State Tax Primer from A to W: Arizona

Welcome to my third in a series on state taxes! For information about what I’m trying to do, read my introductory bit. Next on the agenda: Arizona!

ARIZONA

Population: 6,338,755 (16th)

Capital: Phoenix

Largest City: Phoenix

Gross Domestic Product: $232 billion

GDP per capita: $27,232 (39th)

2004 election winner: George W. Bush

web site: http://www.az.gov/

Income Tax

Arizona collects personal income taxes if your Arizona gross income is at least $15,000, or if your Arizona adjusted gross income is at least $11,000 for married filing jointly ($5,500 for those filing as single, head of household or married filing separately).

Arizona residents are taxed on the same income that they report for federal income tax purposes. This includes unemployment compensation; to the extent that unemployment compensation is taxable for federal purposes, it is also taxable for Arizona purposes. This also means that income earned in other states is taxable in Arizona; if you pay taxes in two or more states, you may be able to take a credit for taxes paid to other states.

There are five income tax brackets in Arizona: 2.87%, 3.20%, 3.74%, 4.72% and 5.04%. Income is income: Arizona has no special treatment for capital gains. Capital gains are taxed at the regular tax rate.

Social Security and Railroad Retirement benefits are exempt from Arizona income tax. Up to $2,500 total of military, civil service, and Arizona state/local government pensions are also exempt from Arizona income tax. All out-of-state government pensions are fully taxed, as well as retirement benefits paid by other states.

Arizona does participate in the Set Off program. An Arizona state tax refund will be taken to satisfy any outstanding liabilities owed to the State of Arizona or to the Internal Revenue Service; a federal refund will be taken for same.

Sales Tax.

Arizona sales tax is 5.6%. Some cities may add a local sales tax, bringing the rate to an average of about 6-6.5%, and as high as more than 10% across the state.

Arizona does not charge sales tax on food purchased at grocery stores, although cities are allowed to do so. Prescription drugs are also exempt from sales tax.

Tobacco Tax

Arizona’s tax rate on cigarettes is $2.00 for a package of twenty cigarettes, ranking them 4th in the country. It’s one of the few taxes in Arizona that is well above the national average.

The rates on other tobacco products like snuff, smoking tobacco, chewing tobacco, and cigars vary based on weight and retail selling price of the products.

Gas Tax

The gas tax rate in Arizona is $.19 per gallon (the 10th lowest in the country).

Property Taxes

Arizona does not impose a flat rate state property tax on real estate. Rather, local jurisdictions set tax rates, which can be significant in some areas. Seniors may be eligible for a property tax credit or property assessment freeze.

Arizona also taxes personal property. Personal property is considered to be tangible property which is not attached to real estate.

Inheritance and Estate Tax

Arizona does not impose an inheritance tax or a gift tax. Like most states, Arizona no longer has an estate tax since it was tied to the federal estate tax state death tax credit.

Overall Tax Burden

The overall tax burden in Arizona, taking into account taxes paid by individuals, results in a ranking as 41st most-tax burdened state in the country, according to Tax Foundation.

taxgirl says

Arizona is a conundrum. It’s a relatively low tax state but does not rely on federal funds to pay the bills. In fact, Senator McCain may have had a lot of things in common with Governor Palin, but earmarks are not one of them. Arizona will receive $18.70 per capita in federal earmarks this year the least of any state (though in prior years, they ranked much higher). In comparison, Alaska received the most per capita, a total of $506.34 per capita. (source and source)

Why so low? Senator McCain and Representatives Jeff Flake and John Shadegg have refused to seek federal money for state projects. That’s awfully impressive when you consider that Arizona is the second fastest growing state in the country – which means that the infrastructure and programming is also increasing.

It’s interesting to consider, then, that Arizona has a relatively low state tax burden and a relatively low GDP per capita. This is similar to the situation in Alabama.

In fact, at first blush, Arizona initially looks a lot like Alabama. By rank, Alabama is 7th in the country in residents living at or below poverty; Arizona is just behind at 11th. But unlike Alabama, Arizona’s sales tax is not very regressive, exempting food from grocery stores and prescription drugs. And the state seems to be providing adequate services: considering the poverty rates, the infant mortality rate is relatively low (31st) and the high school graduation is more than the US average, unlike Alabama.

So if Arizona isn’t taking much federal money, and it’s not taxing its citizens very much, how does the state manage to stay afloat? Corporate taxes. Arizona ranks near the top of the charts for its tax burden on businesses (source), a fact that many are highly critical of. Currently, Arizona businesses pay more corporate taxes and corporate capital gains tax than half of US states. (source)

Funding individual taxpayers on the backs of businesses… Is it good policy? I don’t know. What do you think? Is it better to tax citizens at the expense of business? Or is it better to lower tax burdens of businesses and hope that it trickles down to the citizen?

(Note: tax rates were current as of 11-30-2008 and were taken from the AZ Department of Revenue web site)