Economic development advocates look to mitigate damage from Prop. 208 passage

Dozens of economic development and business groups were disheartened in the wake of the passage of Proposition 208, which imposes a high personal income tax on the state’s top earning individuals. 

They are bracing for the impact and strategizing on how to mitigate the damage. The tax increase will impact tens of thousands of small businesses in Arizona who file their taxes under the individual tax code, not the corporate tax code.

“We are obviously disappointed that this has passed, but not entirely surprised because we had been closely monitoring the polling data from the beginning and it seems pretty clear that the more voters learned about the downside of this proposition, the less likely they were to vote in favor of it,” said Suzanne Kinney, president of the Arizona chapter of the NAIOP that represents the commercial real estate industry.

Reading the small print

With more than 3.2 million votes cast, the proposition was winning by 51.75 percent to 48.25 percent on Friday. 

Many voters simply were not aware of the true implications of the tax hike, Kinney said. They assumed it would only affect wealthy individuals, not small business owners. 

“We ran out of time to get that message across to a sufficient number of voters and that’s where we saw a very narrow win for this proposition. That being said, it will be the law of the land, and we’re looking for ways to move forward and mitigate the damage that it could cause.” 

Bracing for what’s ahead

Under the new tax hike, Arizona is now one of the highest income tax states for top earners. 

The marginal income tax rate will almost double for individuals who earn $250,000 or more, and couples earning $500,000 or more, from 4.5 to 8.0 percent, a 77.7 percent increase.   

An analysis of IRS data—supplemented by additional modeling and adjustments to identify only those Arizona taxpayers directly affected by the rate increase—reveals an estimated 90,000 Arizona tax filers will be affected, according to the Goldwater Institute. Of these, more than 50 percent would be small business owners.

Unintended consequences

Also, the drafters of the proposition failed to adjust for inflation, said Chad Heinrich, Arizona state director for the National Federation of Independent Business (NFIB), a leading voice for small business.  

“Prop. 208 ignores a well-established tenet of taxpayer protection that drives a stake further into the hearts of Arizona small business owners,” Heinrich said. “Without an annual adjustment for inflation, each year, more small business owners will continue to find themselves subject to the 77.7 percent increased income tax rate. Even those businesses with steady, but not increasing, business income will eventually be snared in the Prop. 208 trap.”

Moving forward

Economic development professionals said the new tax will make it tougher to attract new investment to the state. 

They are already strategizing on how to move forward and mitigate some of the damage including:

New tax strategies to help small businesses

There may be some lifelines on the horizon that would allow for some creative tax strategies to help, said Tim Lawless, president of Commercial Real-estate Executives for Economic Development (CREED).

With the new Prop. 208 tax and the passage of many school bond and override elections bringing in more dollars for education, that could free up more tax dollars for other uses, he said. “Wayfair” legislation signed by Governor Doug Ducey last year also is generating new tax revenues for the state. The legislation requires remote sellers and marketplace facilitators to begin filing and paying transaction privilege tax. 

Lawless, whose organization has fought to bring down Arizona’s commercial property rates, said another reduction there could help the state remain competitive, he said. 

“Every major task force that has looked at our tax code over the past 25 years has identified high commercial property taxes as the top impediment — even more than income taxes — to job creation,” said Lawless, referring to previous groups like the Citizen Finance Review Commission. 

Ramp up marketing of Arizona’s business-friendly attributes 

Kinney, of NAIOP, said her organization is moving into overdrive to work “hand-in-hand” with economic develop groups statewide and economic development departments of cities and towns to communicate Arizona’s many remaining positive attributes including:

-More affordable housing than many other markets

-Affordable land prices

-An abundance of office space

-Excellent universities that produce high level employees

-Excellent community colleges that provide a steady workforce for mid-level positions 

-Good infrastructure with easy access to different markets

“We are also looking at an industrial boom in the West Valley with all the distribution centers coming on line. That still remains,” Kinney said. “We still have an excellent interstate system where companies can get their products from those distribution centers in less than a day to tens of millions of consumers.”

Take a new look at Arizona’s voter ballot initiative process   

Kinney and others are most concerned that companies and industry will pass over Arizona for neighboring states with lower or zero income taxes. 

She said the state needs to take a look at Arizona’s voter ballot initiative process that has been largely taken over by out-of-state interests, making campaigns harder and more expensive to battle. Voters often are left in the dark about the nuances of such initiatives.

Once an initiative is locked in to state law, reversing it is no simple task, often requiring a new voter initiative to be approved. An attempt by the Legislature to alter a voter-approved measure requires a three-fourths vote of the state Legislature in both houses and it must further the purpose of the original initiative.   

“The business community is extremely concerned that our citizen initiative process has been hijacked by out of state interests,” Kinney said. “We believe that that was not the intent of the founders of our state to have ballot propositions funded almost entirely by large groups outside of Arizona. This is yet another example of why we need to reform our initiative process so we can reclaim it for the residents of Arizona.”