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Arizonans Will Regret Setting Tax Policy at the Ballot Box

August 20, 2018

By Tom Patterson
August 20, 2018

Initiatives are a poor way to craft public policy. Voters like them. They jealously guard their right to pass laws directly. But they rarely go to the trouble of informing themselves in any detail, so they’re susceptible to slogans like “clean elections,” “it’s for the children,” and “support our firefighters.”

Laws passed at the ballot box don’t undergo a vetting or refining process. They’re written by advocates with no input from opponents. Since they’re not subject to debate or amendment, they’re fraught with unintended consequences and unclear or unknown provisions.

Worst of all, under Arizona’s Voter Protection Act (also passed by voters), laws approved by the initiative process, for practical purposes, can never be changed by the legislature, no matter how unsuitable they may prove out.  There’s a reason our founders gave us a republic rather than direct democracy.

Decisions made by ill-informed voters can be catastrophic.  In 2000, an initiative was passed to increase Medicaid coverage for non-disabled childless adults. The proponents insisted that the funding would come entirely from tobacco settlement funds and federal subsidies, but that’s not how the proposition was written.

Nevertheless, the state Supreme Court refused to force them to tell the truth in the “impartial” official publicity pamphlet. Voters approved the measure believing they would be held harmless financially. Taxpayers still pay hundreds of millions each year for that one.

This year’s InvestinEd may be one of the most thoughtless initiatives ever. The promise to voters this time is that they can “soak the rich” and boost education funding with no consequences to themselves.

Top income tax rates on incomes over $250,000 ($500,000 for couples) would go from 4.54 to 9 percent. According to advocates, that’s a mere 4.46 increase in the top tax rates, but the actual increase in taxes paid is more like 76 to 98 percent.

What’s the discrepancy? Ask yourself if you pay taxes of $1,000 on $20,000 in income one year and next year pay $2,000 on the same income, how much did your taxes go up? 100 percent of course, even though your tax rate moved only from 5 to 10 percent.

It turns out that InvestinEd’s goal of soaking the “rich“ is more like soaking job-creating entrepreneurs. In Arizona, most small businesses are organized as S-corps or LLCs, business entities in which income is “passed through” to the individual owner. Small business profits are taxed at personal income tax rates.

The effect of InvestinEd would be to saddle Arizona with the fourth-highest small business tax in the nation, up from 38th. Ironically, states these days are desperately trying to convince entrepreneurs that they are “open for business.”  Our competitor states must be thrilled.

Here’s another irony. InvestinEd not only soaks the rich, it soaks all taxpayers. That’s the result of an apparent drafting error (see above re: unintended consequences) that eliminated indexing of income tax brackets for all taxpayers.

In 2014, the Legislature authorized indexing of tax brackets so that we wouldn’t pay more taxes just because of inflation. InvestinEd, as written, eliminates all indexing back to 2014. That means all taxpayers would be exposed to higher tax rates. Taxpayers would pay $49 million more in the first year, and that’s sure to grow.

Arizona voters should also ponder the implications of becoming a high tax state (our income tax would be fifth highest) in the light of recent federal changes limiting the deduction of state taxes. Productive taxpayers are fleeing high-tax states while those states are straining to reduce their tax burden. Raising our taxes $690 million under the circumstances defies common sense.

Arizonans should learn from real-life basket cases like Illinois and Connecticut. Dominating government employee unions successfully insisted on spending levels that required tax increases. But more spending is always demanded, and taxes repeatedly raised. The tax base erodes and the weakened economy stumbles. Eventually it’s too late to reverse course.

The Voter Protection Act doubles down on the risk. It ensures that any mistakes made can never be undone. Punitive tax rates and stifled growth will be permanent.

We, too, can join the states threatened with bankruptcy. Don’t do it.

Former Lawmaker Tom Patterson is a retired emergency physician.  He was a state senator from 1989-1998; serving as senate majority leader from 1993-96.   He is the author of Arizona’s original charter school bill and was Chairman of The Goldwater Institute from 2000-2013.



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