Arizona voters will not decide whether to levy a wealth surcharge on high-income households.
The state Supreme Court removed Proposition 207, titled the Investment in Education Act, from the November ballot because of inaccuracies in the language used to collect signatures.
The petition, submitted in July, stated approval of the measure would increase the tax rate on individuals with annual incomes exceeding $250,000 by 3.4 percent, on top of the current 4.54 percent rate, instead of the actual 3.4 percentage-point surcharge that was planned, a far greater increase.
Those earning more than $500,000 or with household income exceeding $1 million would have been hit with a 5.46 percentage point penalty, a 98 percent increase.
About 60 percent of the revenue from the new surcharge was to be earmarked for salary increases for government teachers, on top of a 19 percent pay hike already in the state’s biennial budget, the initiative states.
‘Never a Good Idea’
Arizona state Rep. Mark Finchem (R-Tucson) says deciding tax policy and other complex ideas by popular vote is a recipe for disaster, as demonstrated by Proposition 207’s typo.
“Tax policy set without hearings and close examination is never a good idea,” Finchem said. “I do not believe it is healthy for a state to implement tax policy at the ballot box, because there are too many unintended consequences that can arise without full vetting.”
Kevin McCarthy, a senior research analyst for the Arizona Tax Research Association, says the proposed tax hike would have had many bad effects.
“There is no doubt a tax increase will increase revenues,” McCarthy said. “However, a 100 percent rate increase will absolutely influence business decisions which negatively impact base revenues. Businesses model their cost structure to the last dime. Significantly altering their costs must change their decisions, whether it’s foregoing future hiring, an expansion, or adding locations. Substantially increasing their costs will retard growth.
“While a minor rate change may not force a business to change their behavior, a massive and instantaneous increase is far more likely to create negative dynamic revenue impacts,” McCarthy said.
Chasing Away Prosperity
Finchem says the measure would have encouraged high-performing workers and job-creators to leave the state, instead of luring productive out-of-staters to move there.
“It has been said by many, ‘I’ve never been hired by a poor man,'” Finchem said. “Wealth provides capital that is used to manufacture goods or organize services. Since wealth is a coward, and it knows no loyalty and is not patriotic, it will go to the safest harbor, relative to the risk it is exposed to.
“Arizona is a tax-refugee state that showed 7.5 percent economic growth at the end of Fiscal Year 2018,” Finchem said. “Proposition 207 would have abruptly ended that. There is never a winner in class warfare and wealth envy, only losers.”
Clemency for the Golden Goose
McCarthy says the measure would have wrecked the state’s financial future.
“The leading peer-reviewed study of tax increases on high-income filers, from Varner and Young, concludes that for every 10 percent rate increase, 1 percent of high-income filers will move and another 1 percent who would have moved to Arizona will move elsewhere,” McCarthy says. “The proposed 100 percent rate increase projected to flush 10 percent of high-income filers and prevent the same number of high-income migrants from moving to Arizona.
“Losing 20 percent of future high-income and small-business tax filers represents a massive cut in base revenues and untold downstream economic impacts,” McCarthy said.
Finchem says Arizona’s financial success is a result of the state’s relatively low tax burden.
“What is interesting to note is that the Laffer Curve has once again been proven to be valid,” Finchem said, citing economist Arthur Laffer’s observation that raising taxes can reduce revenues by discouraging economic activity, whereas lowering taxes can actually increase revenues. “We ended the Fiscal Year 2018 budget over-performing against plan, in large part because we reduced taxes again.”
‘Awful Public Policy’
McCarthy says the ballot measure would have unfairly targeted one portion of the population to shoulder an increased tax burden, an idea Arizonans should reject in the future.
“Funding public schools is a mandatory requirement of the state, and the financial burden should be an obligation of all Arizonans,” he says. “Isolating teacher pay raises on less than two percent of the population is awful public policy and should be rejected.”