Contributor Post Created with Sketch. Arizona Voters Foolishly Choose New Taxes

 

Arizona voters have some serious ‘splaining to do about the passage of Prop. 208, which raised education funds by boosting income tax rates up to 98% for high-income filers. How could this have happened?

Arizona schools have already received over $1 billion in new sustainable monies over recent years, with more coming. More importantly, Arizona public schools, without receiving much credit, have become a remarkable success story.

Academic achievement gains for minority students are among the highest in the nation. Arizona charter schools excel in competitive rankings.

But voters apparently weren’t focused on educational outcomes. Prop. 208 was marketed as a way to get “other people“ – the rich – to pay the freight. Even though it’s one of the oldest tricks in the tax-and-spend playbook, Arizonans fell for it, while voters in 17 other states thought better.

California voters rejected what would have been the largest tax increase in state history, the removal of a cap on commercial property taxes. Voters in Illinois, Washington, and Colorado were among those who defeated reckless taxation proposals.

Many may not know that Arizona once was a high tax state, with a 7% top rate for individuals, 9% for corporations. It was considered regionally uncompetitive until the 1990s, when income tax rates were cut 35% and deductions were expanded.

The result, according to data from Arizona Tax Research Association, was 145% more income tax revenue, inflation-adjusted, in 2017 than in 1991, a rate of growth that exceeded population growth by 60%. More importantly, Arizona’s real GDP increased 176% from 1987 to 2016, while the US GDP grew 100.4%. Clearly, Arizona’s relatively low-income tax rates produced abundant tax revenues while attracting capital and capitalists.

No longer. The strategy of sound tax policy is to establish broad-based, fair taxes with the lowest possible rate where they are the least likely to do economic harm. Prop 208 fails on all counts.

It singles out a small group and whacks them hard. Unfortunately, the sector being picked on includes many small business owners who pay their business taxes through the individual income tax system.

These just happen to be the entrepreneurs who drive much of the employment and economic growth in the state. A 100% tax rate increase for them will be enough to discourage further investment in Arizona businesses and to encourage those who can to file elsewhere. Arizona will rank in the top five nationally for income tax rates, a radical change sure to generate impacts that won’t be pretty.

The schools and teachers who have been promised salary increases aren’t so lucky either. Unfortunately for them, Prop. 208 provides a highly volatile funding source, while teacher salaries require a stable, reliable revenue stream.

High-wealth income taxes are notoriously subject to downturns in the business cycle. In 2008, following the great recession, tax collections from high-income filers dropped 32% or $1 billion. School authorities who peg permanent salary increases to this income source are almost assuring a future crisis.

Although Republicans may have dodged a bullet, the election of 2020 continued the trend for Arizona voters to reverse their historical support for prudent, limited government. It’s not likely that Arizonans have changed their mind. But who they are has changed.

Migrants from California and other failing states seem to have brought their old voting habits with them, oblivious to the reasons Arizona offers an attractive, affordable quality of life.

Here’s what the spenders can’t seem to grasp. Editorialists and interest groups will never run out of worthy spending projects that a more enlightened government would surely fund. But high tax rates, especially on those who “don’t need it” is a giant rabbit hole.

Once you start down it, you’re sunk. Government benefits, once conferred, automatically become permanent entitlements that can never be reduced. Meanwhile, high tax rates seldom produce as much revenue as projected, due to tax avoidance behavior. Eventually, basic obligations like public safety and pension funding can’t be met. The answer is … higher taxes on the economically productive. They eventually get fed up and leave.

A growing number of state and local governments are facing economic desperation from this vicious cycle. Let’s hope Arizona isn’t among them.

Published in Economics, Education
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  1. MichaelKennedy Coolidge

    Kelly voters. The teachers went all out and the Democrats had tons of money coming from CA.

    • #1
    • November 19, 2020, at 4:03 PM PST
    • 2 likes
  2. kedavis Member

    More evidence that I got out just in time.

    By the way, a better title might be “Former California Voters Predictably Choose New Taxes”

    :-)

    • #2
    • November 19, 2020, at 7:22 PM PST
    • 1 like
    • This comment has been edited.
  3. Gary Robbins Reagan

    The killer is that the Legislature cannot meaningfully modify this statute. Statutes introduced by initiative can only be taken out by the voters and not the legislature. A black day for Arizona.

    • #3
    • November 19, 2020, at 7:43 PM PST
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  4. DonG (Biden is compromised) Coolidge

    Tom Patterson: The schools and teachers who have been promised salary increases aren’t so lucky either. Unfortunately for them, Prop. 208 provides a highly volatile funding source, while teacher salaries require a stable, reliable revenue stream.

    Doing it For the Children is always gets the votes. A volatile income source is better. The schools can ratchet up spending then demand new revenue in the off years. Think of it as a snake around your chest. 

    • #4
    • November 19, 2020, at 8:46 PM PST
    • Like
  5. David of Reno Coolidge

    I moved part of my business from Arizona to Nevada 2 years ago. Nevada has no state income tax. I need to look more closely at the new tax, but I can move the balance of the business next. So glad we have states with different policies and can vote with our feet! It’s too bad about AZ, they have a good governor in Doug Ducey, but he can stop the insane ballot initiatives.

    “yes” vote supported this ballot initiative to:

    * enact a 3.50% income tax, in addition to the existing income tax (4.50% in 2020), on income above $250,000 (single filing) or $500,000 (joint filing) and

    * distribute the revenue from the 3.50% income tax to teacher and classroom support staff salaries, teacher mentoring and retention programs, career and technical education programs, and the Arizona Teachers Academy.

    “no” vote opposed this ballot initiative, thus keeping the highest income tax rate at 4.50% (in 2020) on income above $159,000 (single filing) or $318,000 (joint filing).

    Democracy is 2 wolves and a lamb voting on what to eat for dinner. Fortunately the lamb can exit the state!

    • #5
    • November 19, 2020, at 10:16 PM PST
    • 2 likes
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  6. Phil Turmel Coolidge

    Tom Patterson: Let’s hope Arizona isn’t among them.

    Sounds more like Californication is well advanced, stage 4, as one might say.

    • #6
    • November 20, 2020, at 5:11 AM PST
    • 2 likes
  7. Stad Thatcher

    I have a love-hate feeling about voter referendums. On one hand, it gives voters a tool to take action when their legislatures fail to do so. On the other hand, it bypasses the function of a representative, constitutional republic. We can vote legislators out of office, but we can’t force citizens to move.

    Unless fellow citizens raise their taxes. Hmmmmmm . . .

    • #7
    • November 20, 2020, at 6:50 AM PST
    • 2 likes
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  8. Old Bathos Moderator

    That is what happens when you lower taxes and increase an influx of new business. Those businesses invariably drag along suburban types who feel like they are tenured or protected by some academic credential or their résumé bullet points and invariably vote to make those with more than them take care of those who have less. It is the traditional white-collar voter twofer–(1) punish those who have more, especially hotshot entrepreneurs whose success was not dependent on SAT scores and graduate degrees, and (2) take moral brownie points for compassion by nominally directing such funds to noble causes and activities. Only when the tax burdens start coming down the ladder to the middle class and/or when the fruits of genius compassion policies arise do they shift back to a more prudent posture.

    Virginia, North Carolina, Georgia, Arizona, Texas, and Colorado all exhibit this purple to blue tendency from exactly the same suburban demographic. We need to find ways to speed up the recognition process.

    • #8
    • November 20, 2020, at 6:59 AM PST
    • 1 like
  9. Seawriter Contributor

    Tom Patterson: A growing number of state and local governments are facing economic desperation from this vicious cycle. Let’s hope Arizona isn’t among them.

    Why would I hope that? The people have spoken. Let them suffer the consequences of their choices. Bad examples serve a useful function for the rest of the country. 

    • #9
    • November 20, 2020, at 8:28 AM PST
    • 1 like
  10. Audacious Member

    Absolutely agree with @Seawriter. The sooner people get what they vote for “…good and hard” as Mencken said, the better.

    • #10
    • November 20, 2020, at 10:12 AM PST
    • 1 like
  11. Doug Watt Moderator

    When reading any initiative whether its a ballot measure, or a property tax measure remember the phrase “projected revenue.” That projected revenue will be spent before it arrives in the state treasury. Then comes the budget shortfall that will generate more ballot measures to cover the shortfall.

    In the ballot measure mentioned in the post eventually the tax threshold on earnings will lower. Also remember the phrase “temporary tax”. There is no such thing as a temporary tax.

    • #11
    • November 20, 2020, at 12:46 PM PST
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  12. Jerry Giordano (Arizona Patrio… Member

    Gary Robbins (View Comment):

    The killer is that the Legislature cannot meaningfully modify this statute. Statutes introduced by initiative can only be taken out by the voters and not the legislature. A black day for Arizona.

    Gary, I had the same thought. I hadn’t previously read the initiative in detail (though I voted against it).

    The text of ARS 43-1013, the code section actually imposing the “income tax surcharge,” imposes a surcharge of 3 1/2% on taxable income in excess of $250,000 (if single) or $500,000 (if married or head of household). Subsection C says: “The income tax surcharge levied by this section must be collected regardless of whether the income tax rate brackets in this chapter are changed, replaced or eliminated by an act of the legislature.”

    (And yes, there was no Oxford comma in that sentence. Barbarians!) 

    This does seem to leave open the possibility that the legislature could alter the other tax brackets down, to reduce or eliminate the net effect of this voter-approved tax increase.

    • #12
    • November 20, 2020, at 12:51 PM PST
    • Like
  13. Jerry Giordano (Arizona Patrio… Member

    I’ll add that while annoying, this tax increase bothers me less than the other statewide proposition approved in Arizona, which legalized marijuana.

    • #13
    • November 20, 2020, at 12:52 PM PST
    • Like
  14. kedavis Member

    Of course, once the Biden/Harris hyper-inflation sets in, EVERYONE will be making over $500,000.

    • #14
    • November 20, 2020, at 1:41 PM PST
    • 1 like
  15. Gary Robbins Reagan

    Jerry Giordano (Arizona Patrio… (View Comment):

    I’ll add that while annoying, this tax increase bothers me less than the other statewide proposition approved in Arizona, which legalized marijuana.

    I voted no on both just as I have always voted against raising the minimum wage.

    • #15
    • November 20, 2020, at 8:47 PM PST
    • Like
  16. David of Reno Coolidge

    Audacious (View Comment):

    Absolutely agree with @Seawriter. The sooner people get what they vote for “…good and hard” as Mencken said, the better.

    I fear the feedback will be slow and disconnected from the cause.

    • #16
    • November 20, 2020, at 9:19 PM PST
    • Like
  17. David of Reno Coolidge

    Jerry Giordano (Arizona Patrio… (View Comment):

    Gary Robbins (View Comment):

    The legislature can lower the tax rate by 3.5% on income above 250/500K and neutralize the initiative.

    • #17
    • November 20, 2020, at 9:21 PM PST
    • 1 like
    • This comment has been edited.