BUSINESS

Ending Arizona's personal income tax is feasible, study says

Russ Wiles
The Republic | azcentral.com
Arizona policymakers could feasibly end the state's personal or individual income tax within six to eight years without necessarily raising consumption tax rates or widening the sales-tax base, according to an Arizona State University report that already is being debated.
  • Arizona policymakers could eliminate the state's personal income tax%2C making Arizona more competitive with other states%2C a new study contends.
  • Stephen Slavinski %2C an economics researcher at Arizona State University%2C said the state could eliminate its income tax over six to eight years of budget vigilance.
  • Arizona's personal income tax currently contributes about %243.5 billion a year%2C or nearly one-quarter of statewide revenue.

Arizona policymakers could feasibly end the state's personal or individual income tax within six to eight years without necessarily raising consumption tax rates or widening the sales-tax base, according to an Arizona State University report that already is being debated.

Stephen Slivinski, author of the report, contends that Arizona's personal income tax could be eliminated, as Gov. Doug Ducey has proposed, over a multiyear period if lawmakers keep general-fund growth to no more than 2.3 percent yearly and assuming overall tax revenues grow close to their long-term average.

Personal income taxes pump $3.5 billion a year into the state's coffers and contribute almost one-quarter of government revenue, Slivinski noted in the report, "Paths to Reform: A Policy Roadmap to Elimination of the Arizona Income Tax," released this week.

Slivinski, a former senior economist at the Goldwater Institute, argued that eliminating the state income tax would enhance Arizona's competitiveness with other states. "Arizona is losing out on the race to attract investors and jobs," he said in the report.

Eliminating the tax also would cast Arizona as a more business-friendly state and reduce volatility in state revenues, since sales taxes are a more steady funding source, added Slivinski, a senior research fellow at the Center for the Study of Economic Liberty at ASU.

Consumption taxes are less harmful to investments and job creation and could fill the gap created by a decline in personal income taxes, Slavinski said. As a temporary measure, he said lawmakers might consider increasing Arizona's statewide 5.6 percent sales-tax rate to 6.6 percent. The state's sales-tax rate already is fairly high, although Arizona's tax base doesn't apply to a lot of personal, business and professional services. Arizona taxes only 55 of 168 services tracked by the Federation of Tax Administrators, the report said.

Whether or not sales taxes were increased temporarily, spending restraint at the Capitol would be needed to offset losses from income-tax elimination, the report said. For example, the state might consider ending funding for the Arizona Commerce Authority or curtail revenue sharing with cities, especially wealthier ones, Slavinski suggested.

Dennis Hoffman, an economics professor at ASU's W.P. Carey School of Business who was not involved in the study, praised the report for laying out various options but said he didn't think eliminating individual income taxes would trigger a major economic transformation of the state.

"I'm skeptical that we could dramatically change our growth trajectory" by eliminating personal income taxes, Hoffman said, noting that various other states including California, Colorado and Utah are faring just as well or better yet with higher income-tax rates. "The economic evidence for states without an income tax is mixed," he said.

Hoffman also noted that Arizona's income tax is progressive, with a small slice of the population paying a big share of taxes. This implies that its elimination could heighten concerns about the widening rich-poor gap. Also, he noted, the 2.3 percent government spending target envisioned in the study might not be realistic if inflation accelerates or if Arizona attracts a lot more newcomers, who would increase demand for government services.

Further, Hoffman said individual income-tax revenue in 2015 is projected at $3.75 billion, which would mean an even bigger funding gap to close if this revenue source were eliminated.

The ASU Center for the Study of Economic Liberty, also housed at the W.P. Carey School of Business, was established in 2014 with the help of $5 million in gifts. Part of the money came through a grant from the W. P. Carey Foundation, which supports schools and universities in the areas of business and economics. The organization's founder, the late investor Wm. Polk Carey and founder of W. P. Carey & Co., also provided a $50 million gift to ASU in 2003 that resulted in the renaming of the business school.

The W. P. Carey Foundation helped to secure up to $3.5 million for the new center from the Charles Koch Foundation, which focuses its philanthropy on university research and education to advance understanding of how free societies improve the well-being of people around the world.

Reach the reporter at russ.wiles@arizonarepublic.com or 602-444-8616.