Arizona’s Lowest Flat Tax in Nation To Take Effect Next Year

Governor Doug Ducey today announced Arizona's surging economy has unlocked the state's historic flat tax package a full year ahead of schedule.

In a letter to Arizona Department of Revenue Director Robert Woods, Governor Ducey directed the department to implement the next phase of Arizona's 2.5 percent flat tax for tax year 2023, not 2024 as originally anticipated.

"It's time to deliver lasting tax relief to Arizona families and small businesses so they can keep more of their hard-earned money," the governor wrote. "This tax relief keeps Arizona competitive and preserves our reputation as a jobs magnet and generator of opportunity."

With the enactment of the flat tax in 94 days on January 1, Arizona will have the lowest flat tax in the nation.

Governor Ducey signed the historic tax package into law last year, further reducing and streamlining taxes for Arizonans while protecting small businesses from the threat of a 77 percent tax increase. The 2.5 percent flat tax was scheduled to phase in over three years.

People and businesses are moving to Arizona in droves. The result is a thriving economy with record revenues that have unlocked the nation's lowest flat tax, indicated by a September 29 joint memo from the Joint Legislative Budget Committee and the Governor's Office of Strategic Planning and Budgeting.

JLBC and OSPB determined that General Fund revenues excluding the beginning balance in Fiscal Year 2022 were $16.7 billion — exceeding the statutory thresholds required to immediately implement the 2.5 percent flat tax in the coming tax year.

The average taxpayer will receive a 13 percent income tax reduction, saving families $350 a year.

The governor continued in the letter, "It's no secret that Arizona's economy is booming. Over the last eight years, we've made responsible decisions to live within our means, reduce burdensome government regulations, lower taxes every year and ensure our state remains a great place to live."

Arizona's competitiveness has soared the last eight years:

• The state has added 400,000 jobs since 2015.
• The Rainy Day Fund sits at the highest level in state history at $1.4 billion.
  
• Economists forecast Arizona will have a $4 billion budget surplus through 2024.
• Arizona ranks #1 for economic performance, according to the most recent Rich States, Poor States report — the ALEC-Laffer State Economic Performance Ranking.

BACKGROUND

Governor Ducey has reformed and cut taxes every year he's been in office.

In 2015, when he took office, the state was operating at a $1 billion deficit. Now, Arizona is projected to have a $4 billion budget surplus from 2021 to 2024. Governor Ducey brought Arizona's Rainy Day Fund to a record-breaking $1.4 billion. Governor Ducey has prioritized keeping ongoing spending below ongoing revenue coming in, resulting in the longest streak of consecutive structural surpluses in Arizona since 2000.

In 2019, the credit rating company Moody's Investors Service today announced it is upgrading Arizona's credit rating from Aa2 to Aa1, the second-highest rating Moody's offers. Arizona is also the only state to have received two rating upgrades from Moody's in the past six years.