Tax Raid in Arizona – WSJ


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Arizona has long been a refuge for Americans seeking relief from high-tax California and states in the Northeast. But a tax referendum on the ballot Nov. 3 would whack job creators and make people rethink retirement in Scottsdale or a business move to Tucson.

Proposition 208, or the Invest in Education Act, would impose a 3.5% surtax on incomes above $250,000, or $500,000 for joint filers. The current top rate of 4.5% would rise to 8%, which would move the state to the 10th highest income-tax rate in the country, from 11th lowest today, according to the Tax Foundation. Arizona would move closer to California (13.3% top rate) than Nevada (no income tax).

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As ever, this is being pitched as soaking the rich, but about half of the targets would be small businesses that pay taxes at the individual rate, according to the Grand Canyon Institute. They employ a huge chunk of Arizona workers, and the added tax costs would trickle down in lower pay and fewer jobs.

All the more so given that the 2017 tax reform limited to $10,000 the federal individual deduction for state and local taxes. This heightens the financial pain from a state tax increase. One definition of fiscal insanity would be to raise state taxes when the Biden Democrats may soon raise federal tax rates to heights not seen since the 1970s.

Economists Art Laffer, Erwin Antoni and Steve Moore estimate that the tax increase would result in the migration to Arizona of 700,000 fewer people, 237,000 fewer jobs created, and a reduction of $25.5 billion in personal income growth over the next 10 years.

The authors looked at IRS data and found that since 1992 Arizona has gained more than 201,000 tax returns and almost $12 billion in adjusted gross income (AGI) from California. Illinois has lost more than 65,000 tax returns to Arizona and about $5 billion in AGI over the same period. New York has lost 37,000 tax returns and $2.3 billion in AGI to Arizona.

No doubt some of these are retirees looking for warmer climes, but snowbirds have other state options and can also live in Arizona less than six months a year and not pay the state tax. Supporters say the tax increase would yield $1 billion in new revenue, a huge expansion in a state with total expected revenue of $12.5 billion in 2021. Yet that revenue estimate for the new tax is based on static figures, which don’t take into account taxpayer behavior. It is likely to yield considerably less, as tax increases typically do.

The tax referendum is driven by unions seeking more money for education, though as recently as 2018 teachers went on strike and won a pay raise of 20% statewide. Republican Gov. Doug Ducey has also increased the state’s education budget by $6.6 billion since 2015—all without a tax increase. The state could afford this because economic growth and new residents drove higher revenue.

Arizona’s Goldwater Institute estimates that only 13 cents of every dollar from Prop. 208 would actually go to teachers. About 75% is for payroll increases in areas such as “student support services,” which covers an indefinite range of school employees.

Much of the financial support for 208 is coming from out of state, notably an outfit known as Stand for Children, which is based in Portland, Ore., that has poured in $4 million. Arizona law makes it relatively easy to put a tax referendum on the ballot, and progressive donors around the country hope a victory will spur a nationwide trend, as in the 2018 teacher strikes.

A tax increase also makes no sense as the state is still trying to recover from its summer Covid-19 spike. Gov. Ducey, who opposes the ballot measure, helped keep the state in motion by allowing key industries to reopen after unemployment peaked at 13.4% in April. But the jobless rate still stood at 5.9% in August, and Prop. 208’s tax increase would slow investment and spending far into the future.

A Sept. 30 poll by Suffolk University and USA Today found 47% support for 208 compared with 66% in a Monmouth poll two weeks prior. But opponents are being heavily outspent. Arizona voters have to decide if they want to set their successful state on the tax-and-spend path to fewer jobs and slower growth.

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Appeared in the October 20, 2020, print edition.


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