Research & Commentary: Arizona Shouldn’t Fund Education with a ‘Millionaires Tax’

Published June 22, 2018

A coalition of Arizona teachers and unions has introduced a new legislative effort to increase funding for the state’s public education system. The proposed legislation, dubbed the “Invest in Education Act” by its supporters, would increase income taxes for those who earn more than $250,000 per year.

The state currently levies a 4.54 percent personal income tax rate. Under the proposed increased rates, those earning between $250,000 and $500,000 would see their rate increase to 8 percent. Those earning more than $500,000 or whose household income is greater than $1 million would pay 9 percent. The new revenue generated by the tax, which supporters predict could amount to about $690 million annually, would be earmarked for education spending. Under the Act, 60 percent of the money raised would go toward teacher pay. The remainder will be earmarked for maintenance and operations.

Relying on a fluctuating tax with a small base like the millionaire tax can lead to larger budget deficits than with broader and flatter tax systems. While some supporters of the new tax argue large-scale relocation by wealthy taxpayers is not likely to occur, the negative effect of Maryland’s millionaire tax provide a stark example of what new tax’s effect will be. In 2009, Maryland created a millionaire tax projected to raise an additional $106 million. Instead of providing the expected new revenue, by the next year, the number of people in the state reporting incomes of $1 million or more fell by one-third.

Supporters of the Invest in Education Act also make the common mistake of assuming increasing education funding will improve education outcomes. Real spending per student nationwide has increased by 23.5 percent over the past decade, even while education outcomes have failed to improve. Despite this spending increase, education outcomes have not improved; scores on the National Assessment of Educational Progress (NAEP) test have improved little despite record spending. In Arizona, already more than $4.5 billion is spent on K–12 education, about 45 percent of the state’s general fund, to pay for about one million students.

Instead of throwing more dollars at the state’s failing public school system, Arizona lawmakers should continue to embrace school choice initiatives, which help improve the cost and quality of education. Arizona is a national leader in implementing school choice; it was the first state to aggressively adopt charter schools. Today, about 17 percent of our public school students attend charter schools. This is one of the main reasons Arizona was one of the few states to make statistically significant gains on all six NAEP tests since 2009. The state’s 4th and 8th graders improved in reading, math, and science.

Arizona could improve their school choice efforts even further by expanding its Empowerment Scholarship Accounts program, an education savings account (ESA) program. Under an ESA, state education funds allocated for a child are placed in a parent-controlled savings account, and parents are able to use a restricted-use debit card to access the funds to pay for the resources chosen for their child’s unique educational program. Arizona should fully fund each ESA to 100 percent of the district per-pupil formula (the current standard is 90 percent) and end the provision that a student must attend public school for 100 days to receive an ESA.

Rather than increase taxes on higher earners, Arizona’s elected officials should focus on making the state a more attractive place for businesses and workers, a goal that would best be accomplished by restraining spending, lowering tax rates, and reducing unnecessary regulations.

The documents cited below examine millionaire taxes and their history of failing to shore up budgets and increase revenue.

Does Spending More on Education Improve Academic Achievement?
Dan Lips and Shanea Watkins of The Heritage Foundation discuss the rising cost of education and whether increasing education spending has improved education outcomes. “Taxpayers have invested considerable resources in the nation’s public schools. However, ever-increasing funding of Education has not led to similarly improved student performance. Instead of simply increasing funding for public Education, federal and state policymakers should implement Education reforms designed to improve resource allocation and boost student performance,” wrote Lips and Watkins.

School Spending and Student Achievement in Michigan: What’s the Relationship?
In this report, Ben DeGrow and Edward C. Hoang of the Mackinac Center for Public Policy examine the relationship between school spending and student achievement in Michigan. “The results suggest that there is only a very limited correlation between these two factors. Only one out of the 28 academic outputs analyzed showed a result that was positive and statistically significant, or different from zero,” the authors reported.

Ten State Solutions to Emerging Issues
This Heartland Institute booklet explores solutions to the top public policy issues facing the states in 2018 and beyond in the areas of budget and taxes, education, energy and environment, health care, and constitutional reform. The solutions identified are proven reform ideas that have garnered significant support among the states and with legislators.

Taxing the Rich Will Bankrupt Your State
John Nothdurft of The Heartland Institute explains the disadvantages and negative consequences of “millionaire” taxes and overtaxing the top income brackets.

Trend #1: “Millionaires’ Taxes”
Joseph Henchman of the Tax Foundation examines the millionaire tax trend in this Fiscal Fact article. “A number of states have enacted high income taxes on those with large incomes. Although nicknamed ‘millionaires’ taxes,’ they have hit income at much lower levels. The trend seems to have petered out although California and Maryland may see further action,” Henchman writes.

Should We Raise Taxes on the Rich?
Peter Ferrara, senior fellow for entitlement and budget policy at The Heartland Institute, writes in the American Spectator about “taxing the rich” and explains why such policies make no fiscal sense.

Long-run Macroeconomic Impact of Increasing Tax Rates on High-Income Taxpayers in 2013
This report from Ernst & Young conducted on behalf of the Independent Community Bankers of America, the National Federation of Independent Business, the S Corporation Association, and the United States Chamber of Commerce examines the long-term impact of an increase in top income tax rates.

Seven Myths About Taxing the Rich
Curtis S. Dubay of The Heritage Foundation considers seven commonly cited myths about policies to tax the rich. Dubay argues raising taxes on the rich would increase the progressivity of an already highly progressive tax code. It also would damage economic growth by stifling job creation, further slowing already stagnant wage growth. Although some see raising taxes on the rich as a silver bullet for fiscal woes, it actually badly damages the economy, he writes.

Education Savings Accounts: The Future of School Choice Has Arrived
In this Heartland Policy Brief, Policy Analyst Tim Benson discusses how universal ESA programs offer the most comprehensive range of educational choices to parents; describes the six ESA programs currently in operation; and reviews possible state-level constitutional challenges to ESA programs.


Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

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