New study: Prop. 208 would cost Arizona $2.4 billion in tax revenue

A new report that analyzes the economic impact of Proposition 208 in Arizona shows that the measure would hurt all income levels, resulting in lost tax revenues for critical services like child protective services, public safety, and higher education.  

If passed by Arizona voters on Nov. 3, the proposition, known as the “Invest in Ed” initiative, would put the state in the top 10 of the highest income tax states in the nation. 

That would, at a minimum, cause a $2.4 billion reduction in local and state tax revenues over the next decade due to lost business attraction and expansion, jobs and wages, the report states.  

“Small businesses across the country have closed their doors because of the COVID-19 pandemic, and now small business owners in Arizona may be dealt a further blow under Proposition 208,” said Victor Riches, president and CEO of the Goldwater Institute that conducted the analysis. “As this report shows, the backers of Proposition 208 want to turn Arizona into California or New York—where crushing tax burdens are driving job creators from the state and bankrupting their own futures.” 

The study, Good for Special Interests and Unions, Bad for Arizona: The Economic Impacts of Proposition 208, was conducted by the Goldwater Institute’s director of education policy, Matt Beienburg, and Jim Rounds, a senior fellow.

Overall economic impact would offset benefits 

Under the initiative, Arizona’s top income tax rate would be raised from 4.5 to 8 percent – almost an 80 percent percent increase. 

Proponents of the measure want to tax high income earners to provide funding for K-12 education. 

But the analysis indicates that any benefits to education would be offset by the damage such a massive tax hike would have on the overall economy.   

“The promised increases in teacher pay and reductions in classroom size will be negligible. However, the economic harm from the measure will be significant,” said Rounds, adding that Arizona should be able to design “a better plan to help both the economy and K-12 education.”  

All industries and incomes will feel it 

To determine the potential impact of the ballot initiative, the economists analyzed the expected economic fallout, accounting for job losses, suppressed wage growth, dampened business recruitment, and harm to the state’s economic base. 

Should Proposition 208 become law, the report findings show that: 

• A minimum of $2.4 billion in state and local tax revenues will be lost As more businesses fail under the weight of the tax hike, job growth and wages would suffer. If the initiative succeeds, a conservative economic modeling of the financial impact indicates that a minimum of $2.4 billion in tax revenues would be lost over the next decade. 
• Cuts to social services, public safety, and higher education The mandate would cause a minimum of $120 million in lost revenues annually to the state’s general fund. Since the proposition requires any decrease in state revenue to be made up from other sources, that would likely put critical services on the chopping block.
• Arizona would see greater job losses than the 2001 downturn Under the most conservative scenario, job losses will reach a minimum of 124,000 over the course of 10 years. That’s four times greater than the losses experienced during the 2001 economic downturn.
• New business expansion would drop The risk to new business attraction and expansion could be as large as a 25 percent reduction.
• Proposition 208 won’t affect only high-income earners The measure will impact businesses that file under the individual, not the corporate tax code. Passage would jeopardize the employment of thousands of plumbers, dry cleaners, nurses, retail store employees, mechanics, janitors, and others throughout the state.

About half of the Arizonans affected will be small business owners Fifty percent of those whose tax rates will be directly targeted will be small business owners. These individuals represent thousands of job creators and they will bear a disproportionate load of the Invest in Ed price tag.

There are better ways to fund education

If voters pass the initiative, Arizona’s standing as a role model for economic growth could quickly erode, Round said.  

“Proposition 208 will impact the state’s ability to be a national leader in economic growth over the next decade. Arguments for additional education funding need to come from diligent research on individual budget items, not from broader generalizations about overall funding. Changes to public policy of this nature also need to be based on reliable return on investment calculations.” 

To read the full report, go to Good for Special Interests, Bad for Arizona.