Arizona hits revenue threshold to implement 2.5% flat income tax a year early

Sep 29, 2022, 12:12 PM | Updated: 12:14 pm
(Pexels Photo)...
(Pexels Photo)
(Pexels Photo)

PHOENIX – Arizona’s flat income tax rate of 2.5% will kick in for the 2023 tax year thanks to a healthy economy, the state announced Thursday.

The single-rate system was scheduled to be implemented no later than the 2024 tax year, but it will start a year earlier because the state’s general fund revenue surpassed a statutory threshold.

The phased-in flat tax plan was part of the 2021 state budget. The plan will cut income taxes by 13% for the average taxpayer, about $340 per year, according to the Governor’s Office.

The plan survived an effort to block it through a ballot referendum, but the Arizona Supreme Court ruled that tax cuts or increases enacted by the Legislature are not subject to a voter initiative in most cases.

Opponents argued the cuts mainly benefit the wealthy and could create a funding shortage for schools, health care and other priorities in the future.

Arizona’s income progressive tax rates ranged from 2.59% at the bottom end to 4.5% for high earners when the cuts were passed.

If the general fund threshold hadn’t been crossed this year, there would have been two rates for 2023: 2.53% for taxable income up to $27,272 and 2.75% for higher amounts.

Gov. Doug Ducey notified the Department of Revenue to implement the flat tax for 2023 after state budget officials calculated the 2022 general fund revenue at $16.7 billion. The threshold to trigger the 2.5% rate early was $12.8 billion.

“Thanks to unprecedented economic growth, we can deliver additional tax relief to Arizonans one year ahead of schedule,” Ducey said in a letter to Revenue Director Rob Woods.

Nine states have flat taxes for the current tax year, none lower than 3%. Nine other states have no income tax.

The Associated Press contributed to this report.

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Arizona hits revenue threshold to implement 2.5% flat income tax a year early