Guest Commentary: Income tax initiative would devastate small business

I’m a small business owner: I offer accounting, CFO, and CPA services to my clients, many of whom are other small businesses. I provide strategic and financial expertise to avoid risk, leverage opportunity, and maximize returns. In other words, I know good investments from bad ones.

The proponents of the “Invest in Education” initiative may have a laudable goal – improving our education system through providing additional revenues – however, I believe they have made several dire miscalculations. Arizonans should beware: this is a bad investment. The costs will far outweigh any potential gains.

Currently, Arizona has five income tax brackets ranging from 2.59 percent and topping off at 4.54 percent. With less than two percent separating the bottom from the top brackets, our state does not disincentivize individuals from working hard to make more money. This is especially true for the thousands of small businesses in our state.

The majority of small businesses in Arizona are S Corps and LLCs. One main difference between their organizational structure compared to large businesses (mostly formed as “C-Corps”) is how they are taxed.  Small businesses’ income is “passed through” to the individual side.  Meaning they pay personal income taxes on their small business profits.

The “Invest in Education” initiative proposes a complicated and confusing new income tax system in our state.  It increases our five brackets to seven and instead of each bracket applying one tax rate, each bracket is taxed two separate rates – a minimum tax liability based upon the upper threshold of the previous bracket plus a higher rate on the excess income over that threshold. Based upon this added complexity alone, it will cost people more to do their taxes as well as cost them more in taxes.

This proposal isn’t well thought-out. The people most damaged by this initiative will be small business owners. Doubling the top two rates is incredibly unfair to the little business that pays personal income taxes on business profits.  It will severely limit their ability to reinvest in their operations, hire people, and expand. It also puts them at a competitive disadvantage to larger corporations that are taxed at a flat 4.9 percent.

Ultimately, if passed, this proposition will drive start-ups, small businesses, and entrepreneurs to other states with a more competitive, less burdensome tax system that doesn’t punish their success. States such as Nevada and Texas will more than take advantage of Arizona’s short-sightedness.

Voters should also be aware that Arizona has what is called the Voter Protection Act. This locks in any initiative passed at the ballot box and precludes the elected Legislature from making any changes to the law unless they have a ¾ majority vote and they further the intent of the proposition. Effectively, this will make this new income tax system permanent and make it impossible to tweak in the future.  Arguably, the legislature will only have the ability to increase income taxes in the future. The primary reason we have a representative government and we elect a legislature at all is to determine a budget and relevant tax policy. I know the complexity of taxes, and I know the best way to debate and craft a modern, simple and effective tax system is not at the ballot box.

It would seem the intention of the backers of this initiative is to “soak the rich” by dramatically increasing the percentage of their wealth that they pay over in taxes.  But Arizonans shouldn’t be fooled.  As has occurred in California, other high-tax states, and at the federal level, those who choose to stay in Arizona and who have the most resources and influence will find ways to shelter their hard-earned income. The main way this will be achieved is through working the political process to instate protections and limitations to their tax liabilities.

My clients, the small business owner, will have no such advantage. We are not politically-connected, and we don’t have the power to hire lobbyists to work the Legislature. Because the legislature will be unable to make requisite fixes to the brackets and rates, tax credit programs and carve-outs will be the go-to mechanism; this will only further complicate our tax code as well as create greater inequities.

Ron Elwood, a Certified Public Accountant and small business owner, is the chairman of the small business committee opposed to the ‘Invest in Ed’ income tax proposal. 

Guest Contributor

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