A flat tax to replace our graduated progressive income tax appears to be part of the possible budget agreement between Republican Governor Jan Brewer and our Republican legislative leadership.
If revenue neutral, this would be a stealth tax increase for many Arizonans and may also undermine state finances well into the future, why?
Economic conservatives generally believe if we tax consumption (the sales tax), then people will save more and we’ll have better economic growth. Unfortunately, in Arizona we’ve raised sales taxes (state and local) significantly since 1994 by approximately 20 percent or more, while reducing income tax rates by a third. The wealthiest paid a marginal tax rate of 6.9 percent on taxable income above $150,000, but today that rate is just 4.54percent (Arizona unlike the federal government doesn’t adjust table income brackets for inflation). Despite this dramatic change in tax policy in the direction economic conservatives favor, Arizona still was struck by a housing bubble in real estate and subsequent economic collapse. In recent months, we’ve had the greatest job losses in the country, even worse than Michigan.
A flat tax would be an even more dramatic change. It would remove graduated progressive income tax rates that currently go from 2.59 percent to 4.54 percent with one flat rate. Read the rest of this entry »