What Arizona Gave up for the Flat Tax: A Child Tax Credit That Could Cut Child Poverty by Nearly a Third

Arizona chose a flat tax that overwhelmingly benefits the wealthiest households — and in doing so, gave up billions that could instead fund a refundable child tax credit and cut childhood poverty by nearly one-third. 

That tradeoff is at the center of new analysis from the Arizona Center for Economic Progress, with support from the Institute on Taxation and Economic Policy and the Center on Poverty and Social Policy at Columbia University. The question isn’t just whether the flat tax works — it’s what Arizona could achieve if those dollars were invested in families instead. 

Affordability increasingly out of reach, families left behind 

Today, 14.6 percent of Arizona children live in poverty — higher than the national average.  

At the same time, rising costs of living are making it harder for working families to afford basics like housing, food, and child care, putting additional strain on household budgets.  

In the Phoenix metro area, the price of food at home rose 3.3 percent year over year from February 2025 to February 2026, while the price of medical care in Phoenix rose 6.9 percent over the same period. More recently, gas prices are up nearly 40 percent from a month earlier.  

According to the Economic Policy Institute, the average annual cost of infant care in Arizona in early 2025 was $15,625. Nationally, child care costs continue to grow faster than the rate of overall inflation.  

What a child tax credit would do 

A $2,000 state-level refundable child tax credit would directly address these challenges by putting money back in the pockets of Arizona families who need it most. 

Research shows that increasing family income leads to better outcomes for children, including improved health, higher educational attainment, and greater lifetime earnings. These gains translate into a stronger economy with higher productivity and increased future tax revenues. 

There are also immediate benefits: Reducing child poverty is associated with lower public costs in areas like health care and the criminal legal system, while helping families stay stable and avoid crisis. 

Who benefits from the flat tax — and who doesn’t 

The flat tax delivers its largest benefits to the highest-income households, while limiting the state’s ability to invest in policies that support working families. 

At the same time, Arizona now collects roughly the same amount in individual income tax revenue as it did in FY 2017, after adjusting for inflation — despite significant economic growth. 

And claims that the flat tax drives stronger growth or increases revenues are misleading and inaccurate. The compound annual growth rate of real GDP was stronger in the three years (2019-2021) before its implementation (partial implementation in 2022) as compared to the three years after (2022-2024).  

Additionally, sales tax revenue growth when adjusted for inflation has flattened since the flat tax was implemented and declined in FY 2023 — a year when Arizona lowered its top income tax rate from 2.98 percent to 2.5 percent. 

A closer look at GDP and sales tax revenue suggests that claims the flat tax has boosted Arizona’s economy are often overstated. Much of the recent growth is more likely tied to pandemic-era factors — federal stimulus, national productivity gains, a higher-valued stock market, and inflation — rather than state tax policy, especially when growth is measured in nominal terms. 

At the same time, IRS migration data shows that while Arizona continues to attract higher-income taxpayers, the rate of those earning over $200,000 moving into the state has declined over time — even after the shift to a flat tax. This suggests that post-pandemic migration was driven more by affordability than by tax rates. 

A question of priorities 

To better understand the stakes, researchers modeled the distributional impact of both policies — the flat tax and a child tax credit. The results make clear that this is not just a question of tax structure — it is a question of priorities. 

A flat tax primarily benefits the highest earners in Arizona while costing the state billions in foregone revenue.  

The Center on Poverty and Social Policy at Columbia University found that Arizona could lift 60,000 children out of poverty with a $2,000 refundable Child Tax Credit. The credit would be designed to reach working families, phasing out for higher-income households. 

Currently, Arizona has a $100 nonrefundable dependent tax credit for children under 17, where the credit does not phase out until a single/head of household filer’s AGI exceeds $200,000 or $400,000 for joint filers.  

Analysis from the Institute on Taxation and Economic Policy shows the proposal is focused on the households who need it most. In each of the bottom four income groups, 20 to 25 percent of households would receive a tax cut averaging $2,000 to $3,000. 

Meanwhile, some of the highest-income households would see a small tax increase —around $100 — as the credit phases out. 

The policy would cost $2.02 billion — less than the revenue Arizona would likely regain by reversing the flat tax. In other words, the state could fund a child tax credit and still invest in priorities like roads, water, education, and housing. 

Even then, Arizona’s top income tax rate would remain relatively low — below nearly half of all states. 

Reversing the flat tax is just one option. The state could also explore a more progressive corporate tax structure or a tax on ultra-wealthy households. 

Arizona can continue to prioritize tax cuts that disproportionately benefit the wealthiest households. Or it can choose to invest in policies like a child tax credit that reduce poverty, strengthen families, and build a more inclusive economy.