Confounding small business advocates and tax policy experts, Proposition 208 proponents this week trotted out a bizarre claim, saying, “it’s legally impossible for any business to be taxed under Proposition 208,” and “under Proposition 208, small business owners will not pay one cent more in additional taxes.”
Arizona small business advocates and tax experts confirmed that small businesses must still pay their income taxes regardless of whether Proposition 208 passes in November. What remains in question is whether their top income tax rate will remain 4.5% or increase by 77.7% to a new 8% rate.
The 8% rate would vault Arizona into the top-10 nationally of states with the highest income tax rates.
“Despite what the initiative’s proponents might say, small businesses do pay taxes, and if Proposition 208 passes we’ll be paying a lot more,” Arizona Small Business Association CEO Jess Roman said. “In fact, under Prop. 208 large corporations will pay at a significantly lower top tax rate than Arizona small businesses. Proposition 208 looms as a major threat to the future competitiveness of Arizona’s small business environment.”
Arizona Tax Research Association Senior Research Analyst Sean McCarthy said the difference in top income tax rates comes down to whether a business files on the individual income tax code or the corporate code.
“This isn’t complicated. This is basic tax policy 101,” McCarthy said. “Arizona corporations are subject to a 4.9% corporate income tax rate. Small businesses, including S corps, limited liability companies (LLCs), partnerships, and sole proprietorships, are pass-through entities and pay taxes on the individual income tax code. Proposition 208 proposes to raise the top individual income tax rate to 8%, which means some small businesses owners will pay a higher tax rate than large corporations.”
Of the taxpayers impacted by the largest permanent tax increase in Arizona history, more than 50% will be small business owners. [source]
The proponents’ television ads have yet to disclose that Proposition 208 will dramatically raise income taxes, and the campaign continues to ignore that the tax increase will pummel small businesses in the middle of a pandemic that has sent shockwaves through Arizona and the nation’s economy.
“Small businesses are the backbone of our economy and we need them to thrive, especially if we’re going to emerge from this pandemic-induced slowdown sooner rather than later,” Roman said. “As we celebrate National Small Business Week, Arizonans can support small business by voting NO on Proposition 208.”
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