By Travis H. Brown
September 14, 2015
With a promising business environment and a governor who understands smart fiscal policy, Arizona is in a position to win big. This growth opportunity comes out of sound economic footing, thanks to Arizona’s decades-long knack for drawing overtaxed Americans to its friendlier climate. What matters most is that Arizona not grow complacent with its successes; the Grand Canyon State needs to capitalize on past wins as well as initiate new, pro-growth strategies. That’s why Governor Doug Ducey’s ideas for investing more in education are so encouraging – and why he should take this opportunity to do even more.
Let’s start with the recent past. Individual taxpayer filings with the Internal Revenue Service tell the story: between 1992 and 2013, Arizona gained $31.4 billion in net adjusted gross income (AGI) from other states. The three states that have lost the most net AGI to Arizona are three of the nation’s most oppressively taxing: California, Illinois, and New York. (Those three states gifted Arizona with the largest number of new residents, as well.)
Using data modeling to create taxpayer count projections for 2013 to 2016, we find Arizona in the winner’s circle. It’s in the top-five projected gainers, lagging only behind Florida, Texas, and North Carolina. Arizona’s projected gain in that period is $3.96 billion. For that same time period, the losses of the top-five projected losers are staggering – New York is on track to see about $12 billion in net AGI leave the state, while Illinois will lose about $6.28 billion (knocking out California for the inauspicious “honor” of being the second-biggest AGI loser in the nation).
Helping matters further is the forward-thinking policy of Governor Ducey. He would like to use cash from state trust land sales to fund K-12 education – a move that, according to Arizona Joint Legislative Budget Committee staff analysis, will increase annual K-12 spending by about $344 million. This ten-year plan is an excellent solution to the state’s education funding problem, and one that does not harm working families by dipping into their pocketbooks. Instead, it increases the amount that K-12 education receives from the trust to 10 percent (from its current 2.5 percent) for the first five years of the funding plan, and then to five percent thereafter. The trust’s overall valuation will still rise, just not by the same rate is if it was left untouched. Ducey’s plan is a prudent one, and it utilizes the best and highest purpose of the trust – to support education.
With Arizona’s spending in greater check, and this new opportunity to invest in education, now is the time to end the price on work. Over the next five to ten years, Arizona should eliminate its state income tax. There’s no need for such an innovative and financially attractive place as Arizona to slap a growth-discouraging premium on doing business in the state.
What’s more, by lowering taxes, Arizona could set itself apart from its neighbor (and frequent competitor) Nevada. That state appears to be ready to steal a page from California’s highly questionable economic playbook; in this year’s State of the State Address, Governor Brian Sandoval called for the largest tax hike in state history, and this June that plan became a reality. Within the governor’s tax-hike package is an increase of the margins tax, a move opposed by businesses and labor unions alike, since margins taxes hit everyone from small business to major employers with no regard for their ability to pay (since taxes are placed on revenues rather than profits).
Given the economic pall cast over California and now Nevada, Arizona can seize a real opportunity to show just how bright the state shines. Governor Ducey’s plan for education funding is a major step in the right direction. The elimination of the state income tax would be a victorious leap across the finish line.