Voters must weigh the potential improvement in K-12 education against higher marginal tax rates and the potential loss of new business investment.

Since fully emerging from the shadows of the Great Recession, Arizona has been in the top five for GDP growth in the United States; has seen increases in personal income, employment, and population; and has consistently been ranked in the top 10 best states for business by Chief Executive magazine.

A key driver of this economic growth is Arizona’s tax policy. In 2011, Arizona ranked 34th in the Tax Foundation’s State Business Tax Climate Index; today it ranks 20th. Because of its tax policy, Arizona has been one of the chief beneficiaries of the exodus of businesses and job creators from California.

This November, Arizona voters will have an opportunity to vote on Proposition 208, which would impose an income tax surcharge for public education and represents a break with Arizona’s three-decade tax policy of lowering individual income tax rates.

In various surveys, Arizona’s K-12 public schools consistently rank near the bottom. In response, in 2018 Governor Ducey signed the 20×2020 law, which increased teacher pay by 20% and spending on education by $1 billion when fully implemented.

Prop. 208 promises to raise an additional estimated $827 million in revenue in 2021. After covering the administrative costs of implementing and administrating the new program, revenue generated by Prop. 208 will be distributed as grants into several buckets:

• 50% for teachers and classroom support, personnel hiring, and base salary increases;
• 25% for student support services, personnel hiring, and base salary;
• 10% for mentoring and retaining new classroom teachers in their first three years of teaching;
• 12% for career training and workforce program for students in grades 9-12; and
• 3% for a teachers’ academy, which incentivizes college students to enter the teaching profession and commit to teaching in Arizona.

The revenue for Prop. 208 would come from imposing a 3.5% surcharge on Arizona’s top marginal income tax rate. Currently, the highest marginal tax rate is 4.5% on a single filer or a married person filing separately who earns over $159,001 and a married person filing jointly or as a head of household earning over $318,001.

Under Prop. 208, the top marginal tax rate would jump from 4.5% to 8%, or by 78% for a single filer or a married person filing separately and earning over $250,000 or a married person filing jointly or head of household earning over $500,000. The 3.5% surcharge would be permanent and would have to be levied even if the legislature changes the income brackets in the future.

If Prop. 208 passes, Arizona would have the nation’s 10th-highest top marginal tax rate and the fourth highest in the western United States, trailing California, Hawaii, and Oregon.

A peer-reviewed study by the Arizona Tax Research Association concluded that “for every 10% rate increase, 1% of high-income filers will move and another 1% who would have moved to Arizona will move elsewhere.” If this analysis is correct, a 78% increase in income tax rates would result in 7.8% of high-income earners leaving the state and an equal number deciding not to relocate to Arizona.

Arizona voters are faced with a dilemma. Will the increased tax revenues promised by Prop. 208 yield a return on investment with better educational results in Arizona’s K-12 schools? Or, will the increased tax rates hinder Arizona’s ability to attract new business investment and maintain its position as a national leader in economic growth and employment?