historical perspective on arizona’s tax structure: past, present, and future

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Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future Jeff McLynch State Policy Director [email protected] www.itepnet.org Presentation to the AEA Education and the Economy Summit August 24, 2009

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Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future. Presentation to the AEA Education and the Economy Summit August 24, 2009. Jeff McLynch State Policy Director [email protected] www.itepnet.org. What is past is prologue…. - PowerPoint PPT Presentation

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Page 1: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Historical Perspective on Arizona’s Tax Structure:Past, Present, and Future

Jeff McLynchState Policy [email protected]

Presentation to the AEA Education and the Economy Summit

August 24, 2009

Page 2: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

What is past is prologue…

Page 3: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureOverview Introduction The Present

Arizona’s tax structure is both inadequate and inequitable.

The Past

Changes in tax policy over the past two decades have exacerbated both of these conditions.

The Future

“Whereof what’s past is prologue; what to come, in yours and my discharge”

Page 4: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureIntroduction – Hello, My Name is ITEP Founded in 1980

Based in Washington, DC

Research focuses primarily on state tax issues, with an emphasis on tax fairness and adequacy

In the past five years, conducted studies of state tax systems in KY, LA, MD, MS, IN, AR, IL, MO, and NY

Conducted hundreds of smaller-scale tax analyses in over 40 states

In conjunction with Citizens for Tax Justice, publishes a weekly newsletter, the Tax Justice Digest, that reviews the latest developments in federal and state tax policy

Page 5: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax Structure Introduction – Key Concepts in Tax IncidenceTaxes may be progressive, proportional, or regressive. For instance:

Personal Income Taxes

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Low 20% 2nd 20% Mid 20% 4th 20% Next 15% Next 4% Top 1%

Sales Taxes

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Low 20% 2nd 20% Mid 20% 4th 20% Next 15% Next 4% Top 1%

Property Taxes

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Low 20% 2nd 20% Mid 20% 4th 20% Next 15% Next 4% Top 1%

Corporate Income Taxes

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

0.40%

0.45%

Low 20% 2nd 20% Mid 20% 4th 20% Next 15% Next 4% Top 1%

Page 6: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Present: AZ’s tax structure is inadequate.

Arizona’s revenue shortfalls arise from both current economic conditions…

JLBC – Monthly Fiscal Highlights – July 2009

“…the largest dollar and percentage decline in revenues in records going back to World War II…”

Change, FY08 to FY09 Lowest point since …

Personal Income Tax –24.6% FY 2004

Corporate Income Tax –24.5% FY 2004

Sales Tax –13.7% FY 2005

TOTAL COLLECTIONS –18.4% FY 2005

Page 7: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Present: AZ’s tax structure is inadequate.

Arizona’s revenue shortfalls arise from both current economic conditions…

Arizona

United States

-60% -45% -30% -15% 0% 15%

Personal Income Tax

Corporate Income Tax

Sales Tax

Total Tax Collections

43/50

42/45

6/46

43/43

Source: Rockefeller Institute

CHANGE IN STATE TAX COLLECTIONSArizona & United States, 1st qtr 2008 v. 1st qtr 2009

Page 8: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Present: AZ’s tax structure is inadequate.

Arizona’s revenue shortfalls arise from both current economic conditions…

Source: Rockefeller Institute

TAX REVENUE COULD TAKE 5 YEARS - OR MORE - TO REBOUND

85

90

95

100

105

110

-3 -2 -1 0 1 2 3 4 5

1981 1990 2001 2008 Low-Gap Scenario 2008 High-Gap Scenario

Page 9: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Present: AZ’s tax structure is inadequate.

Arizona’s revenue shortfalls arise from both current economic conditions…

Source: Joint Legislative Budget Committee, March 2009

GENERAL FUND REVENUE UNLIKELY TO RETURN TO PEAK BY 2012

8.15

7.627.227.32

8.76

9.62

9.26

7.72

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

2005 2006 2007 2008 2009 2010 2011 2012

Fiscal Year

Billio

ns

of

do

lla

rs

Page 10: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Present: AZ’s tax structure is inadequate.

Arizona’s revenue shortfalls arise from both current economic conditions… and from long-term policy choices.

STATE & LOCAL TAXES AS A SHARE OF PERSONAL INCOMEArizona & United States, FY 1987 – FY 2006

Source: Census Bureau, Bureau of Economic Analysis

9.0%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Page 11: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Present: AZ’s tax structure is inadequate.

Arizona’s revenue shortfalls arise from both current economic conditions… and from long-term policy choices.

STATE & LOCAL TAXES AS A SHARE OF PERSONAL INCOME – FY06■ >12% of income ■ 11.5% to 12% ■ 10.75% to 11.5% ■ >10.25% to 10.75% ■ <10.25%

Source: Census Bureau, Bureau of Economic Analysis

Page 12: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Present: AZ’s tax structure is inequitable.

Arizona’s tax structure requires low- and moderate-income individuals and families to devote much larger shares of their incomes to taxes than the affluent.

State & Local Taxes in Arizona in 2007

–2%

2%

4%

6%

8%

10%

12%

14%

Lowest 20% Second 20% Middle 20% Fourth 20% Next 15% Next 4% TOP 1%

Income group

Sh

are

of

inc

om

e

■ TOTAL (net offset) ■ Sales & excise taxes ■ Property taxes ■ Income taxes ■ Federal offset

Page 13: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Present: AZ’s tax structure is inequitable.

Arizona’s tax structure requires low- and moderate-income individuals and families to devote much larger shares of their incomes to taxes than the affluent.

The poorest fifth of Arizonans – individuals and families with incomes of less than $20,000 in 2007 – pay 12.3 percent of their incomes in taxes on average (after taking the “federal offset” into account).

Middle-income residents – whose incomes range from $32,000 to $50,000 – pay 9.4 percent on average.

The wealthiest 1 percent of Arizonans – taxpayers whose average incomes reached nearly $1.5 million in 2007 – pay 4.9 percent on average.

In short, relative to their incomes, the most affluent Arizona residents pay less than half as much as poor and middle-income residents.

Page 14: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Present: AZ’s tax structure is inequitable.

Arizona has one of the least equitable tax structures in the nation.

Page 15: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Present: AZ’s tax structure is inequitable.

Arizona places a greater responsibility for funding public services on low-income residents than any other state in the region.

2%

4%

6%

8%

10%

12%

14%

Poorest 20% Middle 20% Top 1%

Income group

To

tal ta

xe

s a

s a

sh

are

of

inc

om

e

TAXES IN THE SOUTHWEST

Page 16: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Present: AZ’s tax structure is inequitable.

The regressive nature of AZ’s tax structure is attributable to the mix of taxes used …

Source: Census Bureau, Bureau of Economic Analysis

Select AZ Taxes as a Percent of US AverageFY 2006

27%

-14%

-32%

-40%

-20%

0%

20%

40%

Property Taxes Sales & Excise Taxes Income Taxes

Page 17: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Present: AZ’s tax structure is inequitable.

The regressive nature of AZ’s tax structure is attributable to the mix of taxes used …

Personal Income Tax Rank

Sales & Gross

Receipts Taxes Rank

Property Taxes Rank

Corporate Income Tax Rank

California 3.7% 5 3.7% 29 2.7% 36 0.74% 7Nevada — 44 6.1% 4 2.7% 35 — 49Arizona 1.7% 39 4.9% 10 2.9% 31 0.47% 23Utah 3.1% 15 4.5% 13 2.6% 38 0.48% 18New Mexico 2.0% 36 5.7% 6 1.7% 47 0.67% 8Colorado 2.3% 32 3.4% 38 2.9% 32 0.25% 43All States 2.5% 3.9% 3.4% 0.50%

Source: Bureau of Economic Analysis; Bureau of the Census

Arizona State & Local Taxes as a Share of Personal Income, FY06

Page 18: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Present: AZ’s tax structure is inequitable.

The regressive nature of AZ’s tax structure is attributable to the mix of taxes used … and to the design of those taxes.

State Income Tax Progressivity, 2007

AZ2.1%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

CA DC ME MN KS NC OR WV MO AR NM OK DE GA MI MS MD ND CO PA IL

ITE

P In

eq

ua

lity

Ind

ex

Page 19: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Past: Changes in tax policy have made AZ’s tax structure less fair over time.

JLBC lists over 230 changes in tax policy (affecting General Fund Revenue) enacted by the Legislature between 1988 and 2008. Of these:

Approximately 1/4 were tax increases

Roughly even split between progressive and regressive revenue sources, but half of income tax changes due to federal conformity.

Some of most notable increases of past 2 decades – the sales tax rate increase of 2000 and the cigarette tax increases of 2003 and 2006 – not included, as they don’t affect general fund revenue.

Roughly 3/4 were tax cuts

Again, a roughly even split between progressive and regressive sources, but cuts in progressive revenue sources considerably larger.

The magnitude of tax cuts catalogued by the JLBC is much greater than the size of tax increases. Of the 21 fiscal years included in the JLBC report, 15 saw a reduction in tax revenue due to prior year changes.

Page 20: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Past: Changes in tax policy have made AZ’s tax structure less fair over time.

ARIZONA'S INCOME TAX - THEN AND NOW

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Lowest20%

Second20%

Middle20%

Fourth20%

Next 15% Next 4% Top 1% Overall

Income group

Sha

re o

f inc

ome

1989

2009

Page 21: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Past: Changes in tax policy have made AZ’s tax structure less fair over time.

ARIZONA'S INCOME TAX - NOW VERSUS THEN

-1.4%

-1.2%

-1.0%

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

Lowest20%

Second20%

Middle20%

Fourth20% Next 15% Next 4% Top 1% Overall

Income group

Sh

are

of

inc

om

e

Page 22: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Future: For legislative leadership, what is past is more than prologue.

INDIVIDUAL IMPACT OF TAX ELEMENTS IN ‘JULY 31’ BUDGET PLANassumes all changes fully implemented in 2009

–0.25%

0.25%

0.50%

0.75%

1.00%

Lowest 20% Second 20% Middle 20% Fourth 20% Next 15% Next 4% Top 1%

Income group

Sh

are

of

inc

om

e

Sales tax increase PIT rate cut Repeal of equalization tax CIT rate cut

Page 23: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Future: For legislative leadership, what is past is more than prologue.

COMBINED IMPACT OF TAX ELEMENTS IN ‘JULY 31’ BUDGET PLANassumes all changes fully implemented in 2009

–0.40%

–0.20%

0.20%

0.40%

0.60%

0.80%

Lowest 20% Second 20% Middle 20% Fourth 20% Next 15% Next 4% Top 1%

Income group

Sh

are

of

inc

om

e

Page 24: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Future: For legislative leadership, what is past is more than prologue.

TEMPORARY VS. PERMANENT TAX ELEMENTS IN ‘JULY 31’ BUDGET PLANassumes all changes fully implemented in 2009

–0.40%

–0.20%

0.20%

0.40%

0.60%

0.80%

1.00%

Lowest 20% Second 20% Middle 20% Fourth 20% Next 15% Next 4% Top 1%

Income group

Sh

are

of

inco

me

'Temporary' (sales) 'Permanent' (PIT, CIT, property)

Page 25: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Future: For legislative leadership, what is past is more than prologue.

GENERAL FUND BALANCE UNDER ‘JULY 31’ BUDGET PLAN

$(3,500)

$(3,000)

$(2,500)

$(2,000)

$(1,500)

$(1,000)

$(500)

$-

$500

$1,000

FY 2010 FY 2011 FY 2012 FY 2013

SALES TAX INCREASE APPROVED

SALES TAX INCREASE REJECTED

Source: Joint Legislative Budget Committee, August 2009

Page 26: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Future: For legislative leadership, what is past is more than prologue.

IMPACT OF PROPOSED INCOME TAX CHANGES

–0.30%

–0.25%

–0.20%

–0.15%

–0.10%

–0.05%

0.05%

Lowest 20% Second 20% Middle 20% Fourth 20% Next 15% Next 4% Top 1%

Income group

Sh

are

of

inco

me

'Across-the-board' rate cut

'Flat tax'

AVERAGE TAX CUT

$8,000 (0.7% of income)

Page 27: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

What to come, in yours and my discharge …

Page 28: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Future: What to come? In your discharge…STATE AND LOCAL TAXES IN ARIZONA – FY 2006

Property tax28%

Other taxes9%

Income tax16%

Sales & excise taxes47%

Source: US Census Bureau

Page 29: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Future: What to come? In your discharge…

IMPACT OF REPEALING ALL ITEMIZED DEDUCTONS – TY 2009

Proposals to broaden the income tax base can be structured to improve tax fairness. Eliminating all itemized deductions would affect less than 40% of AZ taxpayers, but would generate close to $700 million.

0.0%

0.2%

0.3%

0.5%

0.6%

0.8%

Lowest 20% Second 20% Middle 20% Fourth 20% Next 15% Next 4% Top 1%

Income group

Sh

are

of

inc

om

e

Page 30: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Future: What to come? In your discharge…The proposed tax increase would generate close to a billion dollars per year when fully implemented; options for generating the same amount of revenue in a progressive fashion are available.

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

Lowest 20% Second 20% Middle 20% Fourth 20% Next 15% Next 4% Top 1%

Income group

Sh

are

of

inc

om

e

Sales tax increaseAcross the board PIT rate increaseRestore 2005 PIT rates; consolidate deductions & exemptions; create EITC

Page 31: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Future: What to come? In your discharge…Tax incentives, like appropriations, should be continuously evaluated to ensure they are achieving their intended goals in a cost-effective manner. This is especially true during difficult fiscal times.

■ up to $25,000 ■ $25,000 to $50,000 ■ $50,000 to $100,000 ■ $100,000 to $200,000 ■ over $200,000

Source: Office of Economic Research & Analysis, ADOR; all data are for TY 2003; dollar amounts are federal adjusted gross incomes

Composition of All AZ Tax Returns

26%

46% 20%

6%2%

Composition of All Returns Claiming STO Credit

17%

14%

26%

38%

5%

Page 32: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureThe Future: What to come? In your discharge…While it would not necessarily improve tax equity, taxing additional services would generate significant new revenue and ensure the long-term sustainability of the sales tax.

Source: Federation of Tax Administrators

Arizona55

0

15

30

45

60

75

90

105

120

135

150

165

Page 33: Historical Perspective on Arizona’s Tax Structure: Past, Present, and Future

Perspective on Arizona’s Tax StructureReview At present, Arizona’s tax structure is among the

most regressive in the nation, due to a heavy reliance on sales & excise taxes and to the structure of the income tax.

This situation is the result of over 170 tax cuts – both large and small – enacted over the past two decades.

Looking to the future, policymakers seem intent on repeating the past, but options for improving both the equity and adequacy of Arizona’s tax system are available.