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calculating Arizona flat taxes

The flat tax falls flat for most Arizonans

The Arizona legislature is poised to permanently cut over a billion dollars in state revenues, the largest tax cut in the last three decades. This cut will make Arizona’s tax system more regressive than it is today with 93 percent of the tax cuts going to people in the top 20 percent of incomes.

“For every $1 in new [fiscal year] ’22 ongoing initiatives, the [fiscal year] ’24 cash balance declines by $3”- JLBC staff, April 15th, 2021

Through decades of laws and policy decisions, Arizona’s elected leaders have created a tax code that is unfair and regressive. Those with low incomes pay a much higher share of their income in taxes compared to the wealthiest. In other words, Arizona’s tax policies favor certain people based on their income and wealth, while shifting the responsibility to fund our schools, roads, and public safety to low- and middle-income Arizonans

A year ago, Arizona budget experts were predicting a $1.1 billion deficit and possible cuts to key services due to the COVID pandemic. Fortunately, billions of federal relief dollars have worked to stimulate the state’s economy, backfill state agency budgets, and double unemployment wages for hundreds of thousands of Arizonans. Today Arizona has over a $1 billion ongoing surplus and has temporarily cut $625 million in income tax through federal conformity. On June 22nd, 2021 the Senate passed a permanent $1.7 billion flat tax cut and 4.5 percent cap on the marginal tax rate and the House of Representative plans to follow suit on June 24th.

A flat tax system is one in which everyone pays the same tax rate, regardless of income.

The tax cut is based on a 2.5 percent flat tax and a 4.5 percent cap on the top marginal tax rate. Approximately 93 percent of the tax cuts would benefit the top 20 percent of income earners— residents earning $108,000 or more in taxable income. The flat tax and rate cap will reduce the contributions from households with high incomes to the General Fund and continue Arizona’s increasing dependency on regressive sales taxes to fund state needs. Reducing revenues by an estimated $1.7 billion a year will make it virtually impossible to adequately fund public schools, universities, infrastructure, and other important needs in the future. While it only takes a simple majority of legislators to pass a tax cut, it takes a supermajority to reverse tax cuts or raise revenue.

The state of Arizona relies on two broad types of taxes: personal income and sales and excise. These two types of taxes make up 87 percent of the total general fund revenues. To fill in the gap, Arizona uses a range of other tax and non-tax revenue sources such as corporate income taxes, insurance premium taxes, license fees and permits, lottery and tribal gambling revenue.

Today, Arizona’s only progressive tax is its tiered income tax structure. The income tax structure balances the other major forms of state taxation which tend to fall hardest on those with the least income in the state. The implementation of a flat tax would move Arizona’s tax system to rely more on sales and excise taxes. Proponents of flat tax claim that the tax is meant to create equality between marginal tax rates, yet when accounting for both local and state taxes, a flat tax perpetuates a regressive tax structure. The absence of a graduated individual income tax in other states like Texas and Nevada reveals an overreliance on sales and excise taxes, exacerbating the longstanding problem of an upside-down tax code.

While Arizona’s tax structure didn’t independently create income and wealth gaps, it has perpetuated inequities year after year. Instead of increasing tax cuts for the wealthy, Arizona’s Governor and legislature can create a state budget and tax systems that work for families and Arizona's lowest- income earners. With more than a billion dollars of surplus, the state could make significant investments in K-12 education, fully fund the community colleges including the Maricopa and Pima county systems, and address infrastructure concerns such as highways and roads, bridges, and water.

Notes:
The ITEP microsimulation tax model is a tool for calculating tax revenue yield and incidence, by income group, of federal, state and local taxes. The ITEP model is frequently used to analyze federal and state tax proposals and to look at the impact of current tax policies on issues of public concern.

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