Business Owner Flees AZ because of Prop 208 Income Tax Hike

Matt Boyle had big plans to grow his business in Arizona.

Not anymore.

The steep tax hike voters approved when they narrowly passed Proposition 208 in November changed all of that.

Now Boyle is moving the headquarters of his company, Landmark Recovery, out of Scottsdale to Nashville. About 100 good-paying corporate jobs will go with it. So, too, will his plan to expand the company headquarters to 175 employees this year, and to about 300 by the end of 2022.

Proponents of Proposition 208 sold it as a way to soak the rich to pay for needed improvements in public schools. It imposed an additional 3.5% income tax on individuals making more than $250,000 per year. That raised their total tax rate to 8%, an increase of 78%.

The problem for Boyle and others like him is that, unlike big corporations with fat-cat executives, the way his company is structured means any profits Landmark makes have to be reported on his individual income tax returns.

That means rather than plowing those profits back into the company, and thereby creating more jobs, the money will now have to be coughed up to the state in higher taxes.

“I never would have moved except for 208,” said Boyle, who will relocate his operations to Nashville in June. “Yea I make, on paper, good money running my business. But I’m trying to grow that business and reinvest into more growth and more jobs and more opportunity.

“I fly Southwest Airlines. It’s not like I’m flying around in some private jet. I live in a modest house in Scottsdale. It’s not a multi-million dollar mansion. It’s not like I’m this quintessential rich person. I am growing a business.”

Landmark Recovery operates addiction treatment centers in several states, but none in Arizona. However, its headquarters has been in Scottsdale since 2012, and the company opened its first office there in 2006.

Because of the nature of the business, Landmark needs to make investments in real estate and equipment to keep growing, Boyle said. But since the company’s profits are reported on his individual tax returns, those purchases must be made with money he’s already paid in income taxes on under the new rate.

The additional 3.5% is “quite a lot of money, especially in a business like mine that’s really capital intensive and almost every dollar that I earn gets reinvested back into buying buildings or buying equipment for the buildings. Capital purchases like that that aren’t a tax write-off but have to happen.

“The more in taxes I have to pay, the less real estate I can purchase. The less real estate I can purchase, the less buildings and beds for my rate of growth,” he said.

Prior to passage of Proposition 208, Boyle had begun negotiations with his landlord to triple his space in Scottsdale. With the new law in place, Boyle said an analysis of how it would impact Landmark determined that the additional tax burden would cut the company’s rate of growth by half over the next five years if it remained headquartered in Arizona.

Tennessee has no state income tax.

More than half of the estimated 90,000 tax filers directly affected by Proposition 208 are small business owners, according to a report from the Goldwater Institute.

Proposition 208 was put on the November ballot through an initiative campaign led and financed largely by teachers unions and their supporters. Opponents, who were outspent nearly 3-to-1, warned that the steep tax hike would stifle business growth and recruitment because of the pass-through income tax situation Boyle finds himself in.

The Goldwater Institute filed a lawsuit in November, arguing the ballot initiative violates state constitutional requirements that a tax can only be imposed through a two-thirds vote of the legislature.

The Goldwater Institute report warned passage of Proposition 208 would result in the loss of at least 124,000 jobs and $2.4 billion in state and local taxes over 10 years, in large part because of its impact on individual businesses like Landmark, but also the deterioration of Arizona’s overall business climate.

Arizona businesses already pay high property and sales taxes compared with other states, said Chad Heinrich, state director of the National Federation of Independent Business. It had been among the nation’s most competitive for businesses that pay their taxes through the individual returns of their owners. Now Arizona has the ninth-highest top personal income tax rate in the nation, he said. That substantially harms the state’s overall competitiveness, making it tougher to compete against other states in recruiting and retaining businesses.

“I think that Prop 208 could be that which pushes Arizona over the edge where we are no longer competitive for small businesses that want to start up here or small businesses that want to stay here,” Heinrich said.

That fear of a deteriorating business climate was a factor in Boyle’s decision to move. The initiative process makes it far too easy for moneyed special interests to get tax increases and other business-stifling measures on the ballot, he said.

 “If someone could promise me that the 8% is where everything is going to end up I might have stayed,” he said. “But I know it’s not going to end at 8%. It’s not going to end because it’s too easy in Arizona to get stuff on the ballot and passed.”