Map of USA showing states with no state income tax in red, and states that tax only interest and dividend income in yellow. (Photo credit: Wikipedia)
Eight states currently impose a flat rate income tax throughout the United States. Another seven impose no income taxes at all, while the rest have progressive tax systems imposed at varying income levels (and then there's Tennessee and New Hampshire). A budget amendment filed by Representative Jeff Dial (R-Ariz.) would make Arizona the ninth state in the nation to impose a simple, flat rate on income taxes paid by state residents.
The 2.5 percent flat rate would also make Arizona the state with the lowest top rate in the nation, eighth only behind the no income tax states of Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. It would be a huge step in the right direction towards the full elimination of the income tax and would unquestionably boost the state's regional tax competitiveness. It would also result in income tax cuts for each and every Arizona income tax bracket that currently exists.
Current top individual income tax rates in the region:
The amendment to S.B. 1487 also reduces the corporate tax rate by more than 60 percent, from 6.5 percent to 2.5 percent by 2016. As taxpayers and large companies flee high income states like California, Illinois, and New York for states declaring that they are open for business, this particular tax cut would be a huge boost for business in Arizona. According to the Tax Foundation, Arizona is currently ranked 22nd for its corporate tax rank. At an imposed rate of 2.5 percent, among states that impose a corporate tax, Arizona would have the lowest top rate in the nation.
The House floor amendment also establishes a Legislative Study Committee tasked with finding ways to implement this tax change in a revenue neutral manner. This would likely mean eliminating a number of credits and deductions since allowable deductions will now be capped at 25 percent of Arizona gross income before subtractions.
If the Study Committee fails to make specific recommendations, then it must propose a bill to expand the transaction privilege tax, which is essentially a gross receipts tax. Because this type of tax creates an extra layer of taxation and "tax pyramiding," it is our hope that specific recommendations can avoid the expansion of this specific tax.
Americans for Tax Reform supports Representative Dial's budget amendment and looks forward to working with the legislature to pass these tax cuts into law.