Arizona residents have avoided a major tax increase on higher incomes after a judge ruled the tax unconstitutional (per the Arizona state constitution). The surtax would have charged some Arizonans an 8% marginal tax rate, but after the judge’s ruling, Arizona’s tax rates will actually fall to some of the lowest in the nation by 2024. That year, Arizona will phase in the lowest flat tax rate in the country (for states with an income tax), of only 2.5%. The WSJ editorial board writes:
Nixing the surtax means Arizona will soon have a flat tax of 2.5% on individual incomes, the lowest flat rate among states with an income tax. Gov. Doug Ducey slashed the previous 4.5% top rate in his 2022 budget, and the flat 2.5% rate will phase in by 2024. If the 4.5% rate and the surtax had stayed in place, a combined 8% top rate would have given Arizona the 10th-highest state income tax rate.
Judge John Hannah hewed to the letter of the law in reviewing the surtax. “School district spending more likely than not will exceed the predicted spending limit in 2023,” he wrote. That’s an understatement. Invest in Arizona, the advocacy group behind the surtax, said its proposal would raise at least $253 million for schools that year, pushing spending far above the likely limit.
The state Supreme Court ruled last year that money raised by the tax couldn’t be rebranded as “grants” outside the spending cap, or be put aside to be spent later. It remanded the case for Judge Hannah to rule on the spending cap issue, and he said the constitution didn’t allow the surtax.
Arizona’s teachers union argued that ending the surtax would rob funding from hard-up school districts. State Superintendent Kathy Hoffman agreed after Friday’s ruling, asking “how will we remain competitive when our neighboring states have increased teacher pay?”
How many raises does she want? The courts held that the spending cap couldn’t be surpassed by referendum. But last month the Republican-controlled Legislature voted to suspend the cap temporarily, letting schools claim an extra $1.2 billion appropriated last year. Funding increases in recent years are on top of a 20% raise that Arizona teachers gained after striking in 2018.
Tax competition has helped Arizona draw residents and businesses from neighbors like California, but the surtax would have sent the Grand Canyon State down a Golden State path. The tax’s $250,000 income threshold made it a particular burden on small businesses that pay taxes under the individual code.
The episode is a reminder of the value of constitutional guardrails on state taxes and spending. Arizona voters in 1980 placed limits on school spending through a ballot initiative, preventing unrestrained budget bloat. Taxpayers in other states, take note.
Action Line: Do your local politicians care about you? The easy way to tell is by looking at how they treat you. Do they maximize your freedom while minimizing their impact on your livelihood? If not, if instead, they treat you more like a piggy bank and someone they have power over, it’s time to look for a better America. Start your search with my Super States. If you need regular guidance on the best places in America, click here to sign up for my free Survive & Thrive letter. I’ll help you find a better America, today.
E.J. Smith - Your Survival Guy
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