Friday, June 8, 2018

The 'Invest in Education Act' For Tax Dummies (Like Me)

Posted By on Fri, Jun 8, 2018 at 1:00 PM

click to enlarge The 'Invest in Education Act' For Tax Dummies (Like Me)
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I'm seeing lots in the news these days about the "Tax the Rich" ballot measure, the Invest in Education Act. The problem is, lots of us tax-math impaired folk don't understand how the added tax would work if the measure passes. I went and talked to some people who know more about taxes than I do, and I have a better understanding of how it works. Now, I'm taking it upon myself to explain what the new tax would mean to the one percenters who would pay it, in a way even I can understand.

First, the basics. If the Invest in Education Act passes, an individual making more than $250,000 or a couple making more than $500,000 will pay a higher state tax rate than the rest of us. If an individual makes $500,000 or a couple makes $1 million, the tax rate is even higher. The extra taxes go toward funding education.

Arizona's current personal income tax rate is 4.54 percent. It would go up to 8 percent when an individual's income hits $250,000 or a couple's hits $500,000, then 9 percent at $500,000 for an individual or $1 million for a couple.

So what does that mean in terms of money for the one percenters? Let's use a couple for this explanation, just so I don't confuse things by trying to include figures for individuals and couples.

Let's begin with what the tax measure doesn't mean. It doesn't mean a couple making $499,999 pays 4.54 percent on all their income, but add a dollar and they pay 8 percent on the whole $500,000. Uh uh. Not at all. Adding that one dollar doesn't bring a tsunami of new taxes down on their heads. The rate on the first $500,000 is the same as everyone else's: 4.54 percent. Every dollar above that is taxed at the higher rate.

Let's say our hypothetical couple makes $500,100. Their added tax will be—get ready for it—$3.46. That's right. If the Invest in Education Act passes, they'll pay three dollars and forty-six cents more than if it fails.

See, the new 8 percent rate is 3.46 percent higher than the current 4.54 percent rate, and 3.46 percent of $100 is $3.46. If the couple buys one less Cafe Latte Grande at Starbucks that year, they'll come out even.

For that couple to pay a significant amount of extra taxes, they have to make significantly more than $500,000. Let's increase their income by $100,000, to $600,000. Their added tax will be $3,460. OK, that's real money. If you're one of those people who live from paycheck to paycheck on an average income, paying an extra three grand and change in taxes would really hurt. But for the couple making $600,000, $300 or so every month isn't going to put much of a crimp in their opulent lifestyle. They shouldn't find it hard to make ends meet with what they have left.

If that couple's income breaks through the $1 million mark, every dollar over a million that will have an added one percent tax—from 8 percent to 9 percent.

OK, that's the way the tax rates will work if the Invest in Education Act passes. But the tax bite for the rich is less than it looks like in my explanation so far. That's because there's a big difference between the couple's total income and their taxable income. None of us pays taxes on all the money that comes in. We only pay on the amount that's left after we take all our deductions.

A couple whose total income is in the $500,000 ballpark wouldn't come anywhere near having to pay the extra Invest in Education Act taxes. By the time they take all their deductions, their taxable income will be far below the line where the new tax kicks in. I don't live anywhere near that rarified half-a-million-dollar income neighborhood, so I don't know how much one percenter couples manage to deduct from their total incomes, but I'm sure after they've paid a good accountant to do their taxes, it's a big chunk of change. (Maybe a tax pro can chime in and give us an idea how big a chunk it is.) That means a couple has to make significantly more than $500,000 before they have to think about paying a penny in added tax.

The truth is, the wealthiest Arizonans aren't paying their fair share of taxes. I've written about that in earlier posts at some length. But the Invest in Education Act isn't a punitive "Soak the Rich" measure by a long shot. When you break down the amount one percenters will pay if the measure passes, it won't be a major burden on their incomes or their lifestyles. But putting
that extra money into school funding will mean a world of difference to our school children.

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