PHOENIX — Arizona has one of the most regressive tax systems in the country according to a new report.
The analysis by the financial advice firm of WalletHub notes state and local governments here rely heavily on sales taxes. That has a greater proportional impact on those at the bottom of the pay scale than those at the top, as they pay more of their income in taxes on what they purchase.
Conversely, the tax linked to wealth — the income tax — has some of the lowest rates in the nation, the result of cuts approved over several decades by both Republican and Democrat governors.
The result, according to WalletHub, is Arizona ranks 41st out of the 50 states in what it considers “tax fairness.” And the report also puts Arizona among states where the bottom 20 percent of earners are the most “overtaxed.”
Yet none of that is altering the promise that Gov. Doug Ducey made during last year’s campaign to submit legislation to reduce taxes every year “with the goal of pushing income tax rates as close to zero as possible.” Ducey made good on that this year by signing legislation to index income tax brackets, a move that legislative budget analysts say will reduce state revenues by $15.4 million next fiscal year, $24.7 million the year after that, with increasing loses in successive years.
But gubernatorial press aide Daniel Scarpinato said his boss has concerns about the unfairness of sales taxes.
He said that is why Ducey opposed the 2012 initiative to make permanent the one-cent surcharge on state sales taxes. And Scarpinato said the governor opposes proposals by some to hike sales taxes to boost funding for schools, instead pushing his plan to take money out of the state land trust account.
Scarpinato said the governor recognizes the system may be flawed.
“We need to have taxes that are fair to everyone,” he said. “And the fact is that we don’t.”
But Sen. John Kavanagh, R-Fountain Hills, said he sees nothing unfair about how Arizona collects its revenues — and from whom. He said the WalletHub report that says Arizona’s tax system is regressive misses a key point.
“Half the people don’t pay any income tax,” he said. And he said about half of all individuals — potentially in the same group — get some type of government benefit.
“This fairness group should look into the unfairness of half the people carrying the other half,” Kavanagh said.
“That’s a real problem,” he said. “And all they want to do is make it worse.”
The WalletHub report deals with all sources of revenue for both state and local governments.
Before 1984, Arizona’s sales tax was 4 percent. That was hiked to a nickel in what was supposed to be a temporary levy, one that never went away.
Voters added another six-tenths of a cent in 2000 for education. And the rate went to 6.6 percent for three years in a budget-balancing move but currently stands at 5.6 percent.
On top of that are a host of local sales taxes, not just by cities but also counties, special districts and even transportation funding. That puts the combined rate in some communities in excess of 10 percent.
WalletHub puts Arizona at No. 41 in terms of dependency on sales taxes, with No. 1 being the least.
At the same time, Arizona had the eighth lowest reliance on individual and corporate income taxes, money that goes only to the state. And tax rates are dropping.
The top rate for individuals making more than $150,000 a year in taxable income was 5.17 percent in 1997. It now is 4.54 percent.
For corporations, the decline has been sharper, from a hair below 7 percent as recently as 2013 to 5.5 percent now. And it will drop automatically to 4.9 percent in 2016.
WalletHub also finds Arizona square in the middle of reliance on property taxes, at No. 25. But those are revenues that go to schools, local governments and special taxing districts; the state has no property tax.
Out of an estimated $9.1 billion in taxes to be collected by the state this year, close to 47 percent is predicted to come from sales taxes. Another 40 percent is in individual income taxes, with about 7 percent in corporate income taxes and the balance is other taxes.
