October 17, 2018

Low Tax for Whom? Arizona is a “Low Tax State” Overall, But Not for Families Living in Poverty

State legislators often lock themselves into a race to the bottom in pursuit of being labeled a “low tax state.” Analysis of data from the U.S. Census Bureau appears to lend support to Arizona’s reputation as a “low tax state.” Specifically, Arizona ranks 37th nationally in taxes collected as a share of personal income.[1]

But this narrow lens does not provide a full picture, as it overlooks the fact that Arizona’s tax system has vastly different impacts on taxpayers at different income levels. For instance, the lowest-income 20 percent of Arizonans contribute 13 percent of their income in state and local taxes — considerably more than any other income group in the state. For low-income families, Arizona is far from being a low tax state; in fact, it is tied with Texas as the sixth highest-tax state in the country for low-income families. [2]

Upside-Down Tax Code

According to the most recent data from the Census Bureau and Bureau of Economic Analysis, the state and local tax contributions of Arizona taxpayers total 9 percent of personal income. This relatively small share of personal income collected in state and local taxes is 12 percent below the national average, affording Arizona a reputation as a “low tax state.” But the state tax code is upside-down, that is, it requires taxpayers with the lowest earnings to contribute a larger share of their incomes in state and local taxes than the wealthiest taxpayers.

Analysis from the sixth edition of Who Pays? by the Institute on Taxation and Economic Policy (ITEP) finds the lowest-income 20 percent of Arizona taxpayers — who earn an average income of $11,900 per year — contribute 13 percent of their income in state and local taxes, the sixth highest state and local tax bill for this income group in the country. Similarly, among the next 20 percent of taxpayers — whose average income is $28,000 — state and local taxes are the 10th highest nationally and, on average, account for 10.9 percent of their income. Arizona offers relatively few tax benefits for low-wage workers. Although the state offers a refundable “Increased Excise Tax Credit” for low-income filers, it is one of only 21 states that do not offer a state Earned Income Tax Credit, its property tax credit is limited to the elderly and permanently disabled taxpayers and its “Family Tax Credit” to reduce personal income tax paid is nonrefundable. Further, Arizona does not offer any child-related credits to help offset the costs of child and dependent care[3]

Meanwhile, the top 1 percent of households in the Grand Canyon State — a group with an average income over $1.1 million — contribute just 5.9 percent of their income in state and local taxes. Compared to the rest of the country, Arizona’s state and local tax levy on the top 1 percent is the 12th lowest (or 40th highest).

Low, Mostly Flat Personal Income Tax and High Reliance on Sales and Excise Taxes

Arizona has a relatively low and flat personal income tax structure with rates ranging from 2.59 percent to just 4.54 percent. Various top-heavy income tax preferences, such as a partial exemption of investors’ capital gains income, significantly erode the fairness and revenue yield of the state’s income tax.

But having low personal income taxes comes at a high cost. To pay for state and local government services, Arizona derives nearly half (48 percent) of its tax revenue from sales and excise taxes — far above the national average of 35 percent. As a share of statewide personal income, Arizona’s sales and excise taxes are 22 percent above the national average, ranking the state 11th highest in the country by this measure. According to ITEP’s sixth edition of Who Pays?, the lowest-income 20 percent of Arizona households spend 8.1 percent of their income on sales and excise taxes, compared to just 1.1 percent of income spent on these taxes by the top 1 percent.

Arizona’s upside-down tax code is pushing the state’s impoverished taxpayers deeper into poverty. The state’s low, relatively flat personal income tax has been a major contributor to its reputation as a “low tax state,” but it comes at a steep price as the state relies heavily on sales and excise taxes that fall hardest on low-income families. Despite its reputation as a “low tax state,” Arizona taxes are actually among the highest in the country for lower-income residents.

[1] ITEP analysis of data from the U.S. Census Bureau and Bureau of Economic Analysis: U.S. Census Bureau. “2016 State and Local Government Finance Historical Datasets and Tables,” Sep. 12, 2018. https://www.census.gov/data/datasets/2016/econ/local/public-use-datasets.html.

Bureau of Economic Analysis. “State Personal Income and Employment,” Accessed Oct. 15, 2018. https://apps.bea.gov/regional/docs/DataAvailability.cfm.

[2] Meg Wiehe, Aidan Davis, Carl Davis, Matt Gardner, Lisa Christensen Gee, and Dylan Grundman. “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, 6th Edition,” Institute on Taxation and Economic Policy, Oct. 17, 2018. https://www.whopays.org

[3] Aidan Davis and Misha Hill. “State Tax Codes as Poverty Fighting Tools: 2018 Update on Four Key Policies in All 50 States, Sep. 17, 2018. https://itep.org/state-tax-codes-as-poverty-fighting-tools-2018/.