This report examines the effects of eliminating the state's corporate and personal income tax on Arizona's economy. It finds that by the year 2016 eliminating the income tax would lead to a 42 percent increase in personal income above what may be expected under the present system. By that same year, 606,400 more jobs would be created. More importantly, more jobs would be created in sectors with annual wages that are higher than the statewide average. By increasing this proportion of high-paying jobs, Arizona's economy would be liberated from the stranglehold that low-paying service and retail jobs currently possess.
The tables included in this report illustrate that more jobs-and better-paying jobs-will lead to more revenue being collected through the sales tax. It estimates that, after the phase-in period, the annual net loss in revenue over the next 16 years would average 20 percent from a status quo baseline (which, of course, is expected to grow anyway.) Net revenue never experiences a year-to-year decline.
This report also examines a revenue neutral scenario where the sales tax is raised to make up for lost income tax revenue. It estimates that a 9.5 percent rate for the transaction privilege tax (TPT) would be needed to maintain revenue neutrality. This rate incorporates a 30 percent displacement factor for large-ticket purchases made outside the state's border. Under this scenario, the effects of eliminating the income tax would be muted somewhat, but still large: 385,800 new jobs and a 35 percent increase in personal income over the baseline by the end of the 16-year period. However, by eliminating sales tax exemptions-estimated to be as much as $4.2 billion-no increase in the TPT would be necessary to make up for lost revenue.