I put up a couple of posts last month about the possibility that Arizona might, by approving Proposition 208 in this November’s vote, impose a sharp tax increase on, of course, “the rich.” It was, I argued, a measure, perhaps, of that state’s changing politics that such an item was on the agenda.
Well, Arizonans finally really did it. Maniacs!
Arizona has likely flipped from a red state to a blue state, and along with that momentous change, its voters on election day have approved a massive state income tax hike on high earners. Put one way, it’s a 3.5% state income tax surcharge. Put another way, it’s a 77% state income tax hike.
It’s a mark of Arizona’s changing status that the argument that the tax increase was “for the children” appears to have done the trick.
In Arizona, voters approved a 3.5% tax surcharge on high-income taxpayers on top of the current top rate of 4.5%, bringing its new top rate to 8%. The estimated $1 billion in annual revenue, raised via the Invest In Ed initiative, is earmarked for teacher and staff salaries, career and technical programs and teachers’ college. Who is high income for purposes of the new tax? Individuals with income above $250,000, and joint filers with income above $500,000. The 4.5% rate applies to income above $159,000 for individuals or $318,000 for joint filers. The vote was 53% in favor and 47% against the proposal, Proposition 208, with 98% reporting, according to Ballotpedia.
Ebeling also notes that voters in Illinois rejected a proposed “Fair Tax,” while their counterparts in Colorado approved a small cut in the state’s income tax, something that an organization called — wait for it — Fair Tax Colorado found very sad. It’s worth adding that Coloradans also approved Proposition 117, a measure that will constrain the extent to which the state’s legislators can bypass Colorado’s Taxpayer Bill of Rights (TABOR) by charging “fees,” something that had become a bit of a habit.
We hope to be running articles on the Colorado and Illinois votes on Capital Matters in the next day or so.
But back to Arizona. In my second post on 208 ahead of the vote, I noted how an editorial in the Wall Street Journal had pointed out that the new top tax rate would “move the state to the 10th highest income-tax rate in the country, from 11th lowest today, according to the Tax Foundation. Arizona would move closer to California (13.3% top rate) than Nevada (no income tax).”
Those familiar with the atlas will understand the significance of that. New Mexico’s top rate, meanwhile is 4.9 percent.
One angle to the debate over 208 was over the effect the tax increase would have on the numbers of people moving in and out of the state, a number which will have a significant bearing on future tax revenues.
The state’s long efforts to promote regional competitiveness have paid dividends: the income tax produces 185 percent more revenue in 2019 than it did in 1992 (inflation-adjusted) despite—or perhaps partly because of—substantial rate reductions. The state has seen a population boom, benefiting from outmigration from high-tax California, and inflation-adjusted collections have grown at nearly twice the rate of population increases.
Arizona is also a popular destination for so-called “snowbirds” due to its mild winters and low taxes. With an income tax change, the climate may still beckon some, but the tax climate won’t. And the dramatic increase in the tax rate on pass-through businesses, which pay through the individual income tax, would represent a serious hit to the state’s competitiveness.
Back to the Wall Street Journal:
Economists Art Laffer, Erwin Antoni and Steve Moore [admittedly none of them tax enthusiasts] estimate that the tax increase would result in the migration to Arizona of 700,000 fewer people, 237,000 fewer jobs created, and a reduction of $25.5 billion in personal income growth over the next 10 years.
The authors looked at IRS data and found that since 1992 Arizona has gained more than 201,000 tax returns and almost $12 billion in adjusted gross income (AGI) from California. Illinois has lost more than 65,000 tax returns to Arizona and about $5 billion in AGI over the same period. New York has lost 37,000 tax returns and $2.3 billion in AGI to Arizona.
No doubt some of these are retirees looking for warmer climes, but snowbirds have other state options and can also live in Arizona less than six months a year and not pay the state tax. Supporters say the tax increase would yield $1 billion in new revenue, a huge expansion in a state with total expected revenue of $12.5 billion in 2021. Yet that revenue estimate for the new tax is based on static figures, which don’t take into account taxpayer behavior. It is likely to yield considerably less, as tax increases typically do.
Maybe “maniacs” wasn’t the worst word.