New Analysis: Prop 207 = $1.25 billion tax increase on lower and middle-class families

In a Joint Legislative Budget Committee fiscal memo obtained by CBN, budget experts say the cumulative 10-year fiscal impact of a provision in Proposition 207 would increase taxes on lower and middle-class families by $1.25 billion.

Although supporters of the ballot proposition to double the income tax claim the initiative is only a tax increase on high earners, the new JLBC memo bolsters a June analysis from the non-partisan Arizona Legislative Council, which revealed everyone’s taxes will increase, rich and poor alike.

“The proponents of Proposition 207 can market their initiative as a tax on the wealthy all they want, but that doesn’t change the fact that every single Arizona taxpayer will be hit with a tax increase if their risky scheme becomes law,” said Speaker of the Arizona House of Representatives J.D. Mesnard. “All of our work to protect the middle class from inflationary tax increases will be erased if the tax hike crowd gets its way.”

To prevent “bracket creep,” the Arizona Legislature and Governor Ducey enacted a law in 2015 to permanently adjust tax brackets to keep up with inflation. This adjustment prevents lower and middle-class individuals and families from paying higher income taxes when they are not experiencing any real increase in purchasing power.

The new JLBC memo indicates that the fiscal impact of repealing the income tax indexing would grow for two main reasons:

1. Tax brackets would shift upward by 2.26 percent each year due to the expected long-term rate of inflation.
2. Tax liability growth in general would amplify the impact of bracket indexing, estimated to be 4.8 percent annually.

The inflation estimate is based on IHS Markit’s forecasted average annual growth rate of the Phoenix Metropolitan Consumer Price Index (CPI) between TY 2019 and TY 2027.

Former representative Justin Olson, the original sponsor of the income tax indexing bill, expressed concern about the tax increase on families.

“A $1.2 billion tax increase will devastate our economy and bring real harm to hardworking families all across Arizona,” Olson said. “This tax increase would give Arizona the fifth highest tax rate in the country. This is a job-killing tax rate that Arizona voters should reject.”

Income tax bracket indexing was a major topic of debate during a recent legislative hearing to approve the formal ballot proposition summary, as well as in the courtroom.

Proponents of the ballot measure have claimed that the initiative language does not repeal indexing, but other legal experts disagree.

According to a June 20 memo by Arizona Legislative Council General Counsel Ken Behringer and Executive Director Michael Braun, the proposed initiative would reverse this tax relief on all taxpayers. This analysis was also confirmed by an internal memo from the Arizona Department of Revenue, which was subpoenaed for the court case.

“ADOR concurs with Arizona Legislative Council and JLBC that the initiative, if passed, will also increase taxes for people that do not fall into the new tax brackets” Deputy Director Grant Nulle said in the memo.

“Increased revenues arising from the reversion of tax brackets to pre-inflation indexing levels would be deposited in the General Fund,” Nulle wrote.

It is anticipated that the state Supreme Court will deliver a decision by the end of the month on whether the tax increase measure will appear on the November ballot.