Arizona Republicans are working on a tax plan that is shaping up to be the model for states looking to reduce and eliminate their income taxes.
Over the past decade, millions of people and jobs have moved out of high-tax states, such as New York and California, and into Florida, Tennessee, Texas and the five other states that do not impose income taxes. The flexibility to work remotely will only amplify this trend.
In order to compete for that investment, key lawmakers in several states — including Mississippi Gov. Tate Reeves and House Speaker Philip Gunn, New Hampshire Gov. Chris Sununu, West Virginia Gov. Jim Justice and Arkansas Lt. Gov. Tim Griffin — are looking to put their income taxes on the path to zero.
Arizona’s leaders have also noticed this trend and want to ensure the Grand Canyon State does not fall behind. This year, they are working on a tax plan that would reduce and maybe even phase out the state income tax.
Arizona’s current income tax is not attractive. Its top rate of 8% is one of the highest income tax rates in the country. Why would anyone move to Arizona when its neighbor Nevada and nearby Texas do not impose individual income taxes of any kind, and neighbors Colorado, New Mexico and Utah have top rates that are significantly lower?
Fortunately, Gov. Doug Ducey, Sen. J.D. Mesnard, President Pro Tem. Vince Leach, Majority Leader Ben Toma and many other Republicans in the legislature want to turn things around for Arizona. The Grand Canyon State is experiencing a $3.9 billion surplus for fiscal year 2022, $1.2 billion of which is ongoing. Rather than using it all to grow government, as Democrat-controlled states often do, Arizona Republicans want to return it to taxpayers in the form of pro-growth income tax relief.
As currently written, the Republican tax plan would streamline Arizona’s current four-bracket income tax system (five brackets when accounting for the new 3.5% “surcharge” that will be imposed on certain income due to Prop 208, which now gives Arizona an effective top rate of 8%) down to a flat rate of 2.5%, lower than its current bottom rate of 2.59% (technically, there will be two brackets with the Prop 208 “surcharge,” but the plan would include an aggregate cap to ensure the effective top rate is not higher than 4.5%).
While that alone would be a huge improvement, many lawmakers also want to set Arizona up for success over the long term, even as the list of no-income-tax states continues to grow. While a flat rate of 2.5% is competitive now, it is a lot higher than zero. As such, there is a serious effort to include a responsible phase out of the income tax over time (excluding the Prop 208 “surcharge”) in the Republican tax package.
The income tax phase out provision that is currently being considered was inspired by North Carolina, where revenue triggers were used to reduce the corporate tax. The revenue triggers in Arizona would be structured a little differently, but the general concept is the same: the rate will only be reduced when excess revenues are available to “pay for” it.
Revenue triggers are a smart way for lawmakers to provide tax relief without the need to reduce current spending levels or raise other taxes, and without the risk of getting ahead of their ski tips. If the use of revenue triggers to phase out the income tax is included in the Republican tax package, Arizona would be a model for other states to copy.
Reducing and, ideally, eliminating the state income tax would be a huge win for all Arizonans. It would make the Grand Canyon State more attractive to businesses and investment, which would ultimately lead to new jobs and opportunities for current Arizona residents.
It would allow small businesses, which overwhelmingly file their taxes on the individual side of the code, to invest more resources in their employees. And most importantly, it would allow the hardworking people of Arizona to keep more of their paychecks.
The Republican tax plan is shaping up to make Arizona the model state for income tax relief and reform. The growing movement of states that are looking to phase out their income taxes is paying attention and eager to be next.
• Grover Norquist is president of Americans for Tax Reform.