Arizona Prop 208 Passed: An Economic Rabbit Hole

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Arizona voters have some serious ‘splaining to do about the passage of Proposition 208, which raised education funds by boosting income tax rates by up to 98% for high income filers. How could this have happened?

Arizona schools have already received over one billion dollars in new sustainable monies over recent years, with more coming. More importantly, Arizona public schools, without receiving much credit, have become a remarkable success story.

Academic achievement gains for minority students are among the highest in the nation. Arizona charter schools excel in competitive rankings.

But voters apparently weren’t focused on educational outcomes. Prop 208 was marketed as a way to get other people, “the rich”, to pay the freight. Even though it’s one of the oldest tricks in the tax-and-spend playbook, Arizonans fell for it while voters in 17 other states thought better.

California voters rejected the removal of a cap on commercial property taxes that would have been the largest tax increase in state history. Voters in Illinois, Washington and Colorado were among those who defeated reckless taxation proposals.

Many may not know that Arizona once was a high tax state, with a 7% top rate for individuals and a 9% top rate for corporations. It was considered regionally uncompetitive until the 1990s when income tax rates were cut 35% and deductions were expanded.

The result, according to data from the Arizona Tax Research Association, was 145% more income tax revenue, inflation adjusted, in 2017 than in 1991, a rate of growth that exceeded population growth by 60%. More importantly, Arizona’s real GDP increased 176% from 1987 to 2016, while the US GDP grew 100.4%. Clearly, Arizona’s relatively low income tax rates produced abundant tax revenues while attracting capital and capitalists.

No longer. The strategy of sound tax policy is to establish broad-based, fair taxes with the lowest possible rate where they are the least likely to do economic harm. Prop 208 fails on all counts.

It’s singles out a small group and whacks them hard. Unfortunately, the sector being picked on includes many small business owners who pay their business taxes through the individual income tax system.

These just happen to be the entrepreneurs who drive much of the employment and economic growth in the state. A 100% tax rate increase for them will be enough to discourage further investment in Arizona businesses and to encourage those who can to file elsewhere. Arizona will rank in the top five nationally for income tax rates, a radical change sure to generate impacts which won’t be pretty.

The schools and teachers who have been promised salary increases aren’t so lucky either. Unfortunately for them, Prop 208 provides a highly volatile funding source, while teacher salaries require a stable, reliable revenue stream.

High wealth income taxes are notoriously subject to downturns in the business cycle. In 2008, following the great recession, tax collections from high income filers dropped 32% or $1 billion. School authorities who peg permanent salary increases to this income source are almost assuring a future crisis.

Although Republicans may have dodged a bullet, the election of 2020 continued the trend for Arizona voters to reverse their historical support for prudent, limited government. It’s not likely that Arizonans have change their mind. But who they are have changed.

Migrants from California and other failing states seem to have brought their old voting habits with them, oblivious to the reasons Arizona offers an attractive, affordable quality of life.

Here’s what the spenders can’t seem to grasp. Editorialists and interest groups will never run out of worthy spending projects that a more “enlightened” government would surely fund. But high tax rates, especially on those who don’t need it” is a giant rabbit hole.

Once you start down it, you’re sunk. Government benefits, once conferred, automatically become permanent entitlements which can never be reduced. Meanwhile, high tax rates seldom produce as much revenue as projected, due to tax avoidance behavior. Eventually, basic obligations like public safety and pension funding can’t be met. The answer is… higher taxes on the economically productive. They eventually get fed up and leave.

A growing number of state and local governments are facing economic desperation from this vicious cycle. Let’s hope Arizona isn’t among them.

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Thomas C. Patterson, MD is a retired Emergency Medicine physician, Arizona state Senator and Arizona Senate Majority Leader in the ’90s. He is a former Chairman, Goldwater Institute.

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