Arizona has likely flipped from a red state to a blue state, and along with that momentous change, its voters on election day have approved a massive state income tax hike on high earners. Put one way, it’s a 3.5% state income tax surcharge. Put another way, it’s a 77% state income tax hike.
Two other states that had state income taxes on the November 3 ballot —Colorado and Illinois—went the other way. Colorado reduced its flat tax rate from 4.63% to 4.55%, and Illinois rejected a switch from a flat tax to progressive graduate rates.
In Arizona, voters approved a 3.5% tax surcharge on high-income taxpayers on top of the current top rate of 4.5%, bringing its new top rate to 8%. The estimated $1 billion in annual revenue, raised via the Invest In Ed initiative, is earmarked for teacher and staff salaries, career and technical programs and teachers’ college. Who is high income for purposes of the new tax? Individuals with income above $250,000, and joint filers with income above $500,000. The 4.5% rate applies to income above $159,000 for individuals or $318,000 for joint filers. The vote was 53% in favor and 47% against the proposal, Proposition 208, according to Ballotpedia. The ballot initiative read: “The law would impose a 3.5% tax surcharge on taxable annual income over $250,000 for single persons or married persons filing separately, or $500,000 for married persons filing jointly or heads of households, to increase funding for public education.” Opponents said that it would be an unreliable stream of income and hurt small businesses that pay based on personal tax rates.
Colorado went in the other direction. Colorado voters approved a ballot proposal (Colorado Proposition 116) to reduce its flat tax from 4.63% to 4.55%. While that is a tiny difference (on average, individual income taxpayers will pay $37 less in state income tax for 2020), it’s symbolic: a tax break. The results with 89% reporting were 57% in favor, 43% against. The flat tax rate applies to individuals, estate, trusts and C corporations operating in Colorado, and the new rate will be retroactive back to January 1, 2020. It’s estimated that the tax cut will cost the Colorado Treasury $203 million in 2020-21. Fair Tax Colorado called the initiative bad news for Colorado: “We cannot afford to lose more funding.” Supporters of the measure called it a win for the small business community. Colorado switched form a progressive tax to the flat tax back in the 1980s, and that switch was credited with buoying the state economy and encouraging companies to move to the state.
In Illinois, the ballot question was whether Illinois should allow for graduated state income tax, charging higher income earners more. Voters rejected the proposal. Technically, the measure would have repealed the state’s constitutional requirement that the personal income tax be a flat rate. With 97% reporting, the vote was 55% No and 45% Yes. That leaves in place Illinois’ 4.95% flat state income tax rate. The alternative would have been a tax hike for nearly everyone in Illinois. Gov. J.B. Pritzker signed a law last year that would have enacted the graduated state income tax if voters approved the ballot measure. The 4.75% rate would have been for income up to $10,000 for an individual, 4.9% up to $100,000, 4.95% up to $250,000, 7.75% up to $350,000, 7.85% up to $750,000, and 7.99% on income above $750,00.
What’s happening in other states? In September, New Jersey enacted a change to its state income tax snaring more high earners, by changing the income level where the top rate of 10.75% kicks in, dropping it from $5 million to $1 million. That means that those earning between $1 million an $5 million will see their tax rates increase from 8.97% to 10.75% on that swath of income. Only four states (California, Hawaii, Oregon, and Minnesota) have higher top bracket rates than New Jersey’s second highest, according to the Tax Foundation.
In Massachusetts, a millionaires’ tax is under consideration. A ballot measure to create an additional 4% tax on income above $1 million may appear on the ballot in Massachusetts in November 2022. The tax would be tacked on top of the state’s 5.05% flat state income tax, for a total top rate of 9.05%. The purpose: to provide funds for public education, roads, bridges and public transportation. Meanwhile, in Washington state, one of the few states with no state income tax, there are efforts to specifically prohibit the imposition of a state income tax.