Arizona's income tax rates are capped at 4.5%, headed lower

On June 30, 2021, Arizona Gov. Doug Ducey signed legislation, passed by House and Senate Republicans on party-line votes, that, according to a Governor’s Office statement, “paves the way for the largest tax cut in state history.”

The measure provides a maximum tax rate of 4.5% (the state’s current top tax bracket) and, by year three, replaces the state’s four income tax rates (ranging from 2.59% to 4.5%) with a flat tax rate of 2.5% for most taxpayers.

According to legislative budget analysts, the average Arizonan earning between $75,000 and $100,000 will save $231 a year in state income taxes, while taxpayers earning between $500,000 and $1 million a year will save more than $12,000.

Ducey and Republican legislators pursued the tax reduction to, in part, counter a tax increase stemming from the 2020 voter-approved Proposition 208. A Maricopa County Superior Court judge struck down the provisions of that initiative in March 2022.

Additional Tax Savings. The new law also reduces commercial property taxes by 10%; increases the homeowner’s rebate, with the state covering half of homeowners’ primary property taxes; and spares military veterans from paying state income taxes on their retirement benefits, which is estimated to save the average veteran $650 a year.

Calculated Gamble. According to a Ducey aide quoted in the Washington Post, the tax cuts are estimated to result in revenue losses of about $1.7 billion over three years – 4% to 5% of state revenue – but Ducey and legislative Republicans are counting on those losses being offset at least in part by economic growth that (a) would have been forfeited if the Prop. 208 surtax had remained in effect and (b) will occur as a result of business formation and in-migration attributable to the state’s lower tax rate.

Supporters of the tax-cut legislation noted that, of Arizona’s neighboring states, only California, at 9.3%, has a higher state income tax rate. A Post editorial noted that high-income Californians “would save thousands of dollars in taxes a year by moving across the Colorado River, and they would likely pay much less for a house, too. In the post-pandemic age of working from home, that difference could turn what is already a migration flood into a tidal wave.”

See also:

“Arizona Republicans Are Gambling They Can Win Back Their State With Tax Cuts; It Might Just Work,” The Washington Post, June 25, 2021

“Ducey’s Flat Tax and Arizona’s Future,” The Wall Street Journal, June 28, 2021

This article was prepared in coordination with the Scottsdale law firm Lang & Klain, P.C.