Pro-Growth Tax Reform in Arizona By Dan Mitchell

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Pro-Growth Tax Reform in Arizona

The best referendum result of 2020 (indeed, the best policy development of the year) was when the people of Illinois voted to preserve their flat tax, thus delivering a crushing defeat to the Prairie State’s hypocritical governor, J.B. Pritzker.

The worst referendum result of 2020 was when the people of Arizona voted for a class-warfare tax scheme that boosted the state’s top tax rate from 4.5 percent to 8 percent.

In one fell swoop, Arizona became a high-tax state for investors, entrepreneurs, innovators, and business owners. That was a very dumb choice, especially since there are zero-income tax states in the region (Nevada, Texas, and Wyoming), as well as two flat-tax states (Utah and Colorado).

You can see Arizona’s problem in this map from the Tax Foundation. It’s great to be grey and good to be yellow, but bad to be orange (like Arizona), red, or maroon.

That’s the bad news.

The good news is that lawmakers in have just approved a plan that will significantly lower tax rates and restore the state’s competitiveness.

The Wall Street Journal opined this morning about this positive development.

Arizona currently taxes income under a progressive rate structure, starting at 2.59% up to 4.5%. The ballot last November carried an initiative to add a 3.5% surtax on earnings above $250,000 for single filers. It narrowly passed, meaning the combined top rate was set to hit 8%, higher than all of Arizona’s neighbors except California. …Mr. Ducey’s budget will cut rates for all taxpayers.The Legislature can’t repeal the voter-approved surtax, so above the 2.5% flat rate, there will still be a second bracket on income over $250,000. But the budget also has a provision adjusting the flat tax downward for those Arizonans, so no one will pay a top rate above 4.5%. …the same as today. …No Arizonan will have to pay the threatened 8% rate, since the provisions forestalling it are immediate. …“Every Arizonan—no matter how much they make—wins with this legislation,” Mr. Ducey said. “It will protect small businesses from a devastating 77 percent tax increase…and it will help our state stay competitive so we can continue to attract good-paying jobs.” That’s worth celebrating.

story from the Associated Press gave the development a much more negative spin.

After slashing $1.9 billion in income taxes mainly benefiting upper-income taxpayers and shielding them from higher taxes approved by voters in an initiative last year, the Republican-controlled House returned Friday and passed more legislation targeting Proposition 208. The House approved the creation of a new tax category for small business, trusts and estates that will eliminate even more of the money that the measure approved by voters in November was designed to raise for schools. The proposal passed despite unified opposition from minority Democrats. …The governor has expressed disdain for the voter-approved tax, saying it would hurt the state’s economy and vowing in March to see it gutted either though Legislation or the courts. …The budget-approved tax cuts set a flat 2.5% tax on all income levels that will be phased in over several years once revenue projections are met, with those subject to the new education tax paying 4.5% at most.

If nothing else, an amusing example of bias from AP.

I have two modest contributions to this discussion.

First, it’s not accurate to say that Arizona adopted a flat tax. Maybe I’m old fashioned, but a flat tax has to have only one rate. Arizona’s reform is praiseworthy, but it doesn’t fulfill that key equality principle.

Second, the main takeaway is not that lawmakers did something good. It’s more accurate to say that they protected the state from something bad.

I’ve updated this 2018 visual to show how the referendum would have pushed Arizona into Column 5, which is the worst category, but the reform keeps the state in column 3.

P.S. North Carolina made the biggest shift in the right direction in recent years, followed by Kentucky, while Kansas flirted with a big improvement and settled for a modest improvement. Meanwhile, Mississippi is thinking about making a huge positive jump.

P.P.S. Since Arizona voters made a bad choice and Arizona lawmakers made a wise choice, this is evidence for Prof. Garett Jones’ hypothesis that too much democracy is a bad thing.




More Good News on School Choice

I’m pessimistic about the direction of public policy, especially on fiscal issues such as taxes and spending.

But there is a silver lining to this dark cloud of statism. We’re seeing continuing progress on school choice, most notably a big expansion of educational freedom in West Virginia.

It appears more and more state and local policy makers are reaching the inevitable conclusion that government schoolsoperate for the benefit of teacher unions rather than students.

And this is motivating many legislators to push for school choice, especially since there’s more and more evidence that school choice improves educational outcomes.

For instance, the Wall Street Journal opined last week about a new victory in Indiana.

Ten years ago in these columns, we hailed Indiana for its leadership in establishing one of America’s most ambitious school voucher programs. On Thursday the Indiana Legislature built on that achievement by approving a budget that will take the program to 48,000 students a year from about 37,000. …The teachers unions are unhappy. Their beef is that money to expand choice is taken from traditional public schools. And this year they lobbied local school boards to pass resolutions opposed to school choice. But that common union line about choice robbing public schools isn’t true. …92% of Indiana students will be in traditional public schools, and 93% of all education funding will go to these schools. …Since 2011, when Indiana pushed through its first voucher plan, more than a quarter-million Hoosier students have benefited. In an interview with Today’s Catholic, former Gov. Mitch Daniels explains the moral logic of choice this way: “Providing poor and minority families the same choice of schools that their wealthier neighbors enjoy is the purest example of ‘social justice’ in our society today.”

Meanwhile, Arkansas may be on the verge of adding to the good news.

Here are some excerpts from an article by Jason Bedrick in National Review.

In response to families demanding more educational options, six states have already passed new choice policies or expanded existing ones this year, and similar bills are still making their way through more than a dozen other state legislatures. …the Arkansas state senate…passed Senate Bill 680,which has the support of Governor Asa Hutchinson and the Arkansas Department of Education, by an overwhelming margin. Although only half the size of the previous proposal and limited only to low-income children, the bill still represents a major step toward providing broad access to educational choice. The Arkansas House now has another opportunity to do right by Arkansas families desperate for more educational options. …the Arkansas House Revenue and Taxation Committee voted to recommend that the full House pass the bill.

The superintendents of government schools are fighting to preserve the status quo. Their main argument is that choice will hurt outcomes for students stuck in their schools.

But competition encourages everyone to do better, and Jason shares some of the evidence about government schools doing better when there is school choice .

The research about the effects of educational-choice policies on public schools…overwhelmingly finds that such policies benefit not only participating students, but also the students who remain in their assigned district schools. Out of 27 studies, 25 find that students attending district schools improve their performance on standardized tests after the introduction of a choice program, while only one study found a negative effect, and one found no visible effect. …a recent study by the University of Arkansas found that states with robust educational-choice policies saw significant improvements on the National Assessment of Educational Progress (known as the “Nation’s Report Card”) over the last two decades. …The sky isn’t falling in any of the 29 states that have some form of private-school-choice program. Indeed, the sun is still shining on their public-school systems, which have not only not collapsed but are actually performing better than before.

Fingers crossed that Arkansas lawmakers do what’s right for kids rather than siding with the education bureaucracy.

Let’s conclude with this video from the Institute of Justice, which makes the point that school choice is especially critical for those with low incomes and other challenging backgrounds.


shared a similar video back in 2016 as part of a column about why school choice is critical for black children.

P.S. If you want to learn more about school choice, I recommend this video.

P.P.S. It’s uplifting to see very successful school choice systems operate in nations such as CanadaSwedenChile, and the Netherlands.

Milton Friedman’s School Voucher Idea at 60

ByDAN LIPSJune 24, 2015 8:00 AM

Just the beginning. (Alamy/Getty Images)

From school choice to personalized lifelong learning.

Sixty years ago, Milton Friedman came up with a profound idea for improving education. Rather than paying public schools to educate the students in their districts, the future Nobel Laureate argued, the government should provide parents with vouchers to allow them to choose what school each child would attend.

In cities such as Milwaukee and Cleveland and Washington, D.C., and states such as Arizona and Florida and Indiana, families across America have benefited from programs designed to give families educational choice. Empirical evidence assessing these programs shows that allowing parents to choose their children’s schools results in greater parental satisfaction, higher student test scores, and improved graduation rates.

But in 2015, the landscape of K–12 and higher education, as well as the economy and the labor market as a whole, are changing. And these changes require us to rethink how choice in education could best help children and adults succeed. Consider two key trends:

First, students of all ages now have unprecedented opportunities to benefit from affordable and high-quality learning experiences. In 2015, a student in the United States — or anywhere in the world — with an Internet connection has the opportunity to learn from a wide variety of terrific teachers.

Many schools are using technology to offer personalized and challenging forms of instruction. Brilliant educators like Salman Khan — the founder of Khan Academy — are providing lessons online, for free, for any student who is willing to do the work. Colleges like MIT and Stanford now offer coursework online for free and even award credentials to those who pass an exam.

For motivated students of all ages, learning is becoming a personalized journey that can happen any day, at any hour, at their own pace, not just within the walls of a traditional classroom or during the school year. Students will experience education through multiple channels, and not just from one school.

Second, it is becoming increasingly clear that the need to learn doesn’t end with earning a diploma. Many adults who have traditional credentials like college degrees are struggling to find well-paying jobs. According to the New York Federal Reserve Bank, 44 percent of recent college graduates are in jobs that don’t require a college degree. Some professions that once were secure livelihoods are being disrupted or replaced by machines, technologies, or new enterprises. As a result, many workers are being forced to acquire new skills in order to change careers.

What do these trends mean for Milton Friedman’s original idea of using school vouchers to improve education?

We should be giving families control of the funds that they will spend on K–12 and higher education throughout their lives.

Instead of simply providing parents with the power to choose which school their child attends during a given school year, we should be giving them — and eventually the students themselves, when they reach adulthood — control of the funds that they will spend on K–12 and higher education throughout their lives. Rather than only allowing parents to answer the question of where a child goes to school, we should let students (or, initially, their parents) control where, when, how, and from whom they learn.

Five states, led by Arizona, have introduced state-funded education savings accounts that give families this control of K–12 funding. Parents can use funds in the account to pay for school tuition, tutoring, online classes, and instructional materials, and if there is anything left in a given year, to save it for future years. The state maintains proper oversight by tracking how funds are spent.

Nevada recently enacted a universal education-savings-account program that will offer the parents of all public-school students the chance to take direct control of their children’s education in this way.

Besides these promising state efforts, Congress has an opportunity to begin giving families direct control over how their education funds are spent over the course of a lifetime. Congress could reform federal 529 savings plans, which allow tax-free saving for college, to include other allowable uses — from preschool and K–12 education to post-college job training.

Transforming 529 accounts into Lifelong Learning Education Savings Accounts would provide an immediate benefit to the families of the 12 million holders of 529 savings accounts. Use of the accounts would likely grow if other expenses were allowed, since 35 states and D.C. offer tax incentives for contributions into 529 accounts. Congress could also give families the option of receiving their share of federal education funds directly into an account if they forgo public programs such as Head Start. This would ensure that disadvantaged students also have the opportunity to benefit.

Parents should be thankful for Milton Friedman’s vision for school choice, which has improved educational opportunities for millions. But in 2015, education savings accounts and lifelong learning offer a more promising answer to the question of how best to equip Americans to learn, succeed, and pursue happiness throughout their lives.

— Dan Lips is a fellow with the Goldwater Institute. In 2005, he wrote a paper for the Institute proposing the nation’s first state-funded K–12 education-savings-account program for Arizona.

Milton Friedman

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