Their Take: Failure to Adjust for Inflation Makes Prop. 208 Destructive

The threat to Arizona small businesses posed by Proposition 208’s 77.7% income tax increase will only grow each year due to the initiative’s failure to adjust to annual inflation increases, warned the state’s leading small-business association today.

“Without an annual inflation adjustment, Proposition 208 goes from bad to worse,” said Chad Heinrich, Arizona state director for NFIB. “This initiative should be known as ‘The Small Business Destruction Act.’ Ten years from now, $250,000 won’t have the same buying power as it does today, yet more taxpayers will find themselves falling into Proposition 208’s new 8% income tax rate.”

Federal and state tax brackets are pegged to inflation and readjusted each year in order to ensure that gains in income but not in actual wealth don’t result in a backdoor increase by vaulting taxpayers into a higher tax bracket. Arizona adopted the policy in 2015.

Proposition 208’s authors, however, did not include an annual indexing provision. As a result, the number of single filers earning more than $250,000 and joint filers earning more than $500,000 annually will grow each year even as their buying power diminishes with inflation increases.

Heinrich says Proposition 208’s ever-widening net cannot be trimmed back by state lawmakers. “The state Legislature, regardless of the party in control, cannot retroactively amend Proposition 208 to account for inflation. Due to existing state law, only another vote of the people can roll back this huge blow to small business taxpayers. This is another example of the dangers of ballot box budgeting.”

Proponents of the initiative say the tax increase will affect relatively few taxpayers, a claim Heinrich says is easily refutable by a plain reading of the initiative language.

“Whether this was intentional or just plain sloppy, the number of taxpayers subject to this huge tax increase will grow year after year. From startups to longstanding enterprises to businesses newly profitable after years of breaking even or suffering losses, more small businesses will be impacted by Proposition 208 than the proponents are letting on. Not only does Proposition 208 not align with state and federal tax policy on inflation, but the proponents’ rhetoric doesn’t match reality.”

For more than 77 years, NFIB has been advocating on behalf of America’s small and independent business owners, both in Washington, D.C., and in all 50 state capitals. NFIB is a nonprofit, nonpartisan, and member-driven association. Since its founding in 1943, NFIB has been exclusively dedicated to small and independent businesses and remains so today. For more information, please visit nfib.com.