Tax Insights

Your Guide to State, Local, Federal, Estate + International Taxation

Arizona Proposition 208

Have you heard that there is an election going on? And while most of the attention has been focused on the presidential election, there are local elections and initiatives, as well.

A very interesting proposition in Arizona is Proposition 208 (Prop 208). This is also sometimes known as the Invest in Education Act. (Or Invest in Ed).

Don’t miss: The never ending tax season

A brief history of the proposition: In various surveys, Arizona consistently ranks near the bottom in the nation in both funding and scoring. In 2018, thousands of teachers and other school employees staged protests, walkouts and a strike over funding for education. A budget plan (Governor Ducey’s 20×2020 law) was passed that did increased teacher pay by 20% and funding for education by $1 billion (when fully implemented), but some voters did not believe that the increase was sufficient.

From that, Prop 208 gathered enough voter signatures to be placed on the ballot in Arizona on November 3rd. The measure would impose an income tax surcharge for public education. The measure promises to raise an additional estimated $827 million in revenue in 2021. After covering the administration and implementation of the new program, the funds would distribute as follows:

  • 50% for hiring and raising the salaries of teachers and other certified employees, such as counselors and nurses
  • 25% for hiring and increasing the salaries of student support staff, including classroom aides and bus drivers
  • 10% for mentoring and retaining new classroom teachers in their first three years of teaching
  • 12% for career training and workforce program for students in grades 9-12
  • 3% for a teacher’s academy, which incentivizes college students by waiving college tuition for teachers-in-training who commit to teaching in Arizona after graduation

The income tax surcharge would impose a 3.5% surcharge on Arizona’s top marginal income tax rate. Currently, the highest marginal rate is 4.5%. This rate would increase to 8% (3.5% plus 4.5%) for single filers earning over $250,000 and for head of household and married filing joint filers earning over $500,000. The 3.5% surcharge would be permanent and would be required to be levied, even if the legislature changes the income tax brackets at some point in the future.

If Prop 208 passes, then Arizona would have the 10th highest top marginal rate in the United States and the fourth highest in the western part of the country, only behind California, Hawaii and Oregon. A peer-reviewed study by the Arizona Tax Research Association concluded that “for every 10% rate increase, 1% of high-income filers will move and another 1% who would have moved to Arizona will move elsewhere.” If that is the case, the surcharge, which results in a 78% increase in income taxes would result in 7.8% of high-income earners leaving the state and an equal number deciding not to relocate to Arizona.

This is not an easy decision for voters.  There are questions that just cannot be readily answered. Will the increased tax revenues promised by Prop 208 yield better educational results in Arizona’s public schools? Or will the increased tax rates reduce the ability of Arizona to bring in new business and sustain economic growth?

Contact your Henry+Horne tax advisor with any questions you may have.

Donna H Laubscher, CPA