April 15 is not usually a day for which taxpayers are grateful.
But, for Arizonans, there is some comfort to take on April 15, the deadline for filing income-tax returns: Arizona charges less than all but a handful of the 41 states and the District of Columbia that assess individual income taxes.
The Arizona Republic used income-tax rates collected by the nonprofit Tax Foundation to see how Arizona stacked up with other states at three taxable-income levels: $50,000, $150,000 and $1 million. At each level, Arizona had lower tax bills than all but three to six states.
Arizona’s highest tax rate targeting the well-off is fifth-lowest in the nation; that rate kicks in at a higher level than all but seven states.
Overall, Arizona’s tax burden ranks 41st nationally for all state and local tax rates, the Washington-based Tax Foundation found in its analysis of tax rates as of Jan. 1.
Despite the state’s lower tax rates, income tax has not been mentioned much as a candidate for an increase to address the state’s $3 billion budget shortfall for fiscal 2010. Gov. Jan Brewer has called for a temporary hike on unspecified taxes to raise $1 billion a year, but discussion has centered on sales taxes.
Some legislators and advocacy groups are opposed to any tax hike, believing it would stifle economic growth. One lawmaker, Sen. Ron Gould, R-Lake Havasu City, walked out of Brewer’s speech March 4 when she mentioned a tax increase.
Tom Jenney, director of the Arizona Federation of Taxpayers, said, “You really don’t need to raise taxes at any time and especially at times like this.”
Jenney cited a recent study by the conservative Goldwater and Beacon Hills institutes that estimates a $1 billion income-tax hike would cost the state 14,000 private-sector jobs.
Elizabeth McNichol, a senior fellow at the Center on Budget and Policy Priorities, a Washington organization that advocates for low- and moderate-income families, agrees that higher taxes can “take demand out of the economy.” But so can program cuts, the other main alternative to higher taxes, she said.
McNichol favors a targeted tax hike on the wealthiest. Arizona currently charges 4.54 percent tax on income over $150,000. Income subject to taxes is figured after making deductions, which can include mortgage interest and, in Arizona, all medical expenses for taxpayers who itemize. “The top rate for Arizona is kind of on the low end nationally,” McNichol said. “You have to put everything on the table.”
Revenue for the state
Arizona has paid for its government mainly with sales taxes. In recent years, Arizona’s income tax provided nearly a third of the main revenue for the state, Arizona Department of Revenue records show. Sales taxes accounted for about 60 percent, and corporate taxes provided less than 10 percent. That, in part, is because many businesses file as individuals.
Although Arizona leaders are reluctant to raise taxes, governors of some other states that have higher tax rates and bigger economies are looking to tax hikes to help balance budgets. Lawmakers in at least eight states have proposed income-tax hikes, at least five of them target the wealthiest.
New York raised taxes earlier this year on its richest taxpayers, and California raised taxes in all its brackets. Illinois is considering a permanent 50 percent hike to its 3 percent flat tax.
Of course, state income taxes are one of many ways the government takes a cut of your money. Property taxes often help fund education. Sales taxes seem to reach every transaction, and economists say they can affect the poor disproportionately. That effect is lessened somewhat in Arizona because food is exempt from sales tax. There also are corporate taxes and an array of fees that aren’t taxes at all but feel like it, such as vehicle registration.
Tax-rate differences
State income-tax rates vary wildly, and reputations don’t always match reality.
A person with $50,000 in taxable income taking the standard deduction, for example, would generally owe more in South Carolina ($2,426) than in California ($2,012).
New Jersey taxes are cheaper than New York’s for those earning less than $500,000. But above that, New Jersey rates jump to among the highest in the country, making it pricier for a millionaire there than in New York, at least for state income taxes.
A handful of states, like Michigan and Pennsylvania, have flat tax rates that collect the same percentage regardless of how much is earned.
Many others are like Georgia and Mississippi, which offer multiple rates that top out at such a low level that they have a virtual flat tax. Missouri, for example, has 10 tax brackets, but they top out at 6 percent for every dollar over $9,000, which every full-time worker surpasses in a year.
About 22 states are like Arizona, offering a tiered system of higher rates on those with higher incomes. But there are wide variations even within these states. California has seven tax rates, including a 10.3 percent cut of taxable income over $1 million. Under its February budget accord, that state will raise the top rate to 10.55 percent for up to four years.
Maryland has three tax brackets for those earning more than $300,000. All are higher than Arizona’s top rate. Nine states have top rates above 8 percent.
Even so, Jenney said, Arizona’s economy faces global competition, and all the state’s tax rates remain an obstacle to growth.