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Valley business leaving Arizona, cites Prop 208

Landmark recovery
Posted at 6:18 PM, Dec 03, 2020
and last updated 2020-12-04 14:52:53-05

Prop 208 was one of the most contentious ballot proposals in recent history. Millions of dollars were spent by proponents and those in opposition to the tax increase.

Ultimately, voters approved the ballot measure aimed at increasing school funding, with 52% supporting the initiative.

Already, Prop 208 is being challenged in the courts. The Goldwater Institute and My Sister's Closet filed separate lawsuits Monday questioning the constitutionality of the increase.

“Prop. 208 slams the state’s middle-wage earners and small-business owners at a time when they can least afford it,” said Victor Riches, President, and CEO of the Goldwater Institute. “Prop. 208 violates the state Constitution, and it deprives the people’s elected representatives of their constitutional authority."

Conservative economists predicted, before the November 3rd election, that some small businesses would leave the state.

"We have doubled in size every year since we started in 2016," said Matthew Boyle.

Boyle's company, Landmark Recovery, runs addiction treatment centers, all of which operate outside Arizona. The business, though, is currently headquartered in Scottsdale.

"We are moving to Nashville Tennessee... as a result of the 78% tax increase that passed through Proposition 208 in the November election," said Boyle, who derived the increase based on his tax rate going from 4.5% to 8.0%.

The 78% figure has been disputed by opponents, who say that increase would only apply to a tiny fraction of Arizona's top earners.

Prop 208, the ballot measure that passed in November, increases the income tax by 3.5% on individuals making more than $250,000 or couples clearing $500,000.

The tax impacts some "pass-through" businesses, but not a company's entire revenue.

David Lujan, who helped author Prop 208, points out that only the company's net profits, typically paid out to owners, will be taxed. And the higher tax rate only applies to profits exceeding $500,000.

A fiscal analysis done by the state notes:

"Some of the taxpayers impacted...will derive at least a portion of their income through their business. To the extent that the new tax rates are levied on pass-through business profits, they will reduce the after-tax return on investment for these business owners. This could potentially reduce the incentive to re-invest profits. Reduced business investment may impact Arizona's economy, and as a result may reduce overall state and local tax collections to some degree. The magnitude of this impact is difficult to determine."

Opponents of Prop 208 repeatedly point to the potential business and economic impact.

"This won’t be the only business we hear about leaving Arizona," said Glenn Hamer, President and CEO of the Arizona Chamber of Commerce. "Most small businesses organize under the individual income tax part of the tax code, that’s how they pay taxes," said Hamer.

"[Arizona will lose] roughly 250 employees and $20 million of payroll," said Boyle, estimating the impact of his company's exodus.

Those in support of the initiative cite the positive impact the new revenue will have on Arizona schools.

The state's analysis states, "The tax increase initiated under the proposition would directly lead to increased government spending on education, including teacher and staff salaries...[and] is projected to generate $827 million in revenue, which will be deposited into the Student Support and Safety Fund (SSSF), in the first full year of implementation."

"This is going to give them the resources they need to hire teachers and reduce class-sizes," said Lujan. "That’s why 1.7 million Arizonans voted to support Prop 208."

"When we analyzed the numbers, we found the property would cut our rate of growth by 50% over the next five years," said Boyle.

Already, Boyle says he has purchased a place in Nashville for his family.

"My wife and I just signed a contract on a house in a community in Tennessee. An agent told us we were the third family in a week to be moving from Arizona, as a result of the proposition - just in that one neighborhood in Tennessee," said Boyle.

It is possible, but unlikely the tax will be overturned, given the precedent. Boyle though, is not waiting around to find out.

"If we don’t move now it’s going to be prohibitively costly in the future," said Boyle.