Arizona State Budget Income Details-who pays?
REPRINTED FROM ARIZONA AGENDA| April 18th, 2025
Today, we’re focusing on how most of your tax dollars are collected within the state’s $17 billion General Fund — the main course, if you will. It’s kind of like the state’s main bank account, and it funds more than 60 state agencies.
The meat and potatoes
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Sales tax
Deposited into General Fund: $7.9 billion.¹
Percent of General Fund: 48%
Unlike income tax, you pay your sales taxes every day.
And that 5.6% you pay every time you order a burger or pick up laundry detergent is literally holding the state’s finances together.
Last year, the state revenue department reported collecting $10.3 billion in sales taxes, which filled more than half of the state’s General Fund.
But technically, you’re not the one paying the tax.
It’s actually the In-N-Out or Walmart that has to pay that sales tax, which in Arizona is called a transaction privilege tax. That’s a fancy way of saying a vendor has the “privilege” of doing business here, so they have to pay the state for the sales they make. The businesses pass that cost on to consumers.
Most cities leverage their own sales taxes, which drive up the total you pay at checkout. In some cities, you’ll pay up to 11% sales tax.
Individual Income Tax
Deposited into General Fund: $5.5 billion
Percent of General Fund: 33%
Republicans passed Arizona’s largest tax cut in history when they implemented a flat income tax in 2021. Then-Gov. Doug Ducey approved a 2.5% maximum tax on everyone’s paychecks, no matter how much they make in a year.
It was a stark departure from the state’s graduated income tax scale that went up to 4.5% for someone who makes more than $159,000 a year.
In the 2022 election, opponents of the flat tax got enough signatures to give voters the say if the flat tax should go into effect, but the state Supreme Court said voters don’t have a say on tax legislation.
Economists on the Joint Legislative Budget Committee, a group of economic intellectuals who track the state’s revenue streams and advise lawmakers, said the “primary culprit” behind last year’s $1.7 billion deficit was the flat tax finally taking full effect.
That stark drop in revenue has hit cities hard. About 18% of state income taxes are shared with local governments, and Phoenix’s City Council recently raised its sales tax rate from 2.3% to 2.8% because of revenue lost to the flat tax.
Republicans aren’t ready to stop there, however. They’re advancing a measure this year to automatically cut income taxes if budget analysts calculate a surplus. Gov. Katie Hobbs is against the proposal, but Republicans plan to send it to the voters.
And voters typically like cutting their own taxes.
The veggies
Corporate Income Tax
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Deposited into General Fund: $1.7 billion
Percent of General Fund: 10%
Most corporate entities have to pay taxes on the money they earn in Arizona. That’s usually about 5% of their profits, but businesses can bring that down to 2.5% by reporting income tied to their shareholders. It’s a convoluted process that results in corporations paying the state less.
Overall, the taxes are a pretty volatile funding source. Corporate income taxes are tied to market conditions, and there are confidentiality laws that obscure some of the data on them.
But there’s a lot of ways businesses can reduce their tax bill through tax credits.
Corporations can pay less for increasing the number of people they hire, installing solar panels or selling coal, for example. In tax year 2022, Arizona’s corporations got an estimated $209.8 million worth of tax credits, per the state Department of Revenue.
Insurance Premium Tax (IPT)
Deposited into General Fund: $756.7 million
Percent of General Fund: 5%
Arizona taxes insurance companies on the amount of premiums they collect from state residents. That includes what you pay into car, life and health insurance.
The standard tax rate is about 1.7%. Most of those collections go into the General Fund, but a portion of taxes on fire insurance premiums go back to local fire departments, and part of car insurance payments go toward the pensions of highway patrol personnel.
Dessert
Tobacco and Liquor Taxes
Deposited into General Fund: $64.5 million
Percent of General Fund: >1%
Arizona imposes “luxury” taxes on alcohol and tobacco products, because apparently having a beer and cigarette isn’t an essential service.
The combined tax rate for every cigarette someone buys in Arizona, that’s not on a Native American reservation, is 10 cents. That’s about $2 per pack of 20 cigarettes, but it differs for things like cigars and chewing tobacco.
Different types of alcohol are also taxed differently — liquor is taxed at $3 per gallon, and malt liquor is 16 cents per gallon, for example.
All that money props up the General Fund, but it also goes into other programs like Early Childhood Development and the Drug Treatment and Education Fund. The Arizona Department of Revenue reported collecting $345 million worth of liquor and tobacco taxes last fiscal year.
Spending
The Arizona Legislature is working on the next budget for spending and SBINSIDER will publish those details after it is signed by Governor Hobbs.
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