The first tax rate reduction applies to tax years beginning Januand is not dependent on revenue triggers, unlike the subsequent tax rate reductions.įor tax years beginning January 1, 2022, the top tax rate on individuals is reduced to 2.98% for joint filers with income over $54,544 (“top-bracket earners”). 1828 consolidates Arizona’s four individual income tax brackets and graduated rates into one flat tax rate by 2023. Under this new law, to the extent applicable, high-income earners would be subject to (i) the 3.5% tax surcharge, plus (ii) an additional 1% regular income tax, so that they are subject to the 4.5% cap. Given that the aggregate of the regular tax rate and the 3.5% tax surcharge is capped at 4.5%, the top income tax rate (not counting the 3.5% tax surcharge) for high-income earners effectively becomes 1%.
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1827 enacts a 4.5% cap on the effective tax rate applicable to individuals who would otherwise be subject to the 3.5% tax surcharge. 1827 - Effective for tax years beginning January 1, 2021, S.B. 1828, enacting comprehensive Arizona individual income tax reform. On June 30, 2021, Arizona Governor Doug Ducey signed into law S.B. 1828 – 4.5% Individual Tax Rate Cap and Individual Income Flat Tax Citing an effort to restore Arizona’s competitiveness, legislation was enacted to make changes to Arizona’s income tax system. Consequently, to the extent applicable, high-income earners would be taxed at a total combined state tax rate of 8% on any income exceeding the thresholds.īecause owners of pass-through businesses, such as partnerships and S-corporations, pay income tax under the individual income tax code, rather than the corporate income tax code, this combined 8% state tax rate was deemed by many to discourage in-state investment and diminish Arizona’s economic growth. In addition, under Proposition 208, which the electorate passed in November 2020, a 3.5% state income tax surcharge (the “3.5% tax surcharge”) is levied on taxable income exceeding the thresholds of $250,000 for single filers or $500,000 for joint filers (hereinafter referred to collectively as “high-income earners”). Those in the highest tax bracket will see their rate drop from 4.5% to 2.5%.The State of Arizona adopted several significant tax measures during the 2021 legislative session, including an individual income flat tax, a high-earner tax bypass, and a federal SALT cap workaround.Ĭurrently, Arizona has four individual income tax brackets for individuals ranging from 2.59% to 4.5%. According to the Arizona Center for Economic Progress, the lowest earners in the state may see an average yearly saving of $3. Everyone's tax rate will decrease, but it benefits the wealthy the most.įor example, those in the lowest tax bracket will see their rate drop from 2.59% to 2.5%.
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However, most people will not see that much tax relief. Ducey's office has promoted the plan, which they believe will save Arizonans, on average, around $300.
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“Essentially, what this is doing, is collapsing that into a 2.5% flat tax rate that everyone pays.”Īrizona's four tax brackets will be widdled down to one. So based on how much you make, that can put you into a higher tax bracket,” said Jenna Bentley, with the Goldwater Institute. “So currently, Arizona’s income tax is based on a tier system. The law, passed in 2021, allowed early implementation if the state hit certain economic thresholds. Arizona's 2.5% flat income tax will take effect on January 1, one year ahead of schedule.