Aquila portfolio manager Tony Tanner, CFA®, was quoted in a recent article by The Arizona Republic about some important tax-related changes for Arizonans in tax year 2023. Included is the adoption of a flat income tax rate of 2.5% for individuals, making Arizona’s rate one of the lowest among states that levy income taxes, according to the article. As Mr. Tanner points out, these changes may help attract more wealthy residents to the State. Might this help further contribute to Arizona’s burgeoning population and economy?
About the Flat Income Tax Rate
Arizona implemented a flat income tax rate of 2.5% in January of 2023, replacing the previous progressive tax rate structure. The State most recently had a dual-rate income tax system for individuals, with rates of 2.55% and 2.98% depending on individual income levels. Although a flat tax was originally planned to be phased in over a three-year period beginning in 2024, the Arizona Department of Revenue elected to fully implement a flat tax rate in 2023, based primarily on strong economic growth.
Currently, Arizona is one of 11 states that impose a flat tax, as opposed to those states that have opted to tax income progressively (or not at all). Among states with a flat income tax, Arizona’s rate is the lowest, according to Business Insider.
Potential Implications
Proponents of a flat tax view this structure as a means of possibly easing one’s income tax burden. Potential benefits of a flat tax also include greater efficiency for both taxpayers and the State. On the other hand, opponents of a flat tax believe that lower income taxes may result in decreased revenue. In addition, some have expressed concerns about a seeming inequity, believing that higher-income earners should be required to pay a greater amount of tax.
Since a flat tax applies the same rate to all individuals regardless of the taxpayer’s income, higher-income taxpayers are generally expected to see the most potential tax savings from the new individual tax rate. Under a progressive—or graduated—tax structure, the tax rate varies based on a taxpayer’s income (the more money you earn, the higher rate of taxes you pay).
Going Forward
As for what a flat income tax rate may mean for the Grand Canyon State, actual results may not be fully evident until after Arizonans file their 2023 income tax returns, and beyond. In the meantime, this is an interesting topic and one we’ll continue to pay attention to.
Please note that Aquila Group of Funds does not provide accounting, tax or legal advice. Individual taxpayers are encouraged to consult with a tax professional to see how this and other tax-related changes may affect their particular situation.
This information is general in nature and is not intended to provide investment, accounting, tax or legal advice, nor is it intended to represent a recommendation or solicitation related to any particular investment, security or industry sector. Neither Aquila Group of Funds, nor any of its underlying entities, provide accounting, tax or legal advice. Individuals should seek tax advice based upon their particular situation.
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