Arizona’s Proposition 208 Would Add Fifth Income Tax Bracket

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In a recent Corner post, I discussed Arizona’s Proposition 208, which would introduce a new fifth income tax bracket, raising the top rate from 4.5 percent to 8 percent.

As an editorial in today’s Wall Street Journal points out, the new top tax rate would “move the state to the 10th highest income-tax rate in the country, from 11th lowest today, according to the Tax Foundation. Arizona would move closer to California (13.3% top rate) than Nevada (no income tax).”

The proposed tax increase is being justified by the need to increase spending on education, a claim I discuss in my earlier post and which the Journal looks at too.

One angle to the debate is what effect the tax increase will have on the numbers of people moving in and out of the state, a number, of course, which will have a significant bearing on future tax revenues.

The Wall Street Journal:

Economists Art Laffer, Erwin Antoni and Steve Moore [admittedly none of them tax enthusiasts]  estimate that the tax increase would result in the migration to Arizona of 700,000 fewer people, 237,000 fewer jobs created, and a reduction of $25.5 billion in personal income growth over the next 10 years.

The authors looked at IRS data and found that since 1992 Arizona has gained more than 201,000 tax returns and almost $12 billion in adjusted gross income (AGI) from California. Illinois has lost more than 65,000 tax returns to Arizona and about $5 billion in AGI over the same period. New York has lost 37,000 tax returns and $2.3 billion in AGI to Arizona.

No doubt some of these are retirees looking for warmer climes, but snowbirds have other state options and can also live in Arizona less than six months a year and not pay the state tax. Supporters say the tax increase would yield $1 billion in new revenue, a huge expansion in a state with total expected revenue of $12.5 billion in 2021. Yet that revenue estimate for the new tax is based on static figures, which don’t take into account taxpayer behavior. It is likely to yield considerably less, as tax increases typically do.

Arizona’s (Republican) governor is opposed to the measure, but Arizona is a state that, politically, is in transition.

The Journal:

A Sept. 30 poll by Suffolk University and USA Today found 47% support for 208 compared with 66% in a Monmouth poll two weeks prior. But opponents are being heavily outspent [Quite a bit of that comes from out of state].

On the other hand, in a report for the Arizona Republic datelined October 15 (and updated on October 17), Lily Altavena writes:

The majority of registered voters support the education measure, according to the poll from Monmouth University in New Jersey: 60% said they would vote in favor, while 34% said they would vote the measure down.

However, the measure appears to have lost support from Republicans. Last month, about 53% of Republicans polled supported the measure, compared with 31% now.  Support among Democrats remains high, at 87%, and is at 65% among independents.

The Journal notes that the proposed tax increase will weigh all the more heavily “given that the 2017 tax reform limited to $10,000 the federal individual deduction for state and local taxes.”

I’m old enough to remember being told that this “reform” would mean that blue state governments would change their tax raising ways. Heretic that I am (yes, yes, I’m a Manhattan dweller, don’t @ me), I am also old enough to remember arguing that this was nonsense. Taking a look at the latest round of proposals from Illinois and California, it looks (so far) as if I was right.

But again, whether 208 passes will be a very interesting indicator of Arizona’s future political direction.

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