Arizona will enact income tax cut a year earlier than expected. Here's how much you'll save

The new single-rate income tax system for individuals will lower taxes across the board, but especially for higher-income earners who pay the most.
Russ Wiles
Arizona Republic

A tax cut for Arizonans is coming sooner than expected.

The state will adopt a 2.5% flat-rate income tax system starting with the 2023 tax year — one year earlier than planned — with Gov. Doug Ducey citing rising state revenues and improved financial strength for making the expedited change possible.

The new single-rate system for individuals will lower tax payments across the board but especially for higher-income earners. It also could make tax planning — though not necessarily tax-return preparation — a bit simpler.

On average, taxpayers will receive a 13% state-tax reduction, saving families $350 a year, according to the governor, but the size of the cuts will vary.

For example, a married couple filing jointly with taxable income of $500,000 a year likely would save around $2,165, said Ed Zollars, a certified public accountant at Thomas & Zollars in Phoenix.

But that drops to $725 for a couple in the $200,000 range and a mere $27 for married spouses with less than $54,000 in taxable income.

"It's something, but it wouldn't do much for a down payment on a car," said Zollars of the latter figure. People lacking any taxable state income won't benefit, he added.

Gov. Doug Ducey talks about the school vouchers legislation during a ceremonial signing of the bill at Phoenix Christian Prep  on Aug. 16, 2022.

Ducey on Thursday sent a letter to Robert Woods, director of the Arizona Department of Revenue, directing the agency to implement the flat tax for 2023 rather than 2024 as originally planned.

The flat tax won’t apply in the next round of state returns to be filed early next year, for the 2022 tax year.

"When taxpayers file their 2022 taxes, which are due in April 2023, the tax rates will be 2.55% and 2.98%," said Rebecca Wilder, a spokeswoman for the Department of Revenue, in an email.  

But starting with tax year 2023, the rate for individuals, trusts and estates will drop to the single 2.5% rate, which also will apply for many S corporations and partnerships, she indicated.

The Department of Revenue anticipates that 2023 state tax forms, to be filed in 2024, will be available in December 2023, Wilder added.

More:Phoenix City Council candidate owed $350,000 in unpaid federal income taxes before run

Strong state finances expedited cut

When the new rate is implemented, Arizona will have the lowest flat tax in the nation, Ducey said, though that excludes the eight states don’t levy any income taxes at all, including Nevada, Texas, Washington and Florida.

“This tax relief keeps Arizona competitive and preserves our reputation as a jobs magnet and generator of opportunity,” the governor wrote in the letter to the Department of Revenue. Ducey cited a “thriving” state economy with record revenues that is attracting newcomers from other states as well as business relocations.

The Phoenix area, the engine of the state’s economy, did rank first in newcomers from other states, according to a recent Census Bureau report that tracked migration trends among major cities.

The flip side is that many parts of Arizona face an acute housing shortage with rising rents, partly reflecting that in-migration and job growth. Also, the metro Phoenix inflation rate, which hit 13% in August, not only leads the nation but is well above the national rate of 8.3%.

Arizona’s general fund revenues now exceed the statutory thresholds required to implement the 2.5% flat tax early, the governor's letter said.

“It’s no secret that Arizona’s economy is booming,” Ducey said. “Over the last eight years, we’ve made responsible decisions to live within our means, reduce burdensome government regulations, lower taxes every year and ensure our state remains a great place to live.”

The state’s rainy day fund sits at a record-high $1.4 billion with forecasts of big budget surpluses through 2024, Ducey added. Arizona was operating at a budget deficit in 2015, when he took office. The state has received two recent credit upgrades over that period from rating-agency Moody’s Investors Service.

Shane Levinson, owner of Carpets of Arizona in Chandler, said the new single-rate system should make tax planning simpler, more streamlined and more transparent. The big improvement in the state's budget over the past seven years offers some attractive choices, said Levinson, who favors returning some of that money to individuals and businesses through the lower 2.5% flat tax.

The flat-tax trend

Flat taxes historically are rare but are becoming more prevalent.

In more than a century of state income taxation, until recently, only four states had transitioned from a graduated, multiple-rate system to a flat tax, wrote Jared Walczak, a vice president focusing on state taxes at the Tax Foundation, last year.

But five states including Arizona recently have jumped on the bandwagon, with Walczak describing the trend as "something of a flat-tax revolution."

Arizona is retaining its existing credits, deductions and other tax features, meaning the new flat tax basically represents a compression of multiple rates into one.

However, in an email to The Arizona Republic, Walczak said flat taxes can make it easier for people and businesses to forecast revenue and income as well as estimate their tax liabilities, thereby making some financial decisions easier.

Among factors that taxpayers might want to review, Zollars pointed to possibly lowering your paycheck withholding next year along with any estimated tax payments that you send to the state. The new rules also might prompt some taxpayers to change their charitable donations or other preferences, he added.

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