Despite some GOP opposition, Arizona flat-tax proposal moves forward

(The Center Square) – State lawmakers have taken the first steps toward scrapping Arizona’s multitiered income tax system and lowering the rate for all taxpayers, but the proposal does not yet have the votes to make it to Gov. Doug Ducey.

As part of several bills, lawmakers advanced House Bill 2900 from the House Appropriations Committee on Tuesday afternoon. Should it be enacted, it would transition the state’s four income tax rates to one 2.5% rate over two years. A 3.5% surcharge for earnings over $250,000 for single filers, enacted by Prop. 208 in 2020, would remain, but the total tax rate for the state’s highest earners would be capped at 4.5%.

It would amount to a $1.5 billion tax cut.

Advocates got their chance to weigh in on the prospect of retooling the state’s income tax brackets.

“It’s a huge step in putting more money back in the pockets of Arizona families and small businesses to make their own decisions,” said Boaz Witbeck, deputy state director for Arizona’s chapter of Americans for Prosperity.

Witbeck said the majority of those his organization polled favor lowering the state’s income tax.

Chad Heinrich, with the National Federation of Independent Business, said small businesses stand to benefit from the cap in total percentage of taxes that can be charged one entity.

“Having that total tax rate capped at four-and-a-half percent creates predictability for the small businessman,” Heinrich said. “We believe that will encourage them to invest in their business and grow their business without fear of a higher marginal tax rate from their successful business.”

Others said they were concerned with the expected loss of revenue to local governments that receive 15% of the state’s income taxes.

“This represents the largest cut to income tax revenues to cities and towns in over 50 years and at a time of tremendous uncertainty in that our economy has been artificially infused with trillions of dollars in federal stimulus,” said Nick Ponder, legislative director with the Arizona League of Cities and Towns.

The legislation includes a two-year hold harmless that would keep towns and cities at their 2020 distribution rates. Ponder said the amount wasn’t enough and asked lawmakers to increase the percentage of state income tax municipalities would receive.

Some Republicans, though not voting against the bill in numbers that would kill it, said they may not support the budget in its current form.

“Going to a flat tax helps every Arizonan, regardless of income level,” said Rep. Jake Hoffman, R-Queen Creek, before voting against the measure because of other parts of the bill he disagreed with.

Democrats were unanimous in their dissent to the bill.

“This flat tax is a regressive tax,” said House Minority Leader Charlene Fernandez, D-Yuma. “This is punitive because we passed [Proposition] 208. This is punitive because there’s a Democrat in the White House right now.”

The bill now heads to the House floor to be heard by the Committee of the Whole.

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