Advocates for economic growth cheered the Arizona Legislature’s passage of a major income tax and commercial property tax reduction as part of the Fiscal Year 2022 state budget.

Under the agreement, most taxpayers will pay a flat 2.5% individual income tax rate once the tax reductions are fully phased in, providing relief for all Arizonans. The current lowest rate is 2.59%. The exact timing of the complete implementation of the reduction will depend on state revenues meeting certain targets. 

Groups like the Arizona chapter of the National Federation of Independent Business, the Arizona Small Business Association, the Arizona Tax Research Association, and the Arizona chapter of Americans for Prosperity all applauded the Legislature for its work to send the historic tax reform to Gov. Doug Ducey’s desk.

“Every Arizonan—no matter how much they make—wins with this legislation,” Ducey said. “They will get to keep more of the money they earn under this tax plan.”

Had the Legislature failed to adopt the tax reform, members of Arizona’s small business community were facing a 77% tax increase due to a ballot measure that narrowly passed last fall. 

“It will protect small businesses from a devastating 77% tax increase, it ensures working families and all Arizona taxpayers get to spend their money how they choose, and it will help our state stay competitive so we can continue to attract good-paying jobs,” Ducey said.

Arizona Chamber of Commerce & Industry President and CEO Danny Seiden said the state’s most influential business advocacy welcomed the news. 

“Today is a tremendous step forward in enhancing Arizona’s economic competitiveness,” Seiden said following the bill’s passage. “This historic tax package reduces income taxes for all Arizonans, returning money to hardworking families, providing critical relief for our small businesses, and reforming our disparate property tax structure.”

The property tax provision of the bill reduces Arizona’s corporate property tax assessment ratio from 18% to 16% at the time of full phase-in.

The NAIOP Arizona chapter earlier this year released an analysis of a potential assessment ratio reduction, noting that commercial property in Arizona has the highest assessment ratio of any other property type.

The found Arizona’s commercial property assessment ratio to be uncompetitive both regionally and nationally. The report’s authors pointed to the positive economic development benefits of the assessment ratio reform.

“When site selectors are evaluating locations for business expansions or relocations, improvements in metro Phoenix’s ranking could make a meaningful difference in whether a city in Arizona is ultimately chosen,” the report found.

The Legislature this week is finishing work on two remaining bills in the 11-bill state budget. A state budget must be adopted by July 1 when the new fiscal year begins. 

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State budget analysts brought heartening news to citizens, businesses and schools in the governor’s proposed budget for fiscal 2022. 

First and foremost, there will not be a budget deficit as predicted earlier this year when the pandemic caused a spike in unemployment and disruptions to commerce statewide.

Governor Doug Ducey also wants income tax cuts amounting to $600 million over the next three years, state budget analysts said during a press conference revealing the proposed budget on Friday. 

In fact, Arizona is doing so well, revenues are projected to provide a healthy surplus. Arizona’s healthy economic standing means there will be $389 million to help students who have suffered pandemic-induced learning losses to catch up.

“Arizona is resilient, and we continue to move forward in the face of hardship, loss and disruption,” Governor Doug Ducey said. “Our budget will keep us moving in the right direction, and it makes strategic investments in our greatest areas of need — K-12 education, forestry management, public health and much more.

“Kids have missed out on important learning opportunities and classroom time, and we need to use our resources to help students in need catch up and ensure students, regardless of background, stay on the path to success.”

Keeping Arizona competitive on world stage

The governor’s plan includes funding for education and school choice,  workforce training, wildfire prevention, high speed internet for rural areas, covid relief for businesses and healthcare providers, highway and prison infrastructure, and much more. 

To keep Arizona competitive on the world stage, the budget calls for $600 million in cuts to income taxes “across the board” for citizens and small businesses over the next three years. 

Business groups including the Greater Phoenix Chamber of Commerce and Arizona Chamber of Commerce and Industry applauded the proposed plan. 

“This budget is not only fiscally responsible, but it is loaded with meaningful reform,” said Glenn Hamer, president and CEO of the Arizona Chamber of Commerce and Industry that represents thousands of employers across the state. “Arizona is now spending more from all sources on a per-pupil basis than at any time in the state’s history.

“The governor’s education initiatives will help our students make up for any pandemic-induced learning loss and will help parents, including those with limited transportation options, find the best educational fit for their kids, something that has become even more important during the last several months of educational disruptions.”

The $12.6 billion plan is the largest in the state’s history. Now, the governor and state Legislature will begin negotiations to produce a final spending plan before the conclusion of the fiscal year on June 30. 

Federal CARES Act relief helped state stay the course 

Arizona is in a stronger fiscal position than many states around the country with 97 percent of jobs lost during the pandemic now recovered, budget analysts from the Governor’s Office of Strategic Planning and Budgeting (OSPB) reported. 

About $38 billion in pandemic relief from the federal CARES Act this past year is one reason the state is faring well. Arizona’s healthy pre-pandemic economy and a $1 billion rainy day fund also saved the day, they said. 

Here’s are some of the highlights:

Income tax cuts 

The budget proposal includes $200 million in income tax cuts for fiscal 2022, which begins July 1. Ducey, who will be termed out of office this year, wants to extend his legacy of lowering taxes by including plans to extend the $200 million tax cut another two years. 

While details will be hammered out over the next few months, the tax cuts will help taxpayers “across the board,” the governor said. 

Education, school choice, civics education, rural broadband

In addition to $389 million to help students catch up, the budget includes an additional $250 million for K-12 education above and beyond inflation. 

Funding is targeted for programs to provide COVID-19 relief, rural broadband, early literacy, and additional civics education programs. 

Among the biggest ticket items for K-12 education are: 

• $119 million for school building renewal grants

• $52.6 million to complete two schools already under construction and start construction on five new schools

• $10 million to inform families about education options and support transportation innovations that expand school choice

Wildfire prevention with inmates helping out

The proposed budget includes $24 million for the Arizona Healthy Forest Initiative, a joint program between the Departments of Forestry and Fire Management and Corrections, Rehabilitation & Reentry. 

The Healthy Forest Initiative expands opportunities for state inmates to learn crucial job skills for post-sentence employment by treating our state’s land and wildlife, putting a greater focus on fire prevention.  

Health and welfare

Ducey’s budget also includes money to help Arizona’s most vulnerable citizens including children and the elderly with funding allocated for long-term care surveyors to address high caseloads and backlog. 

Items in the proposed budget with health and safety in mind include:

• $92.7 million in FY 21 supplemental funding for the stabilization of child care centers and to further support providers during the pandemic

• $25 million for the implementation of the Family First Prevention Services Act, focused on keeping children safely with their families

• $18 million to fund the continuation of the Child Care Waitlist and for a new pilot program that provides child care to children of parents pursuing education and nursing degrees

Higher education 

Arizona’s three public universities have been on the front line of research and action to address COVID-19 issues in the state. CARES Act and state funding to help reimburse them and  continue to produce an educated workforce includes:

• $115 million in COVID-19 relief, provided via CARES Act funding

• $35 million to support the public universities’ workforce development for the New Economy initiative

Public safety 

Prison construction including revamping outdated infrastructure is part of the budget including $54 million to address building renewal needs across the Arizona Department of Corrections, Rehabilitation and Reentry (ADCRR), including $25 million for critical safety projects at the Eyman Complex in Florence. 

The budget includes funding to recruit and retain Department of Public Safety (DPS) employees, equip DPS officers with body cameras and necessary support for video and IT management, and update the statewide land mobile radio network. 

Highway infrastructure, online portal for new businesses

Other items in the budget are the launch of a “hoteling pilot program” to increase options for government workers to continue to work remotely and a new online portal where new businesses can complete all state paperwork requirements. 

It also allocates $33.1 million to fund a major expansion of the I-40 West broadband corridor, in addition to $40 million in Federal CARES Act funding for the I-19 and I-17 broadband corridors.

Rainy day fund still holding near $1 billion 

Another positive feature of the budget is Arizona’s $1 billion rainy day fund. It remains almost fully intact at $954.4 million. While many states used these funds to address shortfalls in response to the pandemic, Arizona last year used $55 million to address one-time public health expenses, not shortfalls, budget analysts said. 

To see a complete list of details in the budget, go to:

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Maintaining Arizona’s reputation as a “go-to” state for businesses and expanding school choices for parents are top priorities for the new chair of the Arizona House Ways and Means Committee. 

Rep. Shawnna Bolick (R-Phoenix) is the new chair of the committee, which is important to business and industry, having jurisdiction over taxation and other revenue-raising measures. 

Bolick, who is the outgoing vice chair of the committee, spoke to 91ֱ�� about what she foresees as priorities in 2021.

As an advocate for small businesses, Bolick said she will continue to support legislation that is focused on lessening or eliminating taxes, attracting and keeping businesses, and helping companies still struggling from pandemic disruptions. 

“We’re discussing how we build our path forward to make sure Arizona remains a go-to state. I come from a mindset that we really need to reform the state tax code. It would be really ideal if we were a state without a state income tax state. Obviously, that will take a few steps to get there,” Bolick said. 

A school choice advocate, Bolick’s career includes consulting for nonprofits like the Alliance for School Choice, the Arizona Charter School Association and Arizona School Choice Trust. One of her top priorities will be making sure Arizona families continue to have many options for their children to give them the best education possible.

Lessening impact of new tax on small business top concern

As the legislative session starts this month, Bolick said her top concern is to find ways to reduce the negative impact on businesses from Proposition 208. The proposition created a new tax for top earning individuals and couples but also is expected to affect tens of thousands of small businesses. These are “pass through” entities, meaning they do not file their income taxes as corporations. Instead, they file under the individual tax code. 

Under the new law, Arizona’s top income tax rate has jumped from thirteenth lowest in the nation to the ninth highest, going from 4.5 to 8 percent, a 78 percent increase, affecting individuals who earn $250,000 and joint filers who earn $500,000. Small business owners who file under the individual tax code are subject to the tax as well. 

The new tax rate could not only hurt Arizona’s small businesses — companies with 500 or fewer employees — but it could act as a deterrent for new growth, Bolick said. If measures aren’t taken to mitigate the damage, Arizona could become a “flyover state” for businesses looking for a new place to land. 

“I’m very focused on ensuring Arizona becomes a destination to capture businesses and individuals fleeing high tax states like California. I believe we need to make sure companies at least consider our state before they head to Texas or Florida to do business,” she said.

Bolick has been meeting with other lawmakers, business groups, taxpayers and other stakeholders taxpayers to find solutions. Some options include property tax relief for businesses, flattening tax brackets, and tax incentives. 

More education choices, more control for parents

Another top goal will be to expand education choices for families, whether they choose a charter, district, private, online, home school or other option for their children, she said. 

Covid-19 has highlighted the stark disparities among socioeconomic classes, she said.

Charter schools often have smaller class sizes and can be a better fit for some students.

“Obviously, affluent families have the means to enroll their kids in private schools and hire tutors,” Bolick said. “Lower income students need to have school choice options. I don’t think many even know they exist even though there’s a private school or charter school up the street that is open and has been open the entire semester.”

As a parent during Covid-19 school shutdowns, Bolick has seen firsthand how difficult learning has been for families. One option is to create more learning pods and where students can excel in small group settings, she said. 

“As a parent of two children, one in high school and one in college, I’m seeing exactly how they are learning and where they’re learning has truly changed.”

One benefit from the pandemic is the realization that children can learn anywhere, she said. 

“Fortunately, we reduced some of the regulatory barriers for online learning and now that districts and charters have an appetite for some of that, we might see some new models coming forth,” she said. “Kids can learn from anywhere now. It shouldn’t be relegated to one or two buildings.”

Expect legislation on initiative reform

Bolick also expects bills coming forth to reform the state’s ballot initiative process. 

In recent years, special interest groups and individuals outside of Arizona have waged expensive campaign battles to get initiatives like Proposition 208 passed, she said. Often, these campaigns are not fully thought out when it comes to what is best for Arizona. 

“Businesses are not going to keep coming here if we continue to allow out-of-state groups and individuals to basically run our state,” Bolick said. “I believe Arizona has so many untapped resources and so much potential, I want to make sure that we’re not getting in the way of growing business.” 

Public policy background   

Bolick is currently serving her second term in the state House of Representatives. Bolick graduated from Syracuse University’s Maxwell School of Citizenship and Public Affairs with a B.A. in policy studies. She completed her Masters of Public Policy graduate coursework from American University in Washington, D.C. She interned in the New York State Assembly one semester and later worked for former Texas Lt. Governor Rick Perry on his high-tech council.

Bolick also is an education advocate, having served as a member of the Arizona State Board of Education’s Academic Standards Development Committee as a public high school parent and as an appointee to Arizona’s Early Childhood Education and Health Board by Governor Doug Ducey.

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Arizona’s state Senate Finance Committee met last week to discuss what the new tax law that resulted from passage of Proposition 208 last month will mean for the state’s economic future and what can be done to offset potential negative consequences. 

While the new tax is meant to tax the wealthy to help fund education, it has an unintended consequence: It will affect tens of thousands of small businesses as well. 

That could have dire consequences for Arizona’s economic health, said the chair of the committee, Senator J.D. Mesnard (R-Chandler), who scheduled the meeting to hear from legislative budget analysts and others on what the impact will be. 

“We don’t want to become a flyover state,” Mesnard said when referring to Arizona’s future economic development prospects.

Arizona now in top 10 for high income tax bracket

Before the new tax was approved, Arizona’s top income tax rate was the 13th lowest in the nation. Now, economists calculate the state has the ninth highest rate in the U.S. 

“Having the ninth highest income tax rate, the 11th highest combined average sales tax rate and high business property tax, you can’t have all those things at the highest end and not have at some point a collapse in economic growth,” said Mesnard, who is working with fellow lawmakers and others to find ways to lessen the impact on business and protect Arizona’s ability to attract investment. 

Initiative almost doubled top tax rate

Under the new tax law, Arizona’s top income tax rate went from from 4.5 to 8 percent – a 78 percent increase for individuals who earn $250,000 and joint filers who earn $500,000.  

Businesses that file under the individual tax code instead of the corporate tax code are also impacted. Corporate filers are not affected by the tax increase. 

Positive and negative impacts of the new tax 

At the committee hearing, Hans Olofsson, longtime chief economist for the Joint Legislative Budget Committee (JLBC), laid out the potential outcomes from the new 3.5 percent surcharge.

Using a static analysis that doesn’t account for potential secondary budgetary impacts, Olofsson estimates that the state will gain about $874 million in tax revenues for education the first year.  

Olofsson said the majority of the taxes, 75 percent, will go to increase teacher and staff salaries. With more money in their pockets, they could spend more and that will push up sales tax collections, he said. 

On the negative side, high income earners could decide to leave the state, Olofsson said. Higher tax rates also could reduce incentives for businesses to locate or expand in Arizona. 

High income tax states end up losers in the long run 

National economist Steven Moore also spoke at the meeting about what happens when states raise their income tax rates.  

Moore and fellow economist and researcher Dr. Arthur Laffer conducted an analysis for the Arizona Chamber of Commerce & Industry to determine just that. The report, “Arizona’s Proposition 208 Loses Jobs and Harms Small Businesses,” analyzed how tax rates have affected states over the past 30 years.  

Almost all states with lower tax rates perform better

According to Moore and Laffer’s research, almost all states with low or zero income tax rates performed better in most economic indicators than those states with high tax rates. 

High tax states saw less revenue for government responsibilities, including education. An analysis of the 11 states that introduced income taxes since the 1960s shows they are at the “very bottom of performance” in not only economic and population growth, but revenue for public services. 

Harsh implications for Arizona

Using data from other states, the economists measured the impact Arizona’s Proposition 208 would likely have on jobs, wages, interstate migration, tax revenue collections, state competitiveness, and small businesses.

They found that all areas would likely suffer, making “Arizona residents poorer and the state’s economy less competitive.” 

Among their findings:

•An estimated 200,000 jobs and about $25.5 billion in personal income would be lost over the  next 10 years. 

• Fifty percent of the tax would be borne by small business owners and operators that typically generate from half to two-thirds of the jobs in a state.  

• Arizona’s economic competitive position among the 50 states would fall from No. 10 to No. 16.

•The state would lose 700,000 people in net in-state migration over just the next decade.

Arizona needs to find ways to keep growing

Glenn Hamer, the president and CEO of the Arizona Chamber, also spoke at the meeting to encourage state lawmakers to find a way to fund education without harming the backbone of the state’s economy, small businesses. 

Before Proposition 208, Arizona was among the fastest growing states and “always seemed to be a finalist when it came to big corporate announcements,” Hamer said. 

Now, it will have a much harder time competing with other states that have lower or zero income taxes, he said. 

“This is something that affects all of us,” Hamer said. “We need to figure things out so we can fund education in a sustainable way, but we don’t want to do something to hurt our economy and the incredible growth we’ve all enjoyed and experience with this dramatic change.”

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Let’s stipulate that no one is going to confuse California’s progressive Democratic governor, Gavin Newsom, with more conservative governors like Arizona’s Doug Ducey. But even Newsom understands the danger that a dramatic income tax increase can mean for a state’s competitiveness.

In announcing his support of a ballot proposition to create a “split roll” property tax system that will treat residential and commercial properties differently for tax purposes (itself a bad idea), Newsom also said he will an effort to raise the top state income tax rate and impose a wealth tax. 

What’s happening in California is instructive to the debate over Arizona’s Proposition 208, which would catapult Arizona’s top income tax rate into the top-10-highest in the nation by raising it 77.7%, from the current 4.5% to 8%.  

“In a global, mobile economy, now is not the time for the kind of state tax increases on income we saw proposed at the end of this legislative session and I will not sign such proposals into law,” Newsom .

Even Newsom gets it: In the freest country on the planet, individuals and businesses of all sizes can move to more welcoming tax environments when their current jurisdiction becomes overtaxed and overregulated.

At an August , Newsom was cool to higher tax proposals, saying California has to “consider the impacts of those decisions on your ability to retain and attract talent, individuals, companies, and your competitiveness. Everything needs to be considered in that light. And I would encourage those that are making proposals in this space to consider those impacts in relationship to what may or may not be happening in other parts of this nation.”

Granted, California already has the highest income tax rate in the country at 13.3% (on income over $1 million), but the principal that certain taxes are particularly damaging to economic expansion holds.  

When a big income tax increase during the middle of pandemic is too extreme even for Gavin Newsom, that should tell us all we need to know about the wisdom of Proposition 208. 

Glenn Hamer is president and CEO of the Arizona Chamber of Commerce and Industry. 

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