Common Sense Institute: Spending, not revenue, to blame for fiscal shortfall

A new policy brief by the Common Sense Institute (CSI) challenges the narrative coming from some corners that Arizona’s flat personal income tax is to blame for the state’s projected $1.6 billion budget shortfall. The report, titled Flat Tax & State Budget Myths and Facts, finds that robust revenue growth has continued since implementation of the 2.5% flat tax—and that spending, not tax policy, is the real driver behind the state’s fiscal strain.

“The data simply don’t support the claim that the flat tax has gutted Arizona’s budget,” said Glenn Farley, CSI’s director of policy and co-author of the brief. “The state has a spending problem, not a revenue problem.”

Key findings:

• Revenues remain strong: Since the flat tax was enacted in 2022, General Fund revenues have grown at an average rate of 4.5% annually, exceeding post-Great Recession averages. Arizona is bringing in $1.9 billion more today than before the tax went into effect.
  
• Spending outpaced growth: From 2022 to 2024, state spending surged by nearly 40%—more than four times the long-term trend. Had spending been held to historical averages, Arizona would be facing a $4.3 billion surplus instead of a shortfall.
  
• Cities benefited: The flat tax law also increased the share of income tax revenues distributed to cities and towns, yielding an additional $250 million in shared revenue last year alone. Local governments are currently running historic surpluses, CSI reports.
  
• Education funding increased: Despite flat or declining enrollment, per-pupil spending in Arizona public schools has climbed to a record $15,100—up 30% since FY2016 when adjusted for inflation.
  
• Economic growth is strong: Since 2015, per-capita personal income in Arizona has increased by 68%. CSI attributes this growth in part to pro-growth policies like the flat tax and tax code modernization efforts such as HB 2822.

Farley and co-author Thomas Young caution against reactionary calls to repeal the flat tax or impose new income tax surcharges. Their research estimates that reversing recent tax reforms would cost the state nearly 59,000 jobs and reduce GDP by $11.9 billion over the next decade.

“Policymakers must resist the temptation to view tax increases as a quick fix,” Farley said. “Raising taxes now would ultimately leave Arizona with fewer resources for priorities like education, infrastructure, and public safety.”

Arizona Chamber of Commerce & Industry President and CEO Danny Seiden said the findings affirm what the state’s job creators have long known.

“Arizona’s flat tax is doing exactly what it was designed to do—strengthen our economy, attract new investment, and put more money in the pockets of working families,” Seiden said. “This report makes clear that it’s not tax policy causing budget stress, it’s unchecked spending. We should stay the course on pro-growth policies that have made Arizona a national leader.”

As lawmakers and stakeholders debate the state’s fiscal future, the CSI report underscores the importance of disciplined budgeting and long-term economic planning. “Arizona’s flat tax was never the problem,” the authors conclude. “Unchecked spending was.” The full report is available at CommonSenseInstituteAZ.org.