Tax Reform

Arizona Can Seize the Opportunity to Restore Economic Competitiveness

The U.S. Census Bureau’s 2020 data and the congressional reapportionment that will follow proves that Americans “vote with their feet” away from high-tax states to lower-tax states. In an effort to keep businesses and residents from leaving, several states are looking to eliminate or lower their income taxes. Arizona is now one of the states on this journey.

In 2020, Arizona passed Proposition 208, which increased Arizona’s top personal income tax rate from 4.5% to 8% – an increase of 78%. This move made Arizona a much less attractive state for businesses and taxpayers. In fact, it was estimated upon passage that 124,000 jobs would be lost, and the business in-migration would drop by 15%.

Matthew Boyle, CEO of Landmark Recover, said Prop 208’s impact on his business caused his family to move out of the state, to lower-tax Nashville:

“We’ve doubled in size every year since we started in 2016. When we analyzed the numbers, we found that Prop 208 would cut our rate of growth by 50% over the next five years. If we don’t move now, it is going to be prohibitively costly in the future.”

This year the legislature is working on ideas to cut taxes to keep small business owners and residents like Boyle in Arizona with their hard-earned money still in their pockets. As Reagan Economist Dr. Arthur B. Laffer put it:

“The Income Tax Reform Plan is badly needed to offset Proposition 208’s deleterious tax impact on Arizona. If something doesn’t happen soon, Arizona will revert to its Babbitt, Mecham and Mofford days of economic despair.”

Governor Ducey and the Legislature are now in a position to provide tax relief for Arizona. For FY 2022, Arizona has nearly a $4 billion budget surplus. One idea for discussion replaces the current 8% rate with a 4.5% income tax rate, which returns the surplus to the pockets of their hardworking taxpayers.

The plan would benefit Arizona residents in a variety of ways, aside from reducing the income tax rate. For instance, it shores up pensions meant for Arizona’s retired public employees. This would do a world of good for the retirees of a state that has nearly $94 billion in unfunded pension liabilities.

Arizona is in a good place to try new policy that has proven to improve state competitiveness. The Rich States, Poor States  “adjust policies” feature shows that reducing Arizona’s top rate from 8% to 4.5% brings its top marginal personal income tax rate ranking to 13th place, and the overall economic outlook ranking to 3rd.

Arizona should want to remain an attractive state for businesses and residents. This is crucial when the state sits next to an economic powerhouse like Utah. Arizona is in a position to seize the opportunity.

In Depth: Tax Reform

Mainstream economists, small business owners and taxpayers across the country understand that growth-oriented reforms mean increased opportunity for all. As demonstrated by the annual Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, sound tax and fiscal policies are critical to economic health, allowing businesses and households to flourish. A…

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