Flat tax will slash Arizona’s revenue by 10%, new analysis finds

Caitlin Sievers

(Arizona Mirror) Arizona is one of 26 states that cut income taxes within the past few years, and a new report says that the Grand Canyon State’s cuts could shrink the state’s operating budget by more than 10%, possibly necessitating cuts to vital services like education.

The report warns that the impact of the tax cuts that Arizona passed in 2021 under Republican Gov. Doug Ducey will limit the state’s ability to continue existing services and make new investments.

The Center on Budget and Policy Priorities, a left-leaning research and policy institute that produced the report, concluded that Arizona’s cut to a flat 2.5% income tax rate, from the previous high of 4.5% for the state’s most wealthy residents, will reduce state revenues by “large and growing amounts over time.”

“We have a billion dollars less in revenue and the billionaires of our state have a billion dollars more,” Arizona Senate Minority Leader Mitizi Epstein told the Arizona Mirror. “And that will continue year after year because of this tax policy that, I feel, Republican colleagues created with their eyes closed. They said, ’Let’s just cut this tax for the wealthy,’ without even looking at what our responsibilities are as a state.”

The state is already facing a $400 million budget deficit in 2024, primarily caused by the flat tax which went fully into effect at the start of 2023. The 2024 budget was based on a projection of 1.9% revenue growth, but so far this fiscal year — which began in July — revenues have declined by 6.2%.

“I’m doing my darndest not to say, ‘I told you so,’ but I told you so,” Epstein said.

But Republican Rep. Alexander Kolodin, of Scottsdale, believes there’s plenty of room for cuts in Arizona’s budget.

“Just by cutting out waste, we’ve got enough money to ensure that we’ve got a revenue-neutral budget,” he told the Mirror.

The best place to start cutting, in Kolodin’s view, is the $500 million that the state gave to Water Infrastructure Finance Authority of Arizona for long-term water augmentation, a fund created in 2022 with broad bipartisan support to help shore up Arizona’s water future by bringing in water from out of state.

Kolodin said that there are so many restrictions placed on the money that “there are no good projects to fund.”

He added that he believes the state could also make cuts in areas where the federal government has also allocated money for items that he said are “double funded.”

“It’s actually, I think, kind of good that we have a little bit of budget pressure because there’s so much of this stuff to clean up,” Kolodin said.

But Epstein argued that there’s “absolutely not” room in the budget for cuts while teachers, along with caregivers for the disabled and elderly, are struggling to put food on the table. Low pay not only results in struggles for current teachers, but also causes difficulty in recruiting new ones.

“Cuts in the budget take dinner off the table for some families,” she said.

State Republicans in November introduced a plan to increase teacher pay by $4,000 in 2025 and Kolodin criticized Democrats who generally advocate for teacher pay raises for not backing it. But Epstein said that Democrats have not yet seen the specifics of the plan, and that she would like to see pay increases for not only teachers but support staff as well.

The state’s lower income taxes will result in decreased revenue, Stephen Shadegg, director of Americans for Prosperity Arizona told the Mirror, but the state has not yet seen the positive impact those cuts might have. He believes they will result in more consumer spending and correspondingly higher sales tax revenue. Those possible impacts would come next year, when Arizonans file their 2023 income tax returns.

Americans for Prosperity is a conservative political group, founded by the billionaire brothers Charles and David Koch, that advocates for tax cuts.

After years of budget surpluses, Shadegg believes that Arizona was previously collecting more through income taxes than necessary. This year’s budget also included a surplus of $2 billion, but lawmakers devised a system in which each of the 90 legislators could allocate a portion of that one-time spending wherever they chose as a way to get Republicans to pass the budget bills.

“We need to scale back things that we shouldn’t be spending money on,” Shadegg said.

The report, however, says that many of the budget surpluses states saw over the past several years were bolstered by federal stimulus funds dolled out amidst the COVID pandemic, while the tax cuts are permanent.

The construction of semiconductor factories that are expected to bring in highly-skilled workers, Shadegg said, should also bring revenue growth for the general fund through income and sales taxes for the state.

But even if the cuts do result in increased spending, the experts at the conservative-leaning Tax Foundation wrote that “the reality is that there are positive economic feedback effects of lower taxes, but that except in the rarest of circumstances, they are nowhere near large enough to pay for tax cuts on their own.”

Shadegg added that Republicans have increased spending on public schools in recent years.  Per-pupil spending for public school students is currently at around $14,000 — from a combination of state, local and federal funds — slightly more than the state was spending in 2008, when adjusted for inflation.

But those increases in education funding happened after years of cuts during the Great Recession and the landscape of public education has also changed drastically in the past decade, with increased needs for new technology and a mental health crisis among children and teens that districts are struggling to help address.

The Center on Budget and Policy Priorities report compared Arizona’s cuts to those that Gov. Sam Brownback made in Kansas in 2012, which did not result in the economic boost that Brownback had expected, but instead resulted in decreased revenue, with an economy that grew slower than neighboring states.

Kansas ended up having to cut funding for education and infrastructure, and Republicans reversed course, voting to raise income taxes in 2017.

Epstein believes that Republican legislators in Arizona like to “play the hero” by cutting state property taxes, disregarding the fact that those cuts could trigger increases in local taxes from school districts struggling to balance their budgets.

“Overall, our tax structure is very regressive because lawmakers continue making changes in a silo,” Epstein said.

Epstein hopes that in 2024 Democrats can overturn the one-seat majority that Republicans hold in both the state House and Senate for a chance at a more holistic approach to tax reform.

“We need lawmakers that recognize, if you change one tax here, it will have an effect over there,” Epstein said. “We need to make sure we look at the totality of Arizona’s revenue picture, and not one tax at a time.”