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Income tax is toxic to Arizona’s economy

Scott Beaulier, executive director of the Center for the Study of Economic Liberty at ASU.

Scott Beaulier, executive director of the Center for the Study of Economic Liberty at ASU.

States across the U.S. — including Arizona — are facing major budgetary challenges: 32 are dealing with budget gaps, and many governors are calling for more revenue by raising income taxes, broadening sales taxes, and hiking fees on everything from state park entries to hospital stays.

States like Alabama, Nevada, Kansas, and Ohio, are all poised to raise taxes and fees this year. This would be a mistake. Higher taxes stifle economic growth, kill jobs, and, ultimately, fail to deliver the revenue needed to improve state finances.

And some taxes, like income taxes, are more toxic than others. Income taxes hamstring small business because owners pay personal income taxes rather than corporate taxes. In Arizona, small businesses make-up about 97 percent of all employers, so our income tax makes it harder for our primary employers to grow their businesses and create jobs.

In an ideal world, policymakers would have an eye focused on how their tax policies affect job creation. In most cases, though, they tend to tax people first and ask questions later. Time and again, that strategy hasn’t been a winning one for states.

Between 2010 and 2012, for example, four states and the District of Columbia raised income taxes to generate more revenue. The effect was predictable – people “voted with their feet” by leaving these high tax states for better opportunities.

According to the Chicago Tribune, Illinois’ high taxes have resulted in 850,000 people leaving the state over a 15-year period. That’s one Illinois resident leaving every 10 minutes! No wonder the Chicago Cubs fans at spring training games here in Mesa tell me they’ve permanently relocated from Chicago to the Valley!

Illinois is not alone: The 10 states with the highest income taxes, including California, New York, and Minnesota, collectively, lost more than 3.4 million residents between 2003 and 2012. Even Hawaii has lost residents, which shows that the state’s 11 percent personal income tax trumps Heaven on Earth.

The lessons for Arizona are pretty obvious – staying put with our tax code (much less hiking taxes and fees), while other states like North Carolina and Georgia keep improving, is not enough. Businesses will leave for greener pastures and take top talent and hard-working people with them.

The decisions states make in response to their budget crises have high stakes, which is why the Center for the Study of Economic Liberty at Arizona State University supported Stephen Slivinski’s study on the feasibility of eliminating the income tax here in Arizona.

According to Slivinski’s study, Arizona can eliminate the income tax in just six or seven years — while allowing current spending to rise 2.3 percent annually. In other words, all current funding for schools, prisons, and roads can be maintained while simplifying the tax code. His math is straightforward and realistic, even suggesting broadening the sales tax.

And, Slivinski’s discussion is more than an abstract idea: an experiment along the lines of what he’s describing is playing out in North Carolina with remarkable success. North Carolina has flattened and cut its income tax and, as a result, the state’s revenues have been surging! The tax cuts will continue for several more years, portending to an exciting future for the Tar Heel State.

What North Carolina policymakers don’t know yet, and what Slivinski’s study is not able to tell us about Arizona, is the full extent to which reducing and eliminating the income tax will lead to economic bonuses. What companies will relocate here for the sunshine, dry heat, and absence of income taxes? Nobody knows for sure, but eliminating the income tax sends a clear message that Arizona is open for business.

We are one of the 32 states facing budget challenges. Most states have responded with higher taxes and calls for more revenue. Such arguments fail to recognize the root causes of the messes: excessive spending, high taxes, and weak economic growth.

Doubling down on a bad idea by raising taxes or “just” staying put is completely upside down. The evidence from our recent past is all we need. Arizona would be wise to join states like North Carolina in taking a path less traveled by adopting a tax policy that helps, rather than hurts, our businesses and hardworking Arizonans. Resolving to eliminate income taxes is a good start.

— Scott Beaulier is executive director of the Center for the Study of Economic Liberty at Arizona State University.

5 comments

  1. Michael S. Ellegood, PE

    To put this into perspective, one must keep in mind that the Center for Economic Liberty at ASU was funded by a $3.5 Mil grant from the Koch Foundation. The Center is simply an outlet for Koch thought, attaching it to ASU gives it some appearance of legitimacy. That said, when we can’t fund education in fact steal from our kids education, when we cut the safety net for our poorest citizens, when we allow our children at risk to remain at risk, when we steal from our infrastructure funds to again cut taxes our priorities are severely misplaced. We have cut taxes in 24 of the past 25 legislative sessions, we have cut the income tax twice, we have cut corporate taxes all to “grow the economy”. It hasn’t worked. It seems to me that we don’t have a spending problem, we have a revenue problem. Further tax cuts will hurt us even more.

  2. Eliminating the income tax in order to draw in outside investment is putting non-resident ‘white whale’ prospective employers ahead of those who have chosen to, or have lived here, for years. It puts our children at a global disadvantage, so when they finally have a chance to leave the poor-excuse-for-a-state that the Koch Foundation would like to mold Arizona into, they won’t be able to get ahead.

    Carpetbaggers like Mr. Beaulier have no problem coming into our state, telling us what is best, and then jumping from a sinking ship when they feel like. That leaves long time Arizonans, like my family and me, to clean up the mess.

    Our income tax – both Corporate and Individual – are in the lower half of the country, much less our immediate neighbors (Nevada excluded). Why aren’t our comparatively lower taxes attracting major employers? Because our education base is so poor, that’s why. We are the call-center of the US. Why? Because we have lots of unskilled labor. Is that the natural resource we’re now providing?

  3. Well, given we have lowered our state income tax rate many times since 2000, why has our growth been less than Utah, which has had higher state income taxes than Arizona?

    In other words, if his founding premise is wrong, and state income taxes are only a marginal determinant in locating a business, why should we get rid of them and force ourselves into either perpetual crisis, or very high property taxes as are found in all of the states without income taxes?

    In short, propaganda for folly, which will end up becoming policy.

    I welcome our coming fiscal disasters, because it will be so much fun to watch the spin of “We did not screw up our state, it was the Democrats, somehow, someway.”

    The mirror is not fogging much these days for Republican Economics, depending on this man who would have never even gotten a job at ASU without that donation.

    Well, the current gov is also slavishly following the playbook of Kansas, so disaster is simply a vote of the legislature, and then it shall happen.

    The best part is I used to think that disasters that originate from insane ideology were avoidable, but now I am certain that they are inevitable.

    It does help to laugh, rather than cry at such folly.

  4. Michael S. Ellegood, PE

    According to 24/7 Wall Street and information from the Tax Foundation, of the ten states with the strongest economies, 6 have income tax rates higher than Arizona. Three of the remaining four, So. Dakota, Texas and Wyoming have no income tax (but they do have oil and gas revenue). Arizona, in spite of having lower taxes than the six other states, did not rank in the top ten. So something else must be driving the economy in these States. Even high tax and drought ridden California has a stronger growing economy than ours. Could education have a little something to do with it?

  5. Eliminate the income tax! Music to my ears.
    Again, the Koch brothers … seriously? Glance left, there’s bigger money splattered all over the place — and stench. (But that’s different if Dems do it, because after all, they’re all for the little guy.) I remember the days when California was the place to be in the 60’s and 70’s thanks to sound economic policy. Low taxes lead to a vibrant economy, cheap real estate, and huge surpluses. That California, where I was born and raised, is gone. Those surpluses were devoured in 10 years. Sacramento has a totalitarian mindset that is polar opposite of the California ideal of liberty and independence. California and conformity? California and collectivism? Never thought I’d see the day. Stifling. Crushing. The Un-California. The Anti-California. Emerging on your left.
    Arizona, don’t follow our lead, but reverse course — before it’s too late.

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