Advocates of an initiative to nearly double Arizona’s highest income tax rate claim their plan will impact only wealthy individuals and couples, but taxpayer advocates are sounding the alarm over a provision in the measure’s language that dismantles an existing tax law that protects low and middle-income taxpayers.
The Arizona Legislature in 2015 adopted a tax law designed to protect individuals from being inadvertently bumped up to a higher tax bracket due to a modest increase in pay.
Known as tax indexing, this adjustment of tax rates keeps pace with inflation and prevents lower and middle-class individuals from paying higher income taxes when they are not experiencing any real increase in purchasing power.
According to a June 20 memo by Arizona Legislative Council General Counsel Ken Behringer and Executive Director Michael Braun, however, the proposed initiative would reverse this tax relief on all taxpayers.
State House Speaker J.D. Mesnard says he’s concerned about the proposed policy reversal.
“If this initiative passes, every Arizona taxpayer — rich and poor alike — will face an inflationary tax increase every single year,” Mesnard said.
According to a fiscal analysis from 2015 when the indexing law was passed, this reversal would result in a $25 million tax increase this year alone.
“It’s difficult to tell whether eliminating the adjustment of tax brackets for inflation was an intentional move or sloppy lawmaking,” Sean McCarthy from the Arizona Tax Research Association said. “Either way, the result is an immediate tax increase on everyone and an annual tax increase each year thereafter if approved. The lack of disclosure of this change on the petitions is a huge transparency problem.”
Currently, 60 percent of individual income taxes paid are by head of household filers who earn less than $250,000 as an individual or $500,000 for a married couple. Therefore, any tax hike triggered by the elimination of the indexed brackets will be paid primarily by poor and middle-class families.
“Arizona’s economic climate is red hot right now,” Arizonans for Great Schools and a Strong Economy Chairman Jaime Molera said. “If you look at all the national data it shows that Arizona is one of the leading states in job growth. We’re one of the leading states in wealth creation. We’re one of the leading states in people actually investing in a multitude of industries. This basically would take a wet blanket and just put it over the entire state of Arizona when you have a tax increase at all levels, which this would do.”