Common Sense Institute (CSI) released The Economic Implications of Repealing the 3.50% Surcharge & Moving to a 2.50% Flat Income Tax.
In 2020, the simplicity and relatively low tax rate enjoyed by Arizona residents was put in jeopardy after the passage of Proposition 208. The measure would have imposed a new surcharge on incomes over $250,00 and raised the state’s top rate to 8.00%. “The state would have jumped from the 40th highest rate to the 9th highest,” explained CSI Director of Policy & Research, Glenn Farley, who authored the study.
Since then, however, a State Court decision has invalidated the surcharge and policymakers enacted a 2.50% flat individual income tax. “Arizona will soon be the 11th state in the nation to move to a flat rate and rank as the lowest income tax rate in the country among states that levy an income tax,” continued Farley.
CSI used the REMI dynamic economic simulation model PI+, to estimate the combined 10-year effects of repealing the 8.00% progressive state income tax and replacing it with a single, flat 2.50% income tax. Specifically, CSI found that by 2032:
- Arizona would have about 58,800 more employed workers relative to a world where the 2.50% flat tax did not take effect and the Prop 208 surcharge did.
- State GDP would increase by approximately $11.9 billion.
- Real per capita disposable income would be $684 higher.
- Due to these economic offsets, state and local government spending on all services would be reduced by $1.4 billion on a dynamic basis, versus nearly $4 billion on a static basis without this growth (after accounting for assumed future revenue growth).
According to Farley, since last year – when the state originally passed the 2.50% flat tax plan – revenue collections have continued to exceed forecast, by more than half-a-billion last fiscal year and on track to beat the enacted forecast by nearly $2 billion this year.
The study finds that by the end of FY 2025 the General Fund will have added nearly $6 billion in unanticipated new revenue at current growth rates – versus roughly $3 billion expected last year and more than enough to cover the $2 billion cost of the 2.50% flat tax.
“The bottom line, Arizona’s economy is in a much better position with the passage of the flat tax,” said Farley. “Arizona is fostering job growth, higher revenues and a better economic climate for taxpayers.”
Read the full study here.
Common Sense Institute is a non-partisan research organization dedicated to the protection and promotion of Arizona’s economy. CSI is at the forefront of important discussions concerning the future of free enterprise in Arizona and aims to have an impact on the issues that matter most to Arizonans. CSI’s mission is to examine the fiscal impacts of policies, initiatives, and proposed laws so that Coloradans are educated and informed on issues impacting their lives.
