As famously noted by Supreme Court Justice Louis Brandeis in 1932 to explain federalism, states “are the laboratories of democracy.” Empowered with the autonomy to explore and test policy proposals, states can either act as a beacon for others to follow or a cautionary tale to avoid.
As of late, Arizona is engaging in an economic experiment that should be mimicked across the country. Small businesses and their employees are set to benefit big-time.
The state is pursuing a novel idea: return surplus state tax revenue back to the taxpayers.
Going into the pandemic, the Grand Canyon State had already amassed a $1 billion rainy day fund. And because Gov. Doug Ducey took a measured approach to address the coronavirus, unlike California, New Jersey, or New York, economic activity didn’t come to a standstill. In fact, state tax revenue was up during the pandemic. Tack on federal government dollars that were distributed to the states and Arizona’s financial house has a strong foundation.
Last year, Ducey and his allies in the state Legislature went to work to explore how best to begin returning these excess dollars back to the families and businesses of Arizona. People, not the government, know how best to spend their own money. And rather than being lost forever in the government budget black hole, that money can be spent and invested to create even greater economic opportunity.
The answer: tax cuts.
Passed and signed into law by Ducey last year, a series of tax reform bills is set to benefit working families and small businesses alike. In short, the reforms incrementally phase down the personal income tax rate for most to a flat rate of 2.5% by 2025. For a middle-class family of four in the state, the tax rate falls by up to 40%. According to the governor’s office, the average family can expect $300 in savings annually.
Arizona entrepreneurs like me will receive a boost as well. The reform has created a separate tax system for pass-through small businesses. Owners of, for example, sole proprietorships or S-corps, will be subject to a 2.5% tax rate — down from the prior top rate of 8% under the individual code. And as we learned during the years following the federal 2017 Tax Cuts and Job Act, when small businesses have more money to invest in facility upgrades, employees and expansion, the broader economy booms.
As the owner of HT Metals, I experienced this firsthand. After implementation of the federal tax cuts, accelerated demand and more money in my pocket provided the opportunity to ramp up operations. I purchased new equipment, as well as improved employee wages and benefits just to keep up. That pattern, along with increased hiring, played out in businesses across the country — leading to one of the strongest economies in decades.
Now, because of tax cuts in Arizona, state businesses — fueled by residents retaining more of their hard-earned dollars — are poised to press on the economic gas yet again. The renewed economic fervor will help Arizona continue to recover from the pandemic and solidify the Grand Canyon State as a competitive economy where businesses can flourish. And from a national perspective, Arizona acts as a roadmap other states should follow.
Washington is currently failing our country’s small business owners. Sky-high inflation, the threat of higher taxes and more regulation plague Main Street. But Arizona is one state that is picking up the slack and leading the charge to empower entrepreneurs and provide additional economic opportunity to millions of workers. Other states, and our elected leaders in Washington for that matter, should take note.
Carlos Ruiz is the owner of HT Metals in Tucson and a member of the Job Creators Network.