A Rich Switch

Income equality continues to grow for Arizonans—and taxes continue a shift from the wealthy to the middle class

Gov. Doug Ducey signed a bill earlier this week that will give Arizona's wealthiest citizens another tax break.

The new law sets Arizona's income-tax rates onto a permanent downward ratchet.

HB 2001 indexes the income-tax rates to inflation, meaning each year, the income-tax brackets will expand a little so that people will owe less in income taxes.

Ducey said in a prepared statement that he was "proud to sign this common-sense but significant legislation to protect our taxpayers by eliminating a hidden tax increase on Arizonans. This is one more crucial measure to keep our tax rates reasonable and predictable while further promoting our open-for-business agenda."

What Ducey didn't mention is that the big benefit will go to the state's top earners because they pay the bulk of the Arizona's income tax, says state Sen. Steve Farley.

"It's obvious that it's going to affect the people in the higher brackets more than the people in the lower brackets, because the people in the lower brackets aren't paying much, if anything," says Farley, who estimates that the average taxpayer might save $5 or $10.

While most taxpayers won't see a significant reduction in their individual tax bills, the cost to the state will be big, says Farley. The Joint Legislative Budget Committee estimates that it will cost $15.4 million in fiscal year 2017 and $24.7 million the year after that, with projections growing into the future.

"Ultimately, I think the people at the lower end would rather invest that $5 or $10 and have a decent public school to send their kids to," says Farley, a Tucson Democrat. "It's part of the overall idea that government does things we can't do for ourselves and we have to put our money together to make that happen."

Given Arizona's current financial crisis—Ducey just approved a state budget that includes $99 million in cuts to the state universities as well as cuts to community colleges, overall per-pupil spending in public schools and numerous safety-net programs—a bill that expands the annual deficit means, inevitably, more cutbacks in state programs in the future.

The new law is just another example of how the state has been pushing more of the burden of paying for government onto the backs of the poor and middle class while handing out tax breaks to Arizona's wealthiest citizens.

That particular trend was highlighted in a new report, "Tax Fairness: An Answer to Arizona's Budget Problems." Released a few weeks ago by the Keystone Research Center and Good Jobs First, the report shows that while income equality has been on the rise over the last three decades, state lawmakers have continued to shift the tax burden away from Arizona's richest and onto the backs of the middle-class and the poor.

Keystone Research Center economist Stephen Herzenberg says the report shows that "tax fairness can do wonders for the Arizona state budget."

"People are used to hearing that inequality has grown a lot and that only the very top incomes are growing substantially," Herzenberg says. "They don't always know that those with top incomes pay much less in taxes within states. And they also don't always know that the combination of rising inequality and low tax rates on top incomes are a double whammy for state budgets."

The report estimates that the top 1 percent pay 4.6 percent of their total income in state and local taxes, while people in the middle fifth of earners pay 9.2 percent and the bottom 20 percent pay 12.5 percent of their total income.

"If Arizona taxed the top 1 percent at the same rate as people in the middle fifth, Arizona would have another $2 billion revenue and more than enough to fill Arizona's budget hole," Herzenberg says.

The Keystone report is based on two previous studies.

The first study came from the Institute on Taxation and Economic Policy, which regularly gathers data to show how the tax burden is spread across a state's population. ITEP's most recent report, released in January, showed that Arizona was eighth worst state in terms of pushing the tax burden on lower earners because it relies so much on sales and property taxes.

The second report, from the Economic Policy Institute and Economic Analysis Research Network, shows how dramatically income inequality has been grown over the last three decades in Arizona. The top 1 percent got about 9 percent of the total income of all Arizonans in 1979; by 2012, the top 1 percent was scooping up 19 percent of the total income of all Arizonans.

And for the record, just who are the 1 percent in Arizona? It's people who are earn more than $299,717 a year, according the EARN report. On average, the 1 percenters earn $877,446 annually; by comparison, the average annual income of the remaining 99 percent of workers was $37,811.

Herzenberg makes the point that not only are the wealthiest Arizonans paying less of their income in taxes, but the middle class and poor are hurt because tax dollars aren't there to create jobs in education, construction and other areas where the the government spends money.

"You've got a huge slice of overall income going to people with the highest incomes and as those people pay little of their income in taxes, it becomes harder for states to pay for schools, healthcare, infrastructure and job creation," Herzenberg says.

But increasing income inequality and rewarding Arizona's wealthiest citizens while taking away services from the middle class and the poor appears to be one of Ducey's main priorities.

The new state budget (which Tucson Weekly unpacked in "So I Elected an Ax Murderer," March 19) does nothing to decrease the gap between the rich and middle class in Arizona. The state is still moving forward with corporate income tax cuts whose costs create a hole of hundreds of millions of dollars in the budget.

At the same time, services for Arizonans on the lower end of the income scale—helping working moms with daycare costs or putting a lifetime limit on Temporary Assistance for Needy Families, et al—were cut back. Community colleges in Pima and Maricopa counties, who primarily serve poor and middle income Arizonans, saw their state funding eliminated. And the universities absorbed a $99 million funding hit, which means tuition will likely be rising for Arizonans who want to pursue a higher education.

Ducey had little interest in debating the implications of his tax policy on the campaign trail. Asked about whether he was concerned about the fact that Arizona's richest citizens would be the biggest beneficiaries of his proposal to cut back on the income tax, he said he was more concerned about changing the tax code, reducing regulations and pushing tort reform to reduce legal liabilities for business owners.

"I'm running to be governor of all the people," Ducey said. "I believe the most fair thing that you can do is provide opportunity for all, good jobs and a chance to get ahead. ... No income tax or less income tax is a better direction."

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