VOL. 17 ISSUE NO. 12   |   MARCH 23 – 29, 2011

MARCH 24, 2011

New analysis of Arizona Income Tax Reform

Revised rates would be lowest of any state with an income tax

WASHINGTON – The Arizona State Legislature is currently considering a major income tax reform plan which would do away with many deductions but also eliminate the state’s multiple brackets and bring the income tax rate down to the lowest in the country, according to a new analysis by the Tax Foundation. While seven states have no individual income tax at all, the proposed new rate of 2.08 percent, to be phased in through 2015, would be the lowest of states which do have such a tax.

The most significant changes in the proposal, already passed by the Arizona House of Representatives as HB 2636, are the elimination of major income tax deductions, including the standard deduction, which is available to all income tax filers, as well as federal provisions that have been copied into the Arizona code, such as the mortgage interest and charitable contribution deductions.

“Although revenue-neutral, the elimination of most deductions will increase tax liability for those who currently take significant advantage of those deductions, and some will pay less,” said Tax Foundation director of state projects Joseph Henchman. “The net result would likely be a reduction in compliance costs associated with tracking deductions and calculating state income tax.”

If approved, Arizona will join seven other states with a flat-rate income tax: Colorado (4.63 percent), Illinois (5 percent), Indiana (3.4 percent), Massachusetts (5.3 percent), Michigan (4.35 percent), Pennsylvania (3.07 percent), and Utah (5 percent). In addition, seven states do not have an individual income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming), and two states have a limited tax applying only to interest and dividends (New Hampshire, at 5 percent, and Tennessee, at 6 percent).

“The effort to streamline the individual income tax joins an already-passed effort to simplify and lower the corporate income tax burden in Arizona,” said Henchman. “That legislation, signed into law by Gov. Jan Brewer last month, will phase in a corporate rate reduction from almost seven percent to just under five percent.”

Tax Foundation Fiscal Fact No. 265, “Arizona Weighs Income Tax Reform,” is available online.

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

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