Prop 207 Includes Hidden $300 Million Conformity Income Tax Hike

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 4^th 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.