On September 29, 2022, Governor Ducey sent a letter to Robert Woods, Director of the Arizona Department of Revenue,[1] reporting that the Joint Legislative Budget Committee and the Governor’s Office of Strategic Planning and Budgeting had issued a joint memo certifying that General Fund revenues in Fiscal Year 2022 were $16.7 billion, exceeding the thresholds in the statute that would allow the 2.5% flat tax rate to apply for tax years beginning in 2023.
ARS §43-1011.A.8 and 9 provide:
8. Subject to subsections E and F of this section, for taxable years beginning from and after December 31 of the year in which notice is provided to the department pursuant to section 43-243, subsection A or subsection B, paragraph 1 through December 31 of the year in which notice is provided to the department pursuant to section 43-243, subsection B, paragraph 2:
(a) In the case of a single person or a married person filing separately:
If taxable income is: The tax is:
$0 — $27,272 2.53% of taxable income
$27,273 and over $690, plus 2.75% of the amount over $27,272
(b) In the case of a married couple filing a joint return or a single person who is a head of a household:
If taxable income is: The tax is:
$0 — $54,544 2.53% of taxable income
$54,545 and over $1,380, plus 2.75% of the amount over $54,544
9. Subject to subsection F of this section, for taxable years beginning from and after December 31 of the year in which notice is provided to the department pursuant to section 43-243, subsection B, paragraph 2, the tax is 2.5% of taxable income.
ARS §43-1011.A.8 and 9
The tax rate triggers were found at ARS §43-243.A and B which provided:
A. On or before September 30, 2022, the director of the joint legislative budget committee and the director of the governor’s office of strategic planning and budgeting shall jointly notify the department whether the fiscal year 2021-2022 state general fund revenue, excluding the beginning balance, was $12,782,800,000 or more.
B. On or before September 30, 2023 and on or before September 30 of each year until the notice is provided as prescribed in subsection A of this section or paragraph 1 of this subsection, and paragraph 2 of this subsection, the director of the joint legislative budget committee and the director of the governor’s office of strategic planning and budgeting shall jointly notify the department whether the previous fiscal year state general fund revenue, excluding the beginning balance, was either of the following amounts:
1. More than $12,782,800,000 but less than $12,976,300,000. The notice required pursuant to this paragraph is not required if the notice required pursuant to subsection A of this section was provided on or before September 30, 2022.
2. $12,976,300,000 or more.
ARS §43-243.A and B
Note that while ARS §43-243.B, which would trigger the first year Arizona would have a single 2.5% tax bracket found at ARS §43-1011.A.9, did not require a notification of meeting its target until September 30, 2023, at which point it would have measured the 2023 fiscal year and first impacted 2024 tax rates, nothing in the law prevented the certification being made earlier than that date.
Thus the rates found at ARS §43-1011.A.8 will never apply to any Arizona individual income tax year, but rather they will be bypassed for the lower rate at ARS §43-1011.A.9 in 2023 and later years.
This change in rate will also affect Arizona’s passthrough entity tax rate. Under ARS §43-1014 the entity-level tax rate is the “same as the tax rate prescribed by section 43-1011” which means that rate will also drop to 2.5% for 2023 tax years.
[1] Governor Douglas A. Ducey, Letter to Robert Woods, Arizona Department of Revenue, “RE: Accelerated Tax Relief for Families,” September 29, 2022, https://azgovernor.gov/sites/default/files/accelerated_tax_relief_for_arizona_families_letter.pdf
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