Ducey's Flat Tax falls flat

Oct 14

Introduction

In mid-2021, Arizona legislators passed SB1828; the bill cut individual income taxes by collapsing the 4-bracket progressive tax into a 2-bracket progressive tax and lowering the top rate from 4.5% to 2.98%. The bill also set a revenue trigger to cut the tax rate further into a 2.5% flat tax if revenues exceed 12.976 Billion dollars. It all stems from a campaign promise made under former Governor Doug Ducey (R-AZ) to get the state income tax “as close to zero as possible.” The income tax cuts took effect in FY23 and caused individual income tax collections to fall by 30.4%. The final phase of the flat tax will cause even more revenue losses to occur in FY2024. In fact, revenues are below expectations and the JLBC now projects a 400 million dollar budget shortfall. This bill was based on the false premise that cutting taxes for the wealthy would lead to massive economic growth and offset lost revenue from tax cuts.

The Regressivity of Ducey’s Tax Cuts

The tax cuts Doug Ducey put in place overwhelmingly benefit the wealthiest residents of Arizona and are heavily regressive tax cuts. On average, the top 1% of Arizona residents received a state income tax cut of over 40%, while most Arizona residents only received a tax cut of about 10%. Arizona relies heavily on sales taxes to fund its government, making over 40% of general fund revenue. Arizona has the 11th highest sales tax in the country. Sales taxes are regressive, burdening low- and middle-income people more than rich. When the state cuts income taxes, it relies more on sales taxes, making the overall tax system in Arizona even more regressive. It is wrong to give massive tax cuts to the wealthy when our state has more pressing needs each year, from housing to education and more. Ducey claimed every Arizona taxpayer will get a tax cut. That is not true; many low-income people in Arizona don't pay state income taxes because of the standard deduction, and the vast majority of the benefits go to the rich who do not need a windfall.

Arizona has not learned the lesson of what happened in Kansas.

As the famous line in The Wizard of Oz goes, “I think we're not in Kansas anymore.” While Arizona and Kansas are different places, what is happening in Arizona is very similar to what happened in Kansas between 2013 and 2017. In Kansas, lawmakers cut individual income taxes from 6.45% to 4.6% and eliminated the personal income tax for all small business owners. The Kansas tax cut resulted in a sharp decline in income tax revenue in the first year, which later resulted in a budget shortfall in the hundreds of millions of dollars. Kansas drained its rainy day fund and cut money to highways, schools, and healthcare, yet it was not enough to cover the budget gap, so the state later started borrowing money that resulted in a credit-rating downgrade by Moody’s and two credit-rating downgrades by Standard and Poors. Kansas later repealed most of the tax cuts, overriding the veto of then-governor Sam Brownback. The Kansas tax cuts did not result in significant economic growth. In fact, GDP and job growth were slower than the national average. Arizona has done something very similar, cutting income taxes dramatically in a short period of time, which is a large part of why we are facing a budget deficit soon. The fact is that tax cuts do not have magical powers, and for every action, there is an equal and opposite reaction. This is true in both economics and physics. For instance, when taxes are cut, revenue falls, resulting in budget cuts that depress economic activity.

Conclusion: The tax cut was a mistake

We are in 2023 facing underfunded public schools and a 400 million dollar budget shortfall. Our state has needs like infrastructure and education. When you cut taxes, you have fewer resources to provide a better quality of life for Arizona residents. When your state is ranked in the bottom 10 in k-12 education, which makes up almost half of our budget, cutting taxes by massive amounts to benefit the wealthiest residents is fiscally reckless and un-American. The state legislature needs to look in the mirror and see what happened in Kansas and revere course before it is too late.

References

https://www.azmirror.com/2021/01/15/ducey-calls-for-600-million-in-permanent-income-tax-cuts/

https://itep.sfo2.digitaloceanspaces.com/whopays-ITEP-2018.pdf

https://www.azjlbc.gov/revenues/revenueandbudgetupdate101123.pdf

https://www.bloomberg.com/news/articles/2015-01-20/how-local-sales-taxes-target-the-poor-and-widen-the-income-gap

https://www.azmirror.com/2022/05/23/arizona-again-near-bottom-of-states-for-per-pupil-spending-census-says/

https://en.wikipedia.org/wiki/Kansas_experiment#:~:text=Specifically%2C%20the%20top%20income%20tax,even%20more%20in%20future%20years.

https://docs.google.com/spreadsheets/d/11op1OPOpGAKkyItvDUO9ufY2FnRvxLhL18zZDcxp33Y/edit#gid=487245659

https://apps.azleg.gov/BillStatus/BillOverview/76142

Vin Peterson