In anticipation of Arizona’s Governor Ducey speaking at our Taxes Now Conference on May 8th, and in light of the state’s 2.5% individual income tax rate, it is worth reviewing what Arizona gets right in terms of tax policy. With similar budgets and revenues, Utah and Arizona have a lot they could learn from each other, making this a worthwhile point of study.
Flat Income Tax Rate
Arizona has implemented a flat tax rate for tax year 2023 and moving forward, joining Utah as one of the 11 states with a flat tax. A flat tax comes with advantages to both government and taxpayers. It makes filing taxes easier and makes tax cuts more equitable. It also does not dissuade taxpayers from increasing their incomes and potentially being pushed to a higher tax bracket. A flat tax rate encourages high-earning individuals to relocate to the state with the assurance that they will not be penalized for their higher earnings. This provides both economic and human capital to the state bringing both financial and social advantages.
2.5% Income Tax Rate
Beginning in tax year 2023, Arizona will have a 2.5% individual tax rate.
Arizona has a competitive advantage over almost all its surrounding states (except for Nevada which has no income tax). This encourages people to move to the state, bringing their sales and property tax revenue, capital and skills with them. A larger population can fill employment shortages, increase state revenues without increasing taxes, and give the state more influence on a national level. A 2.5% income tax rate is also a modest burden on taxpayers, and while there is still room to reduce it further, it allows Arizonans to keep more of their money in their pockets. Of states with an individual income tax, Arizona has the lowest rate; arguably, this makes Arizona one of the most attractive states for taxpayers.
(Note: Utah’s individual state income tax rate is 4.65% for tax year 2023)
Revenue Triggers
When Arizona legislators voted to lower the tax rate as part of HB2900 and SB1828 in 2021, they anticipated moving to a 2.5% rate in tax year 2024. However, because they had made the reduction dependent on revenue triggers, this rate was able to be implemented in January 2023 – a whole year earlier. As part of the legislation, if General Fund revenues exceeded $12.8BN, the rate would drop to 2.5%. Revenues amounted to $16.7BN in 2022 – sooner than expected – prompting the expedited tax cut.
Utah could do the same. The state has run on a revenue surplus for several years, and elected officials have often mischaracterized much of the funds as “one-time” revenues, conveniently undermining the ability to implement a substantial tax cut. They have insisted that they cannot implement an ongoing tax cut with one-time money, and that revenues next year will drop. If this is truly the concern, revenue triggers address it while still making tax cuts possible. Your Taxpayers Association continues to work to reduce the income tax rate for all Utahns and to curb wasteful government spending which inhibits tax cuts.
Arizona and Utah have a lot in common in terms of budget and revenue; however, Arizona is poised to leap ahead of Utah with its low rate which will inevitably promote economic growth in the state. Sadly, this growth is growth that could have happened in Utah if our tax rates had been more competitive. As we look to surrounding states, it is important to learn from both their mistakes and their victories: Arizona’s 2.5% flat income tax rate is surely a victory we ought to learn from.