Originally Published: March 29, 2011 9:58 p.m.
The Arizona Legislature had considered a bill to, as the sponsors put it, flatten the state income tax. As I would put it, it would shift a tax system that is already harder on middle and low earners than higher earners and make it more so.
It is House Bill 2636. After being held for further input and amendments, the bill's sponsor, Republican Rep. Steve Court of Mesa, said Tuesday that the controversial measure is dead for the current session.
The current income tax system has graduated rates, so higher earners pay a higher rate. This bill would have flattened it to one rate.
Flat taxes are often touted as a great simplifier. Not on income taxes. If you just have a paycheck and nothing complicated in your finances, you can already file very easily with an "EZ" form. If you have, say, a small business, you still have to separate what is real profit from expense and document all that. That is where all the paperwork comes from. Only after all of that do you get to look up your tax rate in a chart. In a flat tax there is one rate. So it saves you one easy step. Maybe a minute's trouble.
A flat income tax might also seem fair, but it isn't when looking at the overall tax picture. We have property taxes, state sales tax, typical sales tax per area and income tax. The sales taxes in particular are extremely regressive, low earners paying a much bigger percentage of their income than top earners do. A lot of the income of top earners is not spent. It's rolled over, right back into investments, and never gets touched by sales tax. The result is that sales taxes are much harder on middle and low earners.
Our progressive income tax only goes a little way toward balancing that out. The end result is that, looking at all state and local taxes combined, low earners pay almost three times the percentage of their income that the top does. Even in the middle we pay about twice as much. The Institute on Taxation and Economic Policy has a paper, "Who Pays," which graphs the taxes of each state.
So this flat tax bill as originally written would mean that everyone earning around $100,000 a year on down would pay more - the very low end a lot more; the very high end a lot less, maybe half. The law also makes a number of other changes about what can be deducted. It would eliminate the mortgage deduction and the general charitable deduction, among other things.
To their credit, the Legislature looked at amendments. Ideas were considered, such as an exemption of low income, maybe $20,000. That's the right idea. It doesn't do much since low-income people don't pay much income tax, and they would still bear the brunt of sales tax. Actually, the only thing that would correct the situation is to look at overall state taxes and adjust the whole package.
They held this bill for input. So give them input. Go to AZLeg.gov and find your House and Senate members and give them your input. Not just on this bill, but on the larger issue of overall state taxes hitting most of us harder than they hit the top.
Tom Cantlon is a longtime local resident, business owner and writer. Contact him at his email address, TomCantlon@TomCantlon.com.