Fiscal Policy

Arizona’s Tax Disaster: Refugees from Blue States and Other Infuriating Explanations

Sunset over Phoenix, Ariz. (Garrett Griner/Getty Images)
How did the home of Barry Goldwater end up passing the largest tax increase in its history?

All things considered, the 2020 election cycle was particularly generous to those on the right side of the political aisle. The presidency notwithstanding, Republicans will likely keep their hold on the Senate (pending the two runoffs in Georgia on January 5), and successfully picked up several House seats, flipped a couple of statehouses, and secured another governorship. This was all accomplished in a year in which they were outspent by more than $3 billion.

Those of us opposed to the government confiscation of wealth received additional good news at the state level, even in staunchly liberal states. California voters shot down Proposition 15, which would have imposed a $12.5 billion property tax increase on businesses, despite massive funding support from the California Teachers Association and a litany of high-profile political endorsements from big spenders such as Governor Gavin Newsom, Kamala Harris, Michael Bloomberg, and even Joe Biden.

In Illinois, the laughably titled “Fair Tax” proposal — which would have made taxes unequivocally unfair for the state’s residents — crashed harder than cruise line stocks during the pandemic. Despite Governor J. B. Pritzker’s ominous warning that its failure would ensure that “there will be cuts (to government) and they will be painful,” Illinois voters wisely demurred, recognizing that the cuts to their savings accounts would be even more painful.

Perhaps the best news came out of Colorado, a state that has drifted increasingly leftward over the last several years, and where Democrats control the House, Senate, and governorship. Coloradans overwhelmingly approved Proposition 116, which cuts the state’s income-tax rate. While the tax-and-spend crowd bemoaned the across-the-board tax cuts as a “giveaway to the wealthy,” most voters recognized the inherent wisdom of promoting business development and providing fiscal relief during an economic downturn.

Amid all these positive developments, however, one state stands out in stark contrast, bucking against the trend of fiscal accountability: the once reliably red state of Arizona. What happened? How did the home of Barry Goldwater — a state whose residents used to pride themselves on their rugged individualism and general hostility to big government — end up passing the largest tax increase in Arizona’s history? The answers to that question reveal the significant demographic transitions taking hold in the Grand Canyon State, and the nature of how leftist initiatives are funded in 2020 and beyond.

The proponents of Proposition 208 relied heavily on the class-warfare argument, framing it as a “millionaire’s tax” designed to give more money to the state’s K–12 education system. The reality is that the measure nearly doubles the income taxes imposed on small-business owners and individuals making over $250,000 a year, and it is devoid of accountability measures that would ensure the dollars end up in classrooms. An in-depth study we published at the Goldwater Institute found that the initiative would result in the loss of over 100,000 jobs as well as a significant loss of revenue to local and state coffers.

Despite the dire economic consequences, and the opposition of both the small- and large-business communities, Prop 208 passed by 3.5 percentage points. To understand why, one must first understand the tremendous shift in Arizona’s demographics over the past decade. Economically, no other state has benefited from the mass exodus of Californians as much as Arizona. This influx of new residents has been a boon to the construction industry and other key economic sectors — but it’s come with a political price.

Since 2010, Arizona’s population has increased by an astounding 16 percent, with approximately one million new residents moving to the state over the past ten years. Many of these transplants (nearly 30 percent) hail from California — and who can blame them for migrating to a more hospitable economic environment? The cost of living in Los Angeles is 67 percent higher than in Phoenix, and the cost of homeownership is nearly 200 percent higher. For many Californians, Arizona has provided a safe haven for those who can no longer afford to live in their own state.

The same holds true for most other people who have migrated to Arizona in hopes of escaping high housing and living costs. Behind California, these states include Washington, Illinois, and Colorado, and Texas. (Notably, of these top five, Texas is the only Republican state). Indeed, these migrations have dramatically altered the political landscape of the state.

The result of this population boom is that there are 51,000 more registered Democrats than Republicans since 2016, and 49,000 more independents — most of whom say they lean toward the left. Considering the last permanent tax increase to come before Arizona voters was in 2012 (which failed by a two-thirds margin), it’s not hard to decipher the significance of these shifting population trends. Unfortunately, most people moving to Arizona are not doing so to escape the politics of their home state, but rather the housing costs therein. Most of these transplants simply don’t see the intrinsic connection between the two — and so their liberal proclivities accompany them when they move.

Perhaps an even more important factor in explaining the success of Prop 208 is the sheer amount of money spent on its behalf. The final tally appears to be upwards of $25 million — the most money ever spent in support of an Arizona initiative, by a wide margin.

Had this obscene dollar amount been the result of a groundswell of grassroots support, it would have been more difficult to begrudge the passage of Prop 208 — even for those of us who were opposed to it. However, this is far from the case. In a classic example of “good for thee but not for me,” almost none of the funding in support of the tax increase came from people who will have to live with its consequences. In fact, less than one percent of all contributions in support of Prop 208 came from individual Arizona donors.

But $17 million came from two out-of-state sources: the Washington, D.C.-based National Education Association (which also happens to be the largest union in the country) and the Portland, Oregon–based Stand For Children — neither entities known for their advocacy of fiscal restraint. Combined with other union donations and those of a couple of obligatory non-Arizona billionaires, the Prop 208 campaign was able to raise and spend a tremendous amount of money despite having virtually no financial support from actual Arizonans.

If there is a silver lining for Arizona’s fiscal conservatives, it is that the inevitable revenue losses caused by Prop 208 will ultimately require the reduction of other expenditures, giving budget hawks the opportunity to cut government largesse. However, this is cold comfort in a state once renowned for its business- and family-friendly tax code.

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