously raise teacher salaries. Specifically, Prop. 208 would impose a 3.5 percent tax surcharge on income above $250,000 for an individual or above $500,000 for couples. When accounting for the 4.5 rate these earners already pay, piling on another few percentage points would bring Arizona’s top rate to 8 percent. The “millionaire’s tax,” as it is commonly referred to, is a scheme more likely to be found in California, New York or New Jersey - not in a pro-growth state like Arizona. 

With the Coronavirus damaging all parts of the economy, the worst thing voters can do right now is support tax hikes that make it more difficult for families, individuals, and businesses of all sizes to weather the current economic storm.

Proponents of this tax claim it will only impact the most fortunate of our society, however, it’s important to remember that businesses pay individual income taxes, too. Many businesses, including sole proprietorships, partnerships, and S corporations, are structured as pass-through businesses, and pay taxes through the individual income tax code, not the corporate income tax. Since over 99 percent of all businesses in Arizona are small businesses, totaling nearly 600,000 businesses, raising the tax rate would be a big burden for job creators. Small businesses are the lifeblood of the economy and employ over 1.1 million people here. A tax increase for them will make it harder for them to stay in business, raise wages, and keep workers on payroll - something Arizona desperately needs in the time of Covid-19.

Prop 208 comes at a time when many Americans are on the move, particularly from states with relatively high tax rates, to those with relatively low taxes, some with no income tax at all. Passing this ballot measure will make it harder for Arizona to remain competitive for new residents and businesses who are considering moving from expensive states. Since most people who resettle in Arizona are from high tax states, such as California and Illinois, it could make these high tax refugees think twice before making the jump. 

In California, which has the highest marginal income tax rate in the United States, high-income earners are fleeing the state in droves to more tax friendly environments like Arizona. According to an independent study, after the passage of Democratic Governor Jerry Brown’s millionaire’s tax, the state lost a “small, but statistically significant” number of high-income individuals. In fact, according to the California Legislative Analyst’s Office, over the last decade, 5 million Californians left the high-tax state in search of more affordable climates and the “top destinations for those leaving California were Texas, Arizona, Nevada and Oregon.”

An 8 percent tax rate would be one of the highest in the entire nation -- a dramatic change from Arizona’s current top rate, which is among the lowest. Worse yet, the proposed tax rate would be higher than all of its five neighbors, save California. Considering neighboring Nevada has no state income tax, it could give fleeing Californians an incentive to move to Las Vegas over Phoenix. 

Other states that have a misguided millionaire’s tax like Connecticut and New York continue to be plagued by these same issues. Their people continue to flee to low-or-no tax jurisdictions, they continue to miss revenue estimates, and economic growth remains subdued. 

Hiking taxes runs counter to Governor Ducey's recent reforms to make Ariziona’s tax code fairer and less burdensome. In the 2019 state budget, an entire tax bracket was repealed, the standard deduction was doubled to $24,000 for joint filers, and the top rate was lowered. According to a fact sheet by the Governor, these welcomed changes are estimated to save taxpayers $325 million annually, a savings of more than $130 per taxpayer. 

If voters approve this class-warfare ballot measure, Arizona will be throwing away its competitive edge to other states that have a fairer tax code. While not every high-income earner will leave the state, many surely will and it will cause prospective residents to pause and take a second look if Arizona is the right state for long-term growth. There is overwhelming evidence that millionaire’s taxes have failed virtually everywhere they have been tried. While some claim that it will work here, the answer is obvious: high taxes cause people to leave and stall even the strongest state economies. A prosperous future for educators and taxpayers is possible, but the unwise Proposition 208 ballot measure is not the path to getting there.