Raising Arizona Taxes (Maybe)

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(LIgorko/Getty Images)

California, to be expected, Illinois too, but Arizona? It’s a measure, perhaps, of that state’s changing politics that it may soon be seeing an increase in income tax — and not a small one.

The Tax Foundation:

Arizona voters will decide whether to create a new fifth income tax bracket that would raise the top rate from 4.5 percent to 8 percent. Proposition 208 would create an additional 3.5 percent tax on income above $250,000 ($500,000 for joint filers) to generate additional revenue for education. The tax would be levied beginning in tax year 2021, with revenues distributed to localities according to the weighted student count.

Almost doubling the state’s top income tax rate is a huge shift that reverts decades of reforms which lowered the top marginal rate from a high of 7 percent. Currently, Arizona’s top bracket of 4.5 percent is competitive among its neighboring states and ranks as the fifth lowest in the nation. A top rate of 8 percent would move Arizona to the eighth highest of the 50 states and make it an outlier in its region. Next-door Nevada has no income tax, and New Mexico, Colorado, and Utah all have top rates of under 5 percent.

It may be a mark of some lingering conservatism that Proposition 208 is expressed as being “for the children.” Class warfare alone is clearly deemed not to be enough to do the trick by itself, unlike in certain states that I could mention.

And it doesn’t hurt the proposition’s supporters that the results achieved by the Arizona’s school system are — how to put this — underwhelming, much of which is blamed on underfunding. That said, the Goldwater Institute isn’t convinced by some of the arguments advanced on this topic, particularly when it comes to teachers’ pay, citing Arizona’s “20×2020” plan.

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This, it points out, has

 given school districts enough money to give every (actual) teacher a 20% pay raise. That was enough to bring Arizona teacher salaries to the national median (and the 16th highest of any state when adjusting for costs of living).

And the Institute adds that

only 13 cents of every dollar from Prop 208 go to actual classroom teachers, while 75% of the money from Prop 208 will go to open-ended payroll increases.

What’s more, the Institute questions the correlation between education spending and educational outcomes, as well it might, given the poor value (judging, again, by outcomes) for the country as a whole that the U.S. appears to derive from its education spending:

Despite our public schools spending more than twice the amount per student per year than they did in 1970 (even adjusted for inflation), our district school students’ academic achievement has been completely flat. Scholars from Stanford and Harvard have found that our public schools have even failed to reduce the achievement gap for disadvantaged students despite massive spending increase . . .

And in Arizona:

Despite receiving thousands of dollars less in funding per student each year, charter schools in Arizona and across the nation have significantly increased student achievement more successfully than district schools.

It would be unwise to deny that there is some connection between funding and outcome, but . . .

Arizona’s ability to fund its schools will, in the end, depend on the state’s longer-term prospects, and the Tax Foundation has, well, doubts about whether these will be improved by Proposition 208:

The only neighbor Arizona [if the proposition passes] would still beat would be California—and narrowing that margin would undermine Arizona’s status as a destination for those fleeing California’s high taxes. 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.

One interesting twist:

Unlike the rest of the state’s income tax, moreover, the new bracket would not be indexed to inflation, which would result in what is called “bracket creep,” where income tax burdens increase even without an increase in real income. A person whose salary increases track with inflation could have the same amount of purchasing power year over year, while the change in the nominal dollar amount of earnings could push more of their income into the higher bracket. Because of this, the new Arizona bracket would capture progressively lower incomes as the value of the dollar decreases.

Curiously, the proposed ‘Fair Tax’ in Illinois also omits any provision for inflation adjustment too.

Illinois Policy:

When they doubled the state gas tax, Illinois lawmakers made sure it would increase every year with inflation so they’d capture every penny. When they built the “fair tax,” they left out an inflation adjustment, so each year more and more Illinoisans will find themselves defined as “rich” by the state and taxed more.

In 20 years, the “rich” will include those now making $167,000.

Gov. J.B. Pritzker is pitching the “fair tax” as a way to fund the state by taxing wealthy people like him at a higher rate than the average Illinoisan. Putting aside the fact that raising taxes on the rich alone cannot fund the spending that Pritzker has promised, much less the pensions the state has promised to public employees, Pritzker’s “fair tax” rates are designed to hike taxes on more and more people down the income brackets every year.

As inflation rises each year, the tax brackets remain unchanged. This phenomenon is known as “bracket creep,” and it means taxes rise on more and more people year after year as their nominal incomes increase due to inflation.

Pritzker’s proposed rates raise taxes on those making more than $250,000 per year. If inflation continues at the same average rate in the past 20 years, the tax hike would hit those paying the equivalent of around $167,000.

Oh.

Meanwhile, add the vote on Arizona’s Proposition 208 to the list of results to check out next month.

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