Arizona Has One of Nation's Most Regressive Tax Systems

Arizonans on the lower end of the income scale are paying a significantly higher portion of their incomes in taxes than wealthier Arizonans.

The Institute on Taxation and Economic Policy, a non-profil research organization, released a report showing the nation's poorest taxpayers have an effective tax rate that's double that of the richest Americans. In Arizona, the lowest-income residents pay nearly three times as much of their income as the biggest income-earners in the state.

No state is immune to regressive taxation, but Arizona's divide is among the worst.

"The most regressive state tax systems are usually in states without an income tax, or in states where the income tax isn't particularly progressive," ITEP analyst Carl Davis tells New Times. "Arizona falls into this second group partly because its income tax rate structure isn't very progressive. The top tax rate in Arizona is less than two percentage points higher than the bottom rate. There's just not a huge difference between the 2.59 percent rate Arizona charges on the first dollar of taxable income, and the 4.54 percent rate it charges on incomes over $300,000."

Additionally, states that rely on sales and excise taxes are states where low-income people are generally spending more of their income on taxes. Lewis points out, "Arizona gets over a third of its revenue from sales and excise taxes, which is well above the national average of about 24 percent."

ITEP actually created a state-by-state list of the progressive and regressive tax features of each state's tax code, so there's really no mystery as to what's going on with the disparities in each state. Here's Arizona's:

Progressive Features

• Graduated personal income tax structure

• Provides a refundable income tax credit to offset the impact of sales taxes

• State sales tax base excludes groceries

• Requires the use of combined reporting for the corporate income tax

Regressive Features

• Provides an income tax deduction for state income taxes paid

• Provides a partial income tax exclusion for capital gains income

• Comparatively high reliance on sales taxes

• Comparatively high cigarette tax rate

• Fails to provide a refundable Earned Income Tax Credit (EITC)

• Fails to provide a property tax "circuit breaker" credit for low-income taxpayers

• Local sales tax bases include groceries

Tax Changes Enacted in 2013 & 2014

• Phased-in capital gains exclusion (for assets purchased after 2011) took full effect in 2015 at 25 percent of qualifying gains

• Corporate income tax rate is being gradually reduced and will reach final rate of 4.9 percent in 2017

"Upside down state tax systems didn't cause the growing income divide, but they certainly exacerbate the problem," Matt Gardner, the ITEP executive director, says in a statement. "State policymakers shouldn't wring their hands or ignore the problem. They should thoroughly explore and enact tax reform policies that will make their tax systems fairer."

Meanwhile, in Arizona, new Governor Doug Ducey has promised generally lower taxes, and perhaps even an elimination of the income tax.

Although Ducey has been vague about his plans for tax reform, he did outline a few items in his State of the State speech.

He said he would not go about reversing some business tax cuts passed under Governor Brewer, although predictably, Democrats have called on him to do so.

"Any way you look at it, cancelling Arizona's tax reforms is the wrong way to go," Ducey said. "They were designed to put more life in our economy and that need is stronger than ever. Business people - the ones we count on to create jobs - have been making plans around them, plans to build, expand and make new hires. If we change our plans, they'll change theirs. It's a high price to pay for going back on your word and that is why I say: Not on our watch."

(House Democratic Leader Eric Meyer responded to Ducey's speech last week by saying Republicans "have doled out tax credits to special interests with no evidence that Arizonans are getting a return on that investment.")

Ducey also mentioned tying income tax to inflation, so the income tax doesn't grow faster than the actual income.

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Matthew Hendley
Contact: Matthew Hendley