Arizona Proposal for Automated Income Tax Cuts Sounds Benign but Would Cause Great Harm

The Arizona legislature is considering a proposal that would wreak enormous harm on rural areas, local governments, schools, and other vital services Arizona’s people and economy depend on, while delivering an unnecessary payout to already wealthy people through a series of new income tax cuts.

The plan is a wolf in sheep’s clothing: proponents claim it’s harmless, but its complex formulas hide a predatory, harmful outcome. It’s dressed up differently, but it’s ultimately the same kind of irresponsible, triggered income tax cuts being pushed in states across the country.

The proposal takes two forms, Senate Concurrent Resolution 1035 and Senate Bill 1577. Though they’d take different paths to becoming law — the resolution is a ballot question that legislators would put to voters without the governor’s approval and the bill is moving through the standard legislative process — they’d arrive at the same goal. Obscured by terminology like “structural surplus” and a complicated set of formulas based on state revenue and spending data, each proposal would produce a series of costly tax cuts — and could eventually eliminate the state’s income tax altogether — that would provide an outsized gain to wealthy taxpayers who need it least, at the ultimate expense of everyone else.

The measures have already cleared initial legislative hurdles in Arizona’s House and Senate and could come up for decisive votes any day.

The state’s individual income tax will generate about $6 billion this year. For context, that’s nearly as much as the state gave K-12 schools in its 2023 spending plan.

Arizona can’t lose revenue of that magnitude without doing great harm to children’s education and other vital services, such as medical care that people in the state receive and funding for roads, clean water, and other essential infrastructure. To make up the difference, the state would have to sharply raise other taxes like sales taxes or property taxes — both of which fall hardest on those with the least ability to pay.

This legislation would also deeply harm Arizona’s local communities. Under state law, cities and towns have received 15 percent of state income tax collections annually for about the past half-century, and that share is slated to be 18 percent next year. If the state sharply cuts or eliminates the income tax, though, that major revenue source for localities would wither, forcing cities and towns to raise existing taxes, introduce new taxes on their residents, or slash funds for schools, emergency response, libraries, community health clinics, and more.

Exactly how fast the income tax — and the funds it provides to cities and towns — would decline would depend on the economy over the next few years. The legislation’s formulas would force especially sharp tax cuts in periods after a recession, for example, when a recovering economy typically causes revenues to grow faster than spending.

How these tax measures work is seemingly contradictory: the state’s income tax rate would fall when revenues grow more quickly than expected but stay at the same, lower level during times when states need more revenue, not less — such as during a recession or other state emergency. And the plan’s proposed rate cuts appear to be permanent, with each additional rate cut taking more away until the income tax is gone — regardless of the state’s needs.

If these changes are made, they’ll be exceedingly difficult to undo. Due to past legislative action, raising taxes of any kind in Arizona requires supermajority votes of both legislative houses. So once tax cuts are in place they are hard to reverse, even when a large share of the state’s residents see the need.

If enacted, the Arizona tax plan would also further increase the income and power of wealthy interests in the state at the expense of middle- and lower-income families.

Income and wealth inequality has grown in Arizona, while the state’s legislature and courts have recently taken several actions that shift even more of the state’s income to these wealthy interests. Policymakers and the courts ignored public will after Arizona voters approved increasing taxes on millionaires to fund public schools. Instead, the legislature cut income taxes, particularly for high-income people, and restricted voters’ ability to ever again tax wealthy people via the ballot box.

The complex formulas and innocuous-sounding language of the two proposals give them a benign appearance. But if enacted, the legislation would reveal a harmful impact, diverting revenue from schools, communities, and services that working families and small businesses need to cut taxes for the wealthy.