The end of Arizona’s economic growth?

National economists and policy experts are closely watching Arizona–not because of our substantial economic growth or business friendly climate, but because all of the state’s progress may come to a screeching halt if the ballot initiative to double the income tax rate becomes law in November. 

According to the Tax Foundation, Arizona has been well-positioned in recent years to attract businesses and individuals looking to relocate from California. “States like California have a lot to offer that can overcome a high cost of living and high tax burdens for many businesses, but eventually there’s a tipping point, and Arizona has benefited from being able to provide a viable, and far more affordable, alternative,” said Jared Walczak, senior policy analyst at the Tax Foundation. But he cautioned that doubling the income tax rate would eliminate this competitive advantage.

“For certain, almost doubling the state’s personal income tax rate would adversely affect the state’s ability to solicit and secure industries and businesses with higher paying jobs,” said Mike Mullis, president and CEO of J.M. Mullis, Inc., a company that specializes in professional project location. Mullis says Arizona’s progress in becoming a more competitive relocation destination, and that the state is on the move to market to higher value-added industries and businesses that pay higher wages.

From a tax standpoint, Arizona would quickly become one of the nation’s most expensive places to create or grow a business. “Overnight, Arizona would go from having a low income tax to levying the fourth-highest top rate in the country, behind only California, Oregon, and Minnesota,” said Walczak.

Since the majority of small businesses are pass-through businesses, which means their taxes flow through to the individual income tax returns of their owners, a 9 percent top income tax rate also falls directly on small businesses. “Maybe you can get away with that in New York City or the Silicon Valley, but such rates in Arizona would weaken the state’s ability to compete,” Walczak said.

But how does doubling the income tax rate impact Arizona’s ability to attract and retain a qualified workforce?

Mullis says Arizona is well-positioned to compete for higher wage jobs but establishing the fourth highest income tax rate will make it difficult the attract talent.

“In an already tight labor market where young, new talent entering the workforce is essential to filling numerous positions, a significant tax hike will only be cause for increased difficulty with hiring,” Denise Mott, vice-president of labor and workforce development of J.M. Mullis said. “An affordable place to live is an important factor to attracting and retaining qualified labor.”