Budget deal will include huge tax cuts for the wealthy and a new flat income tax

A budget deal reportedly struck by Gov. Doug Ducey and legislative Republican leaders would transform Arizona’s income tax system and provide massive cuts to the wealthy — and also undercut a measure voters approved in 2020 that taxed the rich to increase school funding by nearly $1 billion every year.

The Associated Press on Tuesday reported on the outlines of the deal that would see Arizona adopt a flat income tax rate of 2.5%. For the state’s wealthiest taxpayers, that is a substantial cut from the current 4.5% tax rate. The transition from a progressive income tax scheme to a flat tax would remove an estimated $1.5 billion a year from state coffers. 

That equals roughly 25% of all income taxes the state collects.

Under the terms of Proposition 208, which passed with 52% approval, taxpayers who make more than $250,000 a year would pay an additional 3.5% surcharge on income above that amount. (For joint filers, the income trigger for the marginal tax increase is $500,000.) Backers estimated the marginal tax rate hike would generate $940 million per year, which would be used to increase teacher salaries and provide more funding for public schools.

Per the AP: 

The agreement would cap the maximum any taxpayer will owe with a new voter-approved tax surcharge for education at 4.5% — the current top tax rate. It envisions using $836 million in state general fund revenue in the coming budget year to make up the difference so the full 3.5% surcharge voters approved in November in Proposition 208 will go to schools, if the measure survives a state Supreme Court challenge.

The deal struck by Senate and House leaders with the Republican governor essentially cuts 25% from personal income tax revenue, with most of the savings going to higher-earning taxpayers.

…

The changes are possible because of a big increase in revenue from income and sales taxes, which occurred in Arizona and other states despite fears the pandemic would hammer state revenues. The Legislature’s budget analysts show revenue for the budget year that ends on June 30 is running nearly $700 million above projections and they estimate fiscal year 2022 revenues will be nearly $1 billion above forecasts, on top of a current budget surplus.

Ducey in January proposed cutting $600 million from income taxes, though it was unclear how he planned to do so.