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Arizona effort to tax rich draws concerns from business advocates

(AP Photo/Nati Harnik)

PHOENIX — Arizona voters could decide on a proposal to hike income taxes on the wealthy to generate hundreds of millions of dollars for schools this fall, a measure that leading business advocates say would damage the state’s economy.

The Invest in Education Act is a ballot initiative that’s won support among tens of thousands of teachers who went on a six-day strike to demand higher school funding before a state budget gave them a 20 percent raise over three years.

David Lujan, director of the Arizona Center for Economic Progress and an organizer of the initiative, said the proposal is designed to affect a small amount of residents who can afford to pay.

“I think people realize that what came out of the Legislature is not going to fulfill the funding requirements students in Arizona need,” Lujan said. “This is a fair way to fund our schools.”

The measure would bring in an estimated $690 million for public education by increasing income taxes to 8 percent for individuals who earn $250,000 and households who earn more than $500,000. Individuals who earn more than $500,000 and households who earn more than $1 million would pay 9 percent – which would be among the top five highest tax rates in the nation. Right now, the state ranks 38th.

Citing that same statistic, the Arizona Chamber of Commerce this week created an opposition committee. The group says the proposal would jeopardize small businesses, whose owners file taxes as individuals, and make it less likely for businesses to locate here.

Chair Brandy Wells, chamber vice president of external affairs, said the planned 20 percent teacher raises are possible because of the state’s healthy economy – and that the new tax rates would throw that into jeopardy.

“It would make no sense to pursue policies that would weaken our competitiveness and reduce revenues available for education,” Wells said.

Jared Walczak, an analyst with the District of Columbia-based Tax Foundation, said taxing high earners can be risky because their incomes are often based on capital gains and investment vehicles – which are subject to market-related swings.

“You don’t want to be a state where a single bad year creates a crisis,” he said.

Ballot initiatives to hike taxes on the rich are rare but not unheard of. A measure in Washington state in 2010 to adopt an income tax for individuals who make more than $200,000 was overwhelmingly voted down.

Meg Wiehe, deputy director of the Institute on Taxation and Economic Policy, said the public could be more likely to support income tax hikes since federal tax debate in the fall.

“People understand the consequences,” she said. “They’re starting to connect the dots of what does it mean when there’s less revenue to spend.”

The most successful push was in California, where residents voted to not only increase taxes on higher earners, but extended the provision before it expired, Wiehe said.

Arizona voters have already voted to tax themselves to increase education funding. Proposition 301 enacted a sales tax that was recently extended by state lawmakers. But the state’s Democrats oppose new sales tax hikes, saying they hit low and middle income families the hardest.

The new proposal also spells out where the proceeds go: 60 percent to teacher pay and 40 percent to classroom-based expenses, support staff pay raises and all-day kindergarten.

The initiative needs 150,000 signatures in support by July 7 to get on the November ballot. A push is underway from the teachers who went on strike to gather signatures. Lujan said they secured 10,000 on the first day of signature gathering.

“People are ready to vote, ready to go out and work on campaigns and volunteer,” Lujan said. “It’s something I’ve never seen before in Arizona.”