STATE OF THE WEEK: Sound Advice for Arizona

By at 2 December, 2018, 9:32 am

by Raymond J. Keating-

Small Business Policy Index 2018: Arizona ranked sixth best among the 50 states.

SBE Council’s “Small Business Policy Index 2018” ranks the 50 states according to 55 different policy measures, including a wide array of tax, regulatory and government spending and performance measurements.

Small Business Tax Index 2017: Nevada ranked 11th among the 50 states.

SBE Council’s “Small Business Tax Index 2017” ranks the states according to 26 different tax measures. Among the taxes included are income, capital gains, property, death, unemployment, and various consumption-based taxes, including state gas and diesel levies.

Voters in Arizona on November 6 approved Proposition 126, which was a constitutional amendment prohibiting state and local government from imposing new or increasing existing taxes on services. But can more be done to provide sound tax relief and reform for Arizona taxpayers?

Keep in mind that on the Small Business Policy Index 2018: Ranking the States on Policy Measures and Costs Impacting Small Business and Entrepreneurship, which I write for the Small Business & Entrepreneurship Council, Arizona came in at a solid number six, that is, the sixth best state for encouraging entrepreneurship and small business.

Among the state’s key positives, Arizona imposes fairly low individual capital gains, corporate income and capital gains, unemployment and gas taxes, and has no death tax and no annual LLC fee. The state also has the second lowest level of state and local government employment, the lowest state and local government spending trend, a low level of government spending, fairly low workers’ compensation costs, and is a right-to-work state.

For good measure, Arizona ranked 11th on the “Small Business Tax Index 2017.”

But just as voters showed that tax burdens can be further limited, there is an opportunity for state lawmakers to do the same. In a Washington Times op-ed, Jonathan Williams, chief economist at the American Legislative Exchange Council and vice president of its Center for State Fiscal Reform, called for Arizona lawmakers to conform the state’s tax code in a positive way with the changes made at the federal level with the changes under the Tax Cuts and Jobs Act (TCJA).

Williams hit on a few key points:

● “When federal changes to the tax code — particularly definitions of adjusted gross income (AGI) in the case of Arizona — ‘broaden the tax base,’ they also expand taxable income at the state level. If state lawmakers conform with the federal changes, in many cases, states see a windfall of unbudgeted and ongoing revenue.”

● “As a result of conforming and receiving the resulting revenue boost, states like Idaho, Missouri, Iowa and Georgia were able to use that opportunity and pass along the windfall to state taxpayers by enacting historic tax relief and rate reductions this year. Their economies will be stronger for it.”

● “Not conforming to the federal changes could be very problematic for small businesses across the Grand Canyon State. ‘By not acting, policymakers are allowing more income tax complexity to beset Arizona individuals — and businesses, large and small,’ said Chad Heinrich, Arizona State Director for the National Federation of Independent Business (NFIB).”

● “The untold story of federal tax reform is the golden opportunity it has provided policymakers in our 50 laboratories of democracy and innovation. Only time will tell, but Arizona has a real chance to boost its already solid economic outlook and stay competitive with the many states that have already taken advantage of the federal windfall.”

Ideally, Arizona lawmakers should move to reduce both personal and corporate income tax rates, just as Georgia, Idaho, Iowa, Kentucky, and Missouri have done. Such relief would be a clear plus for Arizona in terms of encouraging growth in entrepreneurship, small business, investment, income and employment.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

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