Arizonans have a business decision to make at the ballot this year. Proposition 208 seeks to nearly double the top income tax bracket. The question each voter must ask is, can Arizona afford to become a high-tax state without severe economic consequences?
As leaders in economics and tax policy, we trust that Arizonans believe us when we say there’s no free lunch. You can’t raise the top marginal tax rate 77.7% without a big economic impact.
If you’re a voter who is interested in raising taxes for K-12 education, surely you’d want to measure the costs against the benefits.
The impact to Arizona is estimated at 124,000 lost jobs and $2.4 billion in lost revenue to state and local governments in just the first 10 years. Roughly half of the filers affected by this tax increase will be owners of small- to medium-sized businesses. The related economic and tax revenue losses will ultimately result in cuts to other areas of government, including public safety, higher education and child safety.
Prop. 208 would give Arizona the ninth highest overall tax rate in the country, far ahead of peer competitor states like Texas, Nevada, Utah and Colorado. We estimate future business locations to Arizona will drop by 15%.
The calculated losses use conservative estimates and don’t factor the impact of those who will move to avoid the tax. A Stanford study on migration patterns of wealthy filers suggests roughly 8% will leave Arizona to avoid the tax hike on top of losing a similar percentage of future wealthy movers who would otherwise choose Arizona.
On the expenditure side of the ledger, the benefits to schools are uncertain at best. Because this money does not go to formula funding, administrators won’t be able to use it for base pay. At best, the money may provide year-end bonuses.
For context, the state recently put $650 million into formula K-12 funding for 20% base salary increases for teachers. This initiative puts zero dollars into formula funding.
The revenues are not guaranteed either. Even in good years, business profits and capital gains are the most volatile of all major tax categories. In the first full year of the Great Recession, this tax bracket declined 32%. It dropped in four of the next seven years. How can schools budget with this unstable revenue source when it grows 20% in one year and declines 5% in the next? It’s no wonder you won’t find this tax policy in any other state — it’s an irresponsible way to fund schools.
Finally, the money does nothing to reward performance or use metrics to measure student outcomes. Prop. 208 has no accountability features to improve public education. Shouldn’t new monies pay for something you want?
In the final analysis, the voter is left with an initiative that does significant damage to an important revenue source for all Arizonans, undermines an economy reeling from the pandemic and offers very little to teachers and students.
The only way to identify what education spending items will result in a positive return on investment for taxpayers is to do more thorough research on the individual budget items, and then compare the cost with the revenues that will be produced from additional economic strength. This more strategic approach is how the small businesses previously addressed became successful and profitable. Government can learn a lot about how the private sector succeeds and fails.
Overall, it’s not just that the juice isn’t worth the squeeze. Both the squeeze and the juice are far worse than advertised. We encourage voters to reject Prop. 208.
Kevin McCarthy is president of the Arizona Tax Research Association. Jim Rounds is president of Rounds Consulting Group.