Starting in 2023, the State of Arizona Will Implement a 2.5% Flat Tax
As a part of the 2021 Arizona state budget, a 2.5% flat tax was scheduled to be implemented by the 2024 tax year. However, now that Arizona’s general fund revenue has surpassed a statutory threshold of $12.8 billion with a surplus of $16.7 billion, the flat tax is going to come into effect one year earlier than expected, levying the same fixed percentage rate on Arizona taxpayers starting in 2023.
If this threshold had not been crossed, there would have been 2 different rates in 2023: 2.53% for taxable income up to $27,272 and 2.75% for amounts above that. This tax is the lowest flat tax in the country, with 9 other states also having a flat tax (Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah).
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There was an effort to block this legislation through a ballot referendum in November 2021, but the Arizona Supreme Court said that tax cuts enacted by the legislature are not subject to voter initiatives and removed it from the ballot; it’s considered a “money matter” that provides for the “support and maintenance” of state government. The main opponents of this flat tax argue that it mainly benefits the wealthy and creates a funding shortage for schools and healthcare.
REDW’s State and Local Tax (SALT) team will continue to follow this tax and its various support and opposition, but as of this posting the 2.5% flat tax goes into effect starting in 2023. Contact SALT Manager Jeanna Schenk, CPA, MST, below. We welcome your state and local tax questions.
