Recent court decisions have settled some of the uncertainty about Arizona income tax rates for 2021 and beyond.
Income tax surcharge struck down
In March, a court ruled that Proposition 208 was unenforceable. The measure levied a 3.5% income tax surcharge on high-income earners.
Voters approved the measure to provide direct funding to schools. The surcharge was set to go into effect beginning in tax year 2021. It would have increased the top tax rate from 4.5% to 8%.
But, according to the court, the measure mandated expenditures in excess of constitutional spending limits for education. Thus, the court struck the measure in its entirety.
Return filing guidance issued
At the time of the ruling, the Department of Revenue had already released tax forms and instructions for 2021. These incorporated the surcharge. But, due to other changes enacted by the Legislature in 2021, the late-breaking ruling did not actually impact an individual’s overall tax liability. The legislation would have capped the combined income tax rate for individuals subject to the surcharge at 4.5%.
The department said that taxpayers could file using the existing forms and instructions. The department will automatically adjust returns and provide for the correct distribution of monies.
Supreme Court blocks referendum measure challenging flat tax
In other developments, voters will not get to weigh in on repealing the state’s flat income tax.
State lawmakers approved a plan phasing in a flat individual income tax rate after 2021. Opponents of the flat tax gathered signatures to place a referendum measure on the November 2022 general election ballot. But, the Arizona Supreme Court blocked the measure.
Under the state constitution, the referendum process does not extend to laws for the support and maintenance of state government. In a brief order, without explanation, the Supreme Court held that the tax law fell within the “support and maintenance” exception. Thus, it could not be referred to the voters. The Supreme Court said that a written opinion explaining its reasoning will follow.