Arizona’s  Flat Tax was passed in the 2021 legislative session and went into full effect for the 2023 tax year, fully impacting the FY2023-2024 and subsequent budgets. The Flat Tax replaced Arizona’s progressive income tax that ranged from 2.59% to 4.5% with a single rate of 2.5% on all taxable income. Because of the consequent reduction in revenue, the Flat Tax was a key driving force behind the need for more than $1 billion in spending reductions and fund sweeps that were used to balance the last two years’ state budgets.

Former Gov. Ducey claimed the average family would save $350 per year. Now the Common Sense Institute claims “the average Arizonan saved $400 per year from the flat tax.”

The Common Sense Institute asserts– without citing sources– “The flat tax was forecasted to cost $4 billion over 10 years, but after accounting for dynamic effects and rapid growth in other tax types, estimates suggest a more modest $1.4 billion impact. Meanwhile, revenue growth from a strong economy has more than offset the difference, meaning the state still collects more each year than before the tax cut.”

So, in nominal terms, a tax cut that the Joint Legislative Budget Committee estimated as costing $2 billion per year–or a static cost $26.6 billion over 10 years is really only $4 billion–but now actually $1.4 billion. So where did the missing $25.2 billion go? Is the revenue impact trivial as the Common Sense Institute asserts? No credible economist has found evidence to back the claims of the Common Sense Institute. 

Key Findings:

1. The Flat Tax really does cost in excess of $2 billion PER YEAR and that 80% of the proceeds go to those with incomes above $200,000. For example, a married couple with $500,000 in income saved $6,500, reducing what they owed the state by more than one-third.
2. The “Average Arizonan” married couple or head of household needs to have an income of about $130,000 to have seen a reduction in income taxes of $400. The typical single, head of household or married couple saw a reduction of $130 or about 7% less than they were previously paying, a sliver of the largess the couple with half a million dollars received.
3. Arizona’s labor productivity growth has not been strong since 2015 and there is no evidence that the Flat Tax has changed that. But other states, including those with progressive income taxes like Oregon, show much stronger labor productivity growth.
4. Arizona’s job creation–influenced by population inflows–has remained strong, but is possibly weaker since the Flat Tax went into effect. The lack of productivity growth means they are not proportionately higher-paying jobs.
5. Investments in at-risk children would be a far better place to prioritize state investments as these investments, unlike the Flat Tax, actually pay for themselves and improve the state overall.
6. State revenue did experience a surge in revenues in FY2022 and FY2023–but that was due to the $78 billion in federal COVID dollars. It was temporary, not permanent.
7.  Consequently, as a result of the Flat Tax, Arizona now has flat-line budgeting that limits the state’s ability to make significant investments that better people’s lives.
   

   Read the full report here.

   About

   
   Dave Wells holds a Ph.D. in Political Economy and Public Policy and is the Research Director of the Grand Canyon Institute. He can be reached at dwells@azgci.org or (602) 595-1025 ext. 2.

    

   The Grand Canyon Institute (GCI) is a nonpartisan, nonprofit organization dedicated to informing and improving public policy in Arizona through evidence-based, independent, objective, nonpartisan research. GCI makes a good faith effort to ensure that findings are reliable, accurate, and based on reputable sources. While publications reflect the view of the Institute, they may not reflect the view of individual members of the Board.

   
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