ARIZONA IS CURRENTLY THE NINTH TAX FRIENDLIEST STATE IN THE UNITED STATES

By Jacob Pierce.

BACKGROUND

One of the leading publications on tax related issues, Kiplinger, in a recent state-by-state guide, named Arizona the ninth best tax state (i.e., most friendly) for individuals and businesses. Kiplinger measured this success by looking at a sum of sales, income, and property tax paid in each state by hypothetical filers. As many fiscal conservatives believe is the best course of action, Governor Ducey credited this achievement to keeping taxes simple yet fair, which has allowed taxpayers to keep more of the money they earn. It is hard to deny some of the positive effects that have resulted from this simplification of the tax code in Arizona. Overall, Arizona taxpayers are paying almost $1,800 less in combined state and federal taxes. Although this is great for current residents of Arizona, the benefits extend further than present day. It was announced that over the 2019 fiscal year, Arizona’s Rainy-Day Fund reached a record level of $1.014 billion. Moreover, because Arizona was running on a budget surplus of almost a billion dollars before the pandemic hit, it has allowed the state to operate through the pandemic on only a minor budget deficit. Lastly, this success, pre-pandemic, permitted Arizona’s economy to expand to where the state government was able to invest resources in public education, public safety, and infrastructure.

HOW TO BECOME A TAX FRIENDLY STATE?

Often, there are common trends in how state governments ease tax burdens on their citizens. Specifically, there are three types of taxes that states can lower across the board for most of their taxpayers. A big move that states often take is to reduce or eliminate their state income tax requirements. For example, six states in the top ten of Kiplinger’s list impose no state income tax requirement on their citizens. Furthermore, many taxpayer’s own property, so they pay annual state property tax. Working to keep property taxes low is not always an easy task for state and local governments, especially when another goal is often increasing economic development. However, many states manage to do it. The states in the top ten of Kiplinger’s list have an annual average property tax from $635 per $100,000 in home value, like in Wyoming, which is number one on Kiplinger’s list overall (i.e., the most tax friendly state overall), to $2,296 per $100,000 in home value in New Hampshire, which is number ten on Kiplinger’s list. The last common approach is to lower the average state and local sales tax rates. Sometimes, a low sales tax rate can balance out a higher state income tax rate. States in the top ten impose anywhere from 0% sales tax like in New Hampshire to a whopping 9.21% sales tax rate like in Washington state. It is worth noting that Washington is one of only two states in the top ten that currently has a sitting Democratic Governor. One final tax relief that Kiplinger points to as influencing this list are gas taxes that drivers pay at the pump. States in the top ten impose gas taxes anywhere from 14 cents a gallon, like in Alaska, which checked in at number five overall, to 49 cents a gallon like in Washington, which is number six on Kiplinger’s list.

MEASURES TAKEN BY ARIZONA

As was mentioned earlier, Arizona checked in at number nine on Kiplinger’s list. As for state income tax, Arizona has a four-tiered system that imposes a 2.59% tax rate on individual filers who have a taxable income of $26,500 or less per year and on joint filers who combine to make $53,000 or less per year. For individuals who have a taxable income of $26,501–$53,000 and joint filers who have taxable incomes of $53,001–$106,000, Arizona imposes a 3.34% tax rate. For individuals who have a taxable income of $53,001–$159,000 and joint filers who have taxable incomes of $106,001–$318,000, Arizona imposes a 4.17% tax rate. Lastly, for individual filers who make $159,000 or more a year in taxable income and joint filers who make $318,000 or more a year, Arizona imposes a 4.5% income tax. Kiplinger points out that this final tax bracket represents a relatively high monetary threshold, meaning that only relatively few will be taxed at Arizona’s highest tax rate. Furthermore, Arizonians pay on average $754 per $100,000 in home value in property taxes and an average of 8.39% in state and local sales tax. One of Arizona’s best statistics is that it only imposes a 19 cents per gallon gas tax, which is well below the national average.

Governor Ducey has pointed to other specific measures on his website that his administration believes were the difference in making this list. The first is the support for our veterans in Arizona. In 2018, Arizona increased the states individual income tax exemption for retired military veterans from $2,500 to $3,500, permitting these veterans to keep more of their money. Also, Arizona has increased the depreciation deduction on the purchase of new equipment. A depreciation deduction permits businesses to declare a tax deduction for the entire value of the property or asset purchased in the first year under certain circumstances. Furthermore, in 2015, with the goal of encouraging donations that will help vulnerable children, Arizona issued and passed legislation expanding the types of charitable organizations eligible for tax credits. Lastly in 2016, Governor Ducey signed a bill allowing taxpayers to make these contributions retroactively.

MOVING FORWARD – WILL ARIZONA MOVE BACKWARDS IN REGARD TO TAX FRIENDLINESS? 

Moving forward, many fiscal conservatives and business owners, who promote supply-side economics principles, would like to see Arizona move to abolish the state income tax requirement like many other states in the top ten have. Some believe this move would enable small business owners to have more confidence in their ability to hire more employees without compromising their bottom line. However, many worry that Arizona could move in the opposite direction when it comes to state income tax. Prop 208 is a ballot measure in Arizona this November that would unilaterally, if passed by voters, create an additional 3.5% state income tax requirement on individual filers who make above $250,000 a year and joint filers who make at least $500,000 a year. The additional tax requirement would be on top of the 4.5% state income tax rate that individuals and joint filers who fit in this tax bracket already pay at the state level. This measure could have a massive impact on small businesses and particularly, small business owners who supply many jobs for citizens of the state. These concerns are magnified given the immediate impact that an increase in state income tax, on some, could have on economic growth coming out of the COVID-19 Pandemic.

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By Jacob Pierce.

J.D. Candidate, 2022

Jacob is a 2L staff writer from Michigan but a now proud Arizona resident for life. Prior to law school he received a B.A. in Political Science from the University of Michigan. Outside of law school, Jacob enjoys playing in his amateur hockey league, trying new restaurants with his fiancé, and taking his Poodle hiking. If he could be anywhere in the world, it would be the golf course.

The opinions expressed herein are those of the individual contributors to the ASLJ Blog and should not be construed as the opinions of the Arizona State Law Journal or the Sandra Day O’Connor College of Law at Arizona State University.