PHOENIX — An initiative proposing to pay for education improvements by hiking taxes on only the most wealthy also appears to remove a small income tax break available to those with fewer financial resources, who are just trying to keep their income even with inflation.
A 2015 law requires that income tax brackets be indexed. The idea is that taxpayers should not be forced into a higher tax bracket simply because their income has kept pace with the cost of living.
But the top legislative attorney says the way the #InvestInEd initiative is crafted eliminates the requirement for the state Department of Revenue to make future inflation adjustments. More immediately, Mike Braun said it would roll the brackets back to what they were in 2014, meaning some people who until now had been getting the benefits of indexing will lose it.
David Lujan, who chairs the campaign committee, said that isn’t the intent.
He cited language in the initiative which says that the new tax brackets — the ones that impose rates as high as 9 percent on the highest wage earners — are subject to existing indexing laws.
But Braun, executive director of the Legislative Council, pointed out that the language on which Lujan relies refers only to a mandate to index the current tax brackets — and not to the new brackets the measure seeks to impose. Put simply, he wrote in a memo, the initiative language promising future indexing is “meaningless.’’
“It might be that the drafters of the initiative intended that the dollar amounts in the new tax brackets be adjusted for inflation,’’ Braun said.
“The language of the initiative does not accomplish this purpose, however.’’
Future indexing aside, Braun said if the initiative is approved, tax brackets will go back to where they were prior to 2015, immediately costing affected affected Arizonans about $25 million more a year. Lujan said he will have his organization’s attorneys “look at it.’’
At the heart of the issue is “bracket creep.’’
Prior to 2015, the break points between tax rates were set at fixed levels.
So an individual with taxable income of up to $10,000 paid 2.59 percent in state income taxes. That same tax rate existed for married couples filing jointly with income up to $20,000.
The next $15,000 earned by individuals — $30,000 for couples — was taxed at 2.88 percent.
Other break points with higher tax rates were at $50,000 and $150,000, again, double for married couples.
That 2015 law directed the Department of Revenue to index those brackets annually according to the average annual change in the metropolitan Phoenix consumer price index.
The result is that for 2017 the lowest tax rate of 2.59 percent applied to income up to $10,346 for individuals and $20,690 for married couples. Similar changes were made for those at higher rates, with new break points at $25,861, $51,721 and $155,159.
If the ballot measure is approved, its plain language most immediately would reset the break points next year to where they were before 2015.
Take a couple whose $50,000 income increased by 2 percent between 2015 and now, up to $51,000. Under the current law, the top tax rate they pay is 2.88 percent, the rate in effect for income for married couples up to $51,721.
But if the rates are rolled back to 2014 level, that $1,000 above $50,000 would be taxed at 3.36 percent.
The actual tax difference for any one individual or couple is quite small. In this example, the additional burden on this couple, moving from one bracket to another, would be about $3 a year.
And wiping out the requirement for future indexing adjustments would boost the amount owed in future years.
The accelerating nature of the tax burden due to inflation and bracket creep was pointed out out in a fiscal note when the legislation was first proposed. The total dollar loss to the state was pegged at $6.1 million the first year, $16.8 million the second, $26.5 million the third — and on up from there.
Justin Olson, who crafted the indexing legislation when he was a state lawmaker, said the provision in the initiative appears to be a drafting error.
But Olson, now a member of the Arizona Corporation Commission, said it makes the ballot measure he never favored in the first place even worse, as it would now mean higher taxes for anyone who hits the cut points.
He said the whole idea behind indexing is a question of tax philosophy.
“I don’t think it’s appropriate that the state should have an automatic tax increase as a result of inflation,’’ Olson said.
The initiative seeks to raise about $690 million a year for education with an entirely new set of tax brackets.
For most individuals, the rates would remain the same. But the current top rate of 4.54 percent would go to 8 percent for earnings above $250,000 for individuals and income for married couples in excess of $500,000. It also would create a 9 percent tax bracket for individual earnings above $500,000 and $1 million for married couples filing jointly.
Initiative proponents say the money is needed to help restore education funding to where it was before the recession.
They also contend that the promise by Gov. Doug Ducey to boost teacher pay by 19 percent by 2020 and restore other state aid is meaningless without a dedicated revenue source. Ducey, by contrast, said he believes the economy will grow sufficiently to generate the new revenues.