Prop 207 Includes Hidden $300 Million Conformity Income Tax Hike

by admin | Aug 21, 2018 | News and Updates, Tax

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.

Arizonans Will Regret Setting Tax Policy at the Ballot Box

by admin | Aug 17, 2018 | News and Updates, Tax

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.

Income Tax Initiative Would Impose 4th Highest Small Business Tax Rate in Nation

by admin | Aug 6, 2018 | News and Updates, Tax

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 4^th 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 4^th 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 38^th 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.

Income Tax Initiative Includes Large Tax Increase on Low and Middle-Income Families

by admin | Aug 2, 2018 | News and Updates, Tax

Since the proposition to double Arizona’s income tax was unveiled in early May, proponents of the measure emphatically promised voters that the only people affected by the tax increase was the “rich.”

That promise has already expired. Last month after filing 270,000 signatures with the Secretary of State, it was revealed that the “Invest in Ed” initiative would eliminate the inflation indexing of our income tax brackets and reset every tax bracket to 2014 levels.  The primary purpose for indexing the income tax brackets for inflation was to shield low and middle-income taxpayers from the cost of living inflation tax that occurs over time.

The irreversible elimination of inflation indexing would result in everyone’s income taxes going up in Arizona – to the tune of $49 Million in the first year, a figure that will grow exponentially over time.

Even worse, there is no real opportunity to fix this problem.  If this measure is passed, the proposition would be voter protected, meaning that it cannot be changed by the legislature. Even if a ¾ majority vote of the legislature agreed to bring back inflation indexing, it would still be illegal since lowering taxes would not further the intent of the proposal.

As more analysis is being done on this initiative to make Arizona the 5^th highest income tax state in the country, the clearer it has become that the Washington DC Labor Unions that financed this measure cared little about making sure that all of their claims were even accurate.

But as the saying goes, “the devil is in the details,” and the proposed largest tax increase in our state’s history has a lot of hidden, unexpected, and negative consequences for the future of Arizona.

Small Business Owner Files Suit Against Major Tax Hike Initiative

by admin | Jul 27, 2018 | News and Updates, Tax

An East Valley small business owner has filed suit against the initiative that would give Arizona one of the highest small business tax rates in the United States after the proponents filed enough signatures to qualify for November’s ballot.

The suit challenges the proponent’s deceptive and misleading claims on the impact the initiative would have on Arizona taxpayers and small businesses. Specifically, the backers of the measure omitted the fact that the initiative would eliminate the annual indexing of Arizona’s income tax brackets for inflation, a radical change that will cost Arizona taxpayers millions.

The measure also hid the size of the tax increase from voters. Supporters of the income tax increase claimed that the initiative would increase tax rates by only 4.46 percent, when in fact small businesses would be hit with a tax hike ranging from 76.2% to 98.2%.

“Like most other small businesses, we pay our business taxes as individuals. If our tax liabilities were to double as a result of this initiative, I don’t know how we will be able to survive.” Said Jennifer Henricks, a small family business in the East Valley and parent of three children in Arizona’s public school system. “It’s unfortunate that whoever wrote this initiative decided to mislead the public about the size of the tax increase.”

Henricks is the Treasurer for the “AZ SMALL BUSINESSES AGAINST I-17-2018,” a grassroots committee formed to educate citizens on the harmful impacts the initiative would have on small businesses throughout Arizona.

Also hidden from voters is how the proposed tax income tax increase will hammer small businesses while corporations are left untouched by the tax hike. “It is completely unfair that we will see our tax rates nearly double while Fortune 500 companies will get a special rate under 5%. If the goal was to punish small business owners while rewarding big corporations, this tax increase is the way to do it.” Henricks added.