The object of tax reform must be to decrease the tax burden on Arizonans and to end a system that punishes savings and investment. The Governor's Citizens Finance Review Commission has been tasked with examining the state's tax system and proposing changes. Although some of the commission's principles are laudable, others are based on the notion that the current system collects too little revenue. Policymakers should focus on reforms that make Arizona's tax code simple, fair, neutral, and regionally competitive. Three comprehensive reform options fulfill those criteria:
- Replace the current Arizona tax system with a 3-percent flat tax.
- Replace the current system with a 3-percent consumed income tax.
- Eliminate all income and sales taxes and institute a 3-percent retail sales tax.
Any of those reforms would make Arizona one of the most economically competitive and taxpayer-friendly states in the nation. If phased in over a five- to ten-year period, the flat tax could save taxpayers $3 billion, the consumed income tax $3.3 billion, and the retail sales tax at least $2.4 billion. Those static losses to state government revenue could be offset by increased economic growth and fiscal restraint.
Short of comprehensive tax reform, policymakers should explore the following reforms:
- Restore inflation indexing of the personal income tax code.
- Make the state tax code conform to new federal depreciation rules.
- Equalize personal and corporate income tax rates at 5.04 percent.
- Lower income tax rates to a regionally competitive level.
- Eliminate the corporate income tax.
Restoring inflation indexing of the personal income tax code would be the most modest of those piecemeal reforms, saving Arizona taxpayers an estimated $50 million the first year. Elimination of the corporate income tax would be the most aggressive of the reforms and could result in a quarter billion dollars in taxpayer savings.