Budget analysts have completed their projections of the tax increase Proposition 207 will trigger by eliminating inflation indexing, and it’s not a pretty picture for low income families and seniors. The Joint Legislative Budget Committee estimates that Arizona taxpayers will pay $1.25 billion more in taxes over the next 10 years if the annual inflation adjustment is repealed under Prop 207.
Arizona’s income tax brackets were indexed to inflation to protect taxpayers from unfairly paying more due to wage inflation and cost of living adjustments that occur over time. Without indexing, taxpayers will see more and more of their paychecks eaten away by inflation. Based on the JLBC numbers, the Arizona Tax Research Association calculates that the average household earning $50,000 will lose over $1,200 in the next ten years as a result of the inflation tax.
Combined with the 98% tax increase on small businesses and the hidden $300 million conformity tax hike, Prop 207 has been revealed as a poorly drafted measure that will inflict long term damage on Arizona’s economy and our most vulnerable taxpayers. The only real winners appear to be big corporations and fortune 500 companies that were exempted from the tax increases in Prop 207 and will now have a competitive advantage in the marketplace.
Voters need to send a message to the Washington DC labor unions funding Prop 207 to keep their special interest tax policy out of Arizona.
The Washington DC Labor Unions financing Proposition 207 told voters that the tax increase on small businesses included in their measure would only be 4.46 percent. Turns out that the actual tax hike will be 98 percent and will give Arizona the 4th highest small business tax in the country.
They also told voters that the proposition would only impact a small percentage of taxpayers. This turned out to be another lie, as it was revealed that the measure would eliminate the annual inflation indexing of Arizona’s income tax brackets. The inflation tax hike on low and middle-income Arizonans will be a $49 million hit in the first year and will growth exponentially over time.
Not shockingly, the proposition includes another tax increase on Arizonans that they failed to disclose.
Last year, when Congress passed the federal Tax Cuts and Jobs Act (TCJA), many significant reforms were made to streamline the federal tax code including capping various deductions and broadening the tax base. Essentially, this had the effect of simplifying the tax code for most filers while giving most Arizonans a federal tax cut.
However, since Arizona pegs our tax code to the Federal code (Federal Adjusted Gross Income) as the starting point for preparing state income taxes, the implementation of TCJA in Arizona could increase state income taxes by as much as $300 million dollars on everyone in FY 2020. To avoid this tax increase, the Legislature needs to modify Arizona’s tax rates to conform and reform with the federal changes.
Unfortunately, this can’t happen if Prop 207 passes. Because of restrictions on making future changes to voter approved measures in Arizona, implementing simple tweaks to our tax rates so that low income Arizonans aren’t paying more than they should, will be impossible. The only alternative will be to use special carve-outs and targeted tax breaks to avoid the conformity tax hike, which means a more complicated and frustrating tax code that only accountants and tax attorneys will enjoy.
The out of state groups that poured millions into our state to push their ‘Invest in Ed’ plan should not be given the benefit of the doubt that the deceptive language and hidden tax increases were unintentional. This is by design, with the hope that voters won’t discover these “surprises” until it is too late. We will know in November if they are able to get away with it.
By: Tom Patterson
Initiatives are a poor way to craft public policy. Voters like them. They jealously guard their right to pass laws directly. But they rarely go to the trouble of informing themselves in any detail, so they’re susceptible to slogans like “clean elections”, “it’s for the children” and “support our firefighters“.
Laws passed at the ballot box don’t undergo a vetting or refining process. They’re written by advocates with no input from opponents. Since they’re not subject to debate or amendment, they’re fraught with unintended consequences and unclear or unknown provisions.
Worst of all, under Arizona’s Voter Protection Act (also passed by voters), laws approved by the initiative process, for practical purposes, can never be changed by the legislature, no matter how unsuitable they may prove out. There’s a reason our founders gave us a republic rather than direct democracy.
Decisions made by ill-informed of voters can be catastrophic. In 2000, an initiative was passed to increase Medicaid coverage for non-disabled childless adults. The proponents insisted that the funding would come entirely from tobacco settlement funds and federal subsidies, but that’s not how the proposition was written.
Nevertheless, the state Supreme Court refused to force them to tell the truth in the “impartial” official publicity pamphlet. Voters approved the measure believing they would be held harmless financially. Taxpayers still pay hundreds of millions each year for that one.
This year‘s InvestinEd maybe one of the most thoughtless initiatives ever. The promise to voters this time is that they can “soak the rich” and boost education funding with no consequences to themselves.
Top income tax rates on incomes over $250,000 ($500,000 for couples) would go from 4.54 to 9 percent. According to advocates, that’s a mere 4.46 increase in the top tax rates, but the actual increase in taxes paid is more like 76 to 98 percent.
What’s the discrepancy? Ask yourself if you pay taxes of $1000 on $20,000 in income one year and next year pay $2000 on the same income, how much did your taxes go up? 100 percent of course even though your tax rate moved only from 5 to 10 percent.
It turns out that InvestinEd‘s goal of soaking the “rich“ is more like soaking job-creating entrepreneurs. In Arizona, most small businesses are organized as S-corps or LLCs, business entities in which income is “passed through” to the individual owner. Small business profits are taxed at personal income tax rates.
The effect of InvestinEd would be to saddle Arizona with the fourth highest small business tax in the nation, up from 38th. Ironically, states these days are desperately trying to convince entrepreneurs that they are “open for business”. Our competitor states must be thrilled.
Here’s another irony. InvestinEd not only soaks the rich, it soaks all taxpayers. That’s the result of an apparent drafting error (see above re: unintended consequences) that eliminated indexing of income tax brackets for all taxpayers.
In 2014, the Legislature authorized indexing of tax brackets so that we wouldn’t pay more taxes just because of inflation. InvestinEd, as written, eliminates all indexing back to 2014. That means all taxpayers would be exposed to higher tax rates. Taxpayers would pay $49 million more in the first year and that’s sure to grow.
Arizona voters should also ponder the implications of becoming a high tax state (our income tax would be fifth highest) in the light of recent federal changes limiting the deduction of state taxes. Productive
taxpayers are fleeing high tax states while those states are straining to reduce their tax burden. Raising our taxes $690 million under the circumstances defies common sense.
Arizonans should learn from real life basket cases like Illinois and Connecticut. Dominating government employee unions successfully insisted on spending levels that required tax increases. But more spending is always demanded, and taxes repeatedly raised. The tax base erodes and the weakened economy stumbles. Eventually it’s too late to reverse course.
The Voter Protection Act doubles down on the risk. It ensures that any mistakes made can never be undone. Punitive tax rates and stifled growth will be permanent.
We too can join the states threatened with bankruptcy. Don’t do it.
Former Lawmaker Tom Patterson is a retired emergency physician. He was a state senator from 1989-1998; serving as senate majority leader from 1993-96. He is the author of Arizona’s original charter school bill and was Chairman of The Goldwater Institute from 2000-2013.
The Arizona Free Enterprise Club announced today the 2018 Free Market Champion Award recipients. The Free Market Champion Award is given to members of the Legislature that demonstrate leadership and a commitment to free market, pro-growth policies in Arizona. This year’s award includes a picture and quote from world renowned economist and intellectual defender of property rights, Frederic Bastiat. The quote on the award reads, “Life, liberty, and property do not exist because men have made laws. On the contrary, it was the fact that life, liberty, and property existed beforehand that caused men to make laws in the first place.”
The two recipients of the Free Market Champion Award are:
- Senator Steve Smith (District 11)
- Representative Javan Mesnard (District 17)
“The Free Enterprise Club is proud to honor these two legislators for their hard work and consistent support of economic freedom and prosperity at our state capitol,” President Scot Mussi said. “They truly made a difference for Arizona taxpayers and businesses.”
It seems every day more information emerges about the devastating impact the Washington DC financed ‘Invest in Ed’ initiative would have on Arizona taxpayers and small business owners.
Recently it was revealed that the proposed measure would repeal the automatic indexing of Arizona’s tax brackets – triggering a permanent and ever-growing tax increase on low and middle-income people and families. This tax hike contradicts months of promises by the supporters of the measure that it would only raise taxes on the “rich.”
Now it has been confirmed that Arizona would have the 4th Highest Small Business Tax Rate in the Country if this initiative is passed in November.
Jared Walczack, Senior Policy analyst at the Tax Foundation, confirmed to the Arizona Free Enterprise Club that a near doubling of Arizona’s income tax would vault Arizona to 4th highest small business tax rate in the nation. “In most states, as with Arizona, the tax on pass-through income is just the personal income tax. If Arizona jumped to nine percent, it would now be fourth (in the country), behind California, Oregon and Minnesota for the highest rate.”
Arizona currently has the 38th highest small business tax in the country, a ranking that makes our state attractive to entrepreneurs and small business owners.
Recent changes made by federal tax reform will only magnify the tax hit. Under the Tax Cuts and Jobs Act passed in 2017, the State and Local Tax Deduction was capped, limiting how much a small business may deduct in Arizona income taxes. “Given the recent cap placed on the SALT deduction, the tax cost of such high rates (on small businesses) is higher than ever.” Walczack said.
Exacerbating the tax hit is the fact that the new higher tax rates would not apply to corporations. Publicly traded companies and Fortune 500 businesses will be taxed at half the rate (4.9%) than most small businesses, an unfair advantage that will grow over time.
Arizona taxpayers should reject this radical upheaval of our income tax system, and preserve the attractive tax climate in our state for small businesses.