A new report that analyzes the economic impact of Proposition 208 in Arizona shows it will likely place Arizona 8th or 9th in the nation for the highest income tax rates. Negative unintended consequences will likely follow, two nationally renowned economists said Tuesday.
The ballot initiative is intended to tax the state’s highest earners, but those at the bottom of the income scale would suffer most, said Stephen Moore, an American author and television commentator on economic issues, who released the report during a press conference hosted by the Arizona Chamber of Commerce and Industry.
“It’s not the rich people that are going to be hurt. The rich can pay higher taxes or they can go somewhere else. It’s really the people at the bottom who will lose jobs,” Moore said. “About half the impact of this tax will be paid not by big corporations and not, you know, the very, very wealthy, but will be paid by the small business owners.
Moore and fellow economist and researcher Dr. Arthur Laffer conducted an analysis of how tax rates have affected states over the past 30 years for the report, “Arizona’s Proposition 208 Loses Jobs and Harms Small Businesses.”
What they found is that almost all states with lower income tax rates perform better than higher income tax rate states in most economic indicators.
Initiative would almost double top tax rate
Proponents of the measure, also known as Invest in Ed, want to tax high income earners to provide funding for K-12 education.
Under the initiative, Arizona’s top income tax rate would be raised from 4.5 to 8 percent – almost an 80 percent increase for individuals who earn $250,000 and joint filers who earn $500,000.
Couldn’t come at a worse time for small business
The tax increase would come at a time that could further devastate a large number of small businesses that may be affected by the new tax, said Laffer, who is known as the “Father of Supply-side Economics” for inspiring a world-wide tax-cutting movement in the 1980s.
Those most at risk are small businesses still struggling to keep their doors open during the pandemic.
Simply put, Arizona would move from having the 13th lowest income tax rate on small businesses to the 8th or 9th highest in the nation, Laffer said.
Raising taxes when the nation is trying to recover from the COVID-19 is “inappropriate and foolish,” Laffer said.
Almost all states with lower tax rates perform better
Such a drastic increase would dampen investment and growth, and research backs that up, they said.
In conducting their research, the economists examined how similar types of tax increases over the past 30 years have affected states. Almost all states with low or zero income tax rates performed better in most economic indicators than those states with high tax rates, they found.
High tax states saw less revenue for government responsibilities, including education, Laffer said.
An analysis of the 11 states that introduced income taxes since the 1960s shows they are at the “very bottom of performance” in not only economic and population growth, but revenue for public services, Laffer said.
Harsh implications for Arizona
Using data from other states, the economists measured the impact Arizona’s Proposition 208 would likely have on jobs, wages, interstate migration, tax revenue collections, state competitiveness, and small businesses.
They found that all areas would likely suffer, making “Arizona residents poorer and the state’s economy less competitive.”
Among their findings:
•An estimated 200,000 jobs and about $25.5 billion in personal income would be lost over the next 10 years.
• Fifty percent of the tax would be borne by small business owners and operators that typically generate from half to two-thirds of the jobs in a state.
• Arizona’s economic competitive position among the 50 states would fall from No. 10 to No. 16, according to the ALEC-Laffer competitiveness index.
•The state would lose 700,000 people in net instate migration over just the next decade.
•Wage growth would decline in the state and after a decade average household income would be roughly $6,000 lower with the tax hike.
•A loss of businesses, jobs and taxes from in-migration would reduce by half the proponents estimate of $1 billion in tax revenue gains
“The preponderance of the evidence shows a negative effect when states raise income taxes,” Laffer said. “That’s because we’re a country where people can move across borders. We’re a very mobile population. Businesses, corporations and financial capital can move across borders and they do.
“They move to places where they have the best pro-growth and pro-business atmosphere.”
About Stephen Moore
Stephen Moore is FreedomWorks’ chairman of the Task Force on Economic Revival. He previously served as president of the Club for Growth, chief economist of the Heritage Foundation, and as a member of the Wall Street Journal editorial board.
About Arthur Laffer
Arthur Laffer is the founder and chairman of Laffer Associates, an institutional economic research and consulting firm, as well as Laffer Investments, an institutional investment management firm utilizing diverse investment strategies. Dr. Laffer’s economic acumen and influence in triggering a world-wide tax-cutting movement in the 1980s have earned him the distinction in many publications as “The Father of Supply- Side Economics.”