President Joe Biden has proposed an increase in the United States’ Global Intangible Low-Tax Income (GILTI) tax, which applies to a category of foreign income for U.S. multinational businesses. 

The proposed American Jobs Plan Act raise the GILTI tax “from 10.5 percent to 21 percent, calculate GILTI on a per-country basis, and eliminate the exemption of the first 10 percent return on foreign qualified business asset investment (QBAI).”

A study produced by the Seidman Institute at Arizona State University’s W. P. Carey School of Business and Ernst & Young’s Quantitative Economic and Statistics Team (QUEST) concludes that an international tax increase on U.S. multinational companies operating in Arizona could create substantial economic uncertainty—and place up to 47,000 Arizona jobs at risk over the next five years.

The GILTI tax “is specifically targeted at the income earned by foreign affiliates of those companies from intangible assets including intellectual property such as patents, trademarks, and copyrights,” according to the study.

More than 260 businesses operating within the state of Arizona could face negative consequences as a result of the proposed tax hike.

Job losses and economic impact

The study released by the Seidman Institute and QUEST calculates both low- and high-impact scenarios for the proposal’s effect on Arizona’s economy.

The worst case scenario for the Arizona economy is that it loses 42,569 jobs in year one, which will increase to 46,872 in year two, and taper down to 46,452 in year three. Additionally, the state’s GDP would be negatively affected by $5,056,200,000 in the first year, grow to $5,883,000,000 in the second year, and swell up to $6,387,000,000 in year three.

While this does not mean that the state’s GDP would lose that much in GDP growth annually, each year the total negative impact of the tax increase on GDP would increase. The same goes for job losses. Each year’s numbers are cumulative.

The best case scenario for the Arizona economy is that it loses 2,326 jobs in year one, increasing to 2,555 in year two, and going down slightly to 2,532 in year three. The state’s GDP would be negatively impacted by $276,700,000 in the first year of its implementation, grow to $321,400,000 in year two, and grow once again to $348,900,000 in year three.

Once again, each year’s numbers are already cumulative.

Dr. Timothy James, director of research and consulting at the Seidman Research Institute, told �鶹��ýӳ�� that if the GILTI tax increase is implemented, it will negatively impact Arizona’s economy. A higher tax on foreign income exploited for intellectual property — which is the category of income that the GILTI tax applies to — will affect companies’ investment decisions.

Industries and businesses that are more dependent on intellectual property would be disproportionately affected by the policy. It won’t be the “Fords and GMs of the world” that are impacted, but tech- and software-related companies, said Dr. James. That’s because more of their foreign income is likely to be taxable under the GILTI tax.

Arizona’s post-COVID recovery

As Arizona recovers from the COVID-induced pandemic, leaders across the state are intent on keeping the momentum going. Among the top strategic objectives of Gov. Doug Ducey’s administration and pro-business leaders across the state has been the maintenance and acceleration of Arizona’s economic competitiveness.

“The Biden administration should be looking for ways to accelerate and sustain the post-pandemic economic recovery,” Arizona �鶹��ýӳ�� of Commerce & Industry President and CEO Danny Seiden said. “A new tax increase that creates a drag on overall GDP growth is not only the wrong policy move, but it couldn’t come at a worse time. Congress should reject this proposal.”

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The Arizona Supreme Court last Thursday issued that puts the future of Proposition 208 on shaky ground.

Narrowly adopted by voters last November, Proposition 208 sought to increase Arizona’s top state income tax rate by more than 77 percent, ratcheting the rate up from 4.5 percent to 8 percent and taking the top rate to one of the nation’s highest. 

Many small businesses, which file their taxes as pass-through entities, would have been impacted by the tax hike since they pay their taxes on the individual tax code, not the corporate tax code, which has a 4.9 percent income tax rate.

Since the proposition’s passing last year, the Arizona Legislature passed and Gov. Doug Ducey signed a phased-in 2.5 percent flat income tax for most taxpayers. Under the new tax schedule, the state income tax cannot exceed 4.5 percent once any surtaxes are factored in, such as the 3.5 percent surtax included in Proposition 208.

The court ruled that the proposition’s attempt to bypass expenditure limits in the state constitution by classifying the new tax revenues as “grants” was unconstitutional. 

The court noted that Invest in Education — the proposition’s writers — had “requested a review of the initiative’s language from Arizona’s Legislative Council, who opined that the provision defining Prop. 208 money as grants and not local revenues was ‘likely invalid’ because it conflicted with the Education Expenditure Clause [of the state constitution].”

“Despite receiving this legislative feedback before the initiative was certified for the ballot, Invest in Education declined to modify the text of this initiative or to pursue an initiative to amend the constitution,” Justice Robert Brutinel wrote for the majority.

While the Supreme Court found the attempt to dodge the expenditure limits unconstitutional, it could not determine whether the revenues would indeed exceed those limits. The court left that task to a lower court, which must strike down Proposition 208 in its entirety if the revenues are found to exceed the limits.

Proposition 208 was strongly opposed by the business community, and several organizations filed amicus briefs before the Supreme Court arguing the proposition was unconstitutional. 

The Arizona �鶹��ýӳ�� of Commerce & Industry and the Arizona Tax Research Association together filed an amicus brief.

“We are gratified that the Arizona Supreme Court affirmed that out-of-state special interest groups can’t make an end-run around our state constitution through passage of a regular statute – they’d have to instead amend the Arizona Constitution, which the proponents failed to do,” �鶹��ýӳ�� President and CEO Danny Seiden . “We look forward to the trial court determining whether the new taxes in Proposition 208 will exceed the constitution’s expenditure limits.”

ATRA was equally pleased with the decision.

“Claiming these surcharge taxes were not tax revenues but rather ‘grants’ is not only facially unconstitutional, it would have encouraged further watering down of constitutional taxpayer protections with statutory measures,” ATRA said in a . 

Partially dissenting from the court’s opinion, Justice Ann Scott Timmer said that “The framework imposed on the trial court for deciding whether Prop. 208 is unconstitutional almost certainly doom[s] the measure.”

Gov. Ducey, an opponent of Proposition of 208 who advocated strongly for the legislatively adopted reform to blunt the damage of the big tax increase, was pleased with the court’s decision.

“There is a clear legal path to Prop. 208 being knocked down entirely, it’s only a matter of time,” Ducey . “Today’s ruling is a very positive one for the state and for taxpayers. The out-of-state proponents of this measure drafted bad language, and now they are paying the price.”

�鶹��ýӳ�� previously reported on the proposition’s heavy reliance on out-of-state donors. At the time of reporting, only .7 percent of contributions to the initiative campaign were from individual donors in Arizona.

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The Arizona Tax Research Association says Arizona school districts have proposed a $98,886,980.56 increase in property taxes to fund transportation costs. This increase more than doubles state school district spending on the same item in FY2021, when $79,295,907 in property tax dollars were allocated for transportation costs.

The funding formula for transportation spending by school districts is based on route-miles driven the previous year. The sharp increase in property taxes was accomplished through the utilization of a caveat in the funding formula that allows school districts to increase their spending on transportation, denoted as Transpo Delta, in order to account for a difference between projected spending and historic spending.

Federal COVID relief spending

The coronavirus pandemic meant that “Arizona school districts used their school buses far less last school year,” ATRA Senior Analyst Sean McCarthy said. This means that some increase in spending on transportation might have been inevitable as the state and the nation emerge from the pandemic, and children go back to school.

An increase in spending on transportation costs by school districts was likely inevitable, but that does not account for a massive influx of federal fiscal relief for K-12 public schools that came about in response to the pandemic. The federal government has nearly $4 billion in fiscal aid over the course of the past year towards Arizona’s K-12 education system, 90% of which is given “directly to school districts or charter schools.”

These relief funds “are one-time monies and mostly unrestricted, meaning they can be used for any legal purpose,” says McCarthy, “The one-time decrease in formula monies for transportation is a perfect example of what federal dollars should backfill.”

School districts are set to adopt these property tax hikes on Monday, August 16th. ATRA is encouraging the districts to reconsider.

“Saddling the community with increased property taxes when schools actually saved money on these programs last year is insulting and shows a complete lack of regard for taxpayers,” McCarthy said.

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In a glimmer of hope for American businesses, President Joe Biden’s administration appears to be steering away from hardline Democrats who want to impose the highest corporate income tax in the industrial world — 28 percent. 

Now, White House officials said that Biden is willing to bend on his tax proposal to gain GOP support for a substantial infrastructure bill.

“He is personally leaning in, willing to compromise, spending time with senators — Democrat and Republican — to find out what is the art of the possible,” Commerce Secretary Gina Raimondo . “The only thing he won’t accept is inaction. It has to be big and bold, $1 trillion or more.”

Bipartisan groups in both houses also indicated Wednesday that they are working to find alternatives to tax increases to pay for the package. 

That doesn’t mean the threat of a harmful tax increase is going away anytime soon, said Erik Paulsen, a former U.S. congressman who now is a consultant with political consulting firm , which is headquartered in Washington, D.C. and has in Arizona.  

“It’s good that the new administration is floating new ideas as alternatives rather than just a straight increase to 28 percent, which is what many Democrats in the House and Senate would still like to see,” said Paulsen, a former leading member of the chief tax writing House Ways and Means Committee. “It’s important to really view these proposals with a lot of caution because the devil is in the details. There’s lots of fine print.”

Compromise possible?  

Biden is backing off of his original request for $2.2 trillion for the infrastructure package, which would be financed by relying heavily on tax increases on corporations and the wealthy. The current corporate income tax rate is 21 percent.

With little support from the GOP, Biden is now calling for at least $1 trillion for the package.

“If anything, it’s pretty safe to assume that Democrats want a rate increase,” Paulsen said. “And they want it badly. Some say 28 percent. Some are saying 25 percent is an acceptable level.”

Congress needs to act with care in considering changes to the current tax code, which came out of the Tax Cuts and Jobs Act of 2017 and has fueled jobs, innovation and tax revenues in Arizona, he said. 

“There is the potential that you would be giving up some very real economic incentives that are in the tax code right now and those could go away. These are incentives like research and development or clean energy for instance.”

Bipartisan groups in both houses seeking to avoid tax hikes 

After negotiations with Republicans failed this week, in both houses are working to find consensus on an infrastructure package.    

On Wednesday, a member of the Senate group, which includes Arizona Sen. Kyrsten Sinema (D), told that it is taking tax hikes off the table as they try to reach consensus on how to pay for the plan after White House negotiations with GOP leaders failed. 

“That’s my understanding. I think there’s ways to do that; hopefully it won’t be smoke and mirrors. Bottom line, this is probably the hardest part from my perspective, is how you get it paid for,” Sen. Jon Tester, D-Mont., said.

The group is expected to produce a $900-billion plan. 

Meanwhile, in the House on Wednesday, the bipartisan released a $1.25 trillion infrastructure plan. It also indicated it is avoiding tax increases right now as they enter into discussions about how to pay for it. Among the proposals being set forth are increased tax enforcement, reducing inheritance tax breaks for the wealthy, and using unspent Covid-19 relief funds. 

Increase would punish more than 1 million small businesses

Pro-business groups, trade associations and chambers of commerce including the Arizona �鶹��ýӳ�� of Commerce & Industry are calling on Capitol Hill to tread lightly when it comes to raising taxes on companies right now, particularly small businesses.

About 1.4 million small businesses that are organized as C-Corporations will pay the higher rate, according to an by Curtis Dubay, senior economist for the U.S �鶹��ýӳ��, the world’s largest business organization. 

“There is a false assumption that only big businesses will pay a higher rate. In fact, over a million small businesses— ‘Mom-and-Pop’ retailers, small manufacturers, and professional services firms that often suffered the worst during the pandemic—would also see their tax bills increase significantly,” Dubay said. 

These small businesses employ almost 13 million American workers across various sectors. Most are small businesses and many are very small: over 84 percent have fewer than 20 employees. 

“Hardest hit would be the sort of skilled jobs that politicians love to praise, but often in practice, do too little to support,” Dubay said. 

They include manufacturing small business C-Corps which employ the most workers, about 1.8 million; professional, scientific, and technical services are next with 1.3 million employees, followed by retail with about 1.2 million workers. 

Report shows more than half of small businesses need time to recover 

Many of these small businesses are just now beginning to return to normalcy, surveys show. According to the latest , 59 percent of small businesses believe it will take more than six months to return to normal.

That should be reason enough to hold off on a punishing tax hike right now, Paulsen said. 

“We’re coming out of a significant economic crisis coming out of the pandemic and we don’t want to see that stall out —and it is stalling out right now. Unfortunately, despite the rebound, it’s not coming back out as robustly as it should be.”

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A few final thoughts on Proposition 208 with Election Day just a few days away:

The wrong top 10

If Proposition 208 passes, the state will join a top-10 list on which no state wants to appear.

We’ll end up on the list of states with the highest income tax rates nationwide. Our contemporaries will include the likes of California, New York and New Jersey.

As numerous economists and commentators have pointed out, high-tax states tend to underperform economically, sometimes dramatically so.

A recent by economists Dr. Art Laffer, Stephen Moore and Erwin Antoni compared the economic health of seven states with no income tax against the nine states with the highest income tax rates:

Over the past decade, these seven states have outperformed the nine states with the highest marginal income tax rates, as well as the nation as a whole, in population growth, employment growth, personal income growth and GSP growth. If passed, Arizona would replace Delaware as the ninth highest income tax rate state in America.

In other words, it would join the category of the loser states, not the gaining states.

The proponents of Proposition 208 are attempting to turn a half-century of economic history on its head.

Neighborhood leaders and laggards

The move to the top-10-highest list would make Arizona economically uncompetitive regionally and nationally.

It’s in our own neighborhood where we’d stick out like a sore thumb. Our neighbors Utah, Colorado and New Mexico all have top income tax rates under 5%, but our current 4.5% rate is the lowest. Nevada doesn’t have a state income tax. If Proposition 208 passes we’d rocket up to a top rate of 8%.

Arizona has been in the pole position to attract jobs fleeing California, a state with a top income tax of more than 13%.

As Laffer, Moore and Antoni write, “According to the IRS, since the 1992 tax year (conveniently in the midst of Arizona’s tax cutting spree), Arizona has gained over 201,000 tax returns and almost $12 billion in adjusted gross income (AGI) from California alone.”

If we erase our competitive advantage, it will be far too easy for job creators to pass over Arizona for another friendlier locale.

We’ve got the best house on the block right now. Let’s not trash the place with the largest tax increase in Arizona history.

An accelerant, or sand in the gears?

Arizona’s economy is in the pandemic than most states in the country. Arizona’s labor force is , but we’re still down about 125,000 jobs.

All of our energy should be on ensuring our policies are properly calibrated to win back every single one of those jobs. Proposition 208 does exactly the opposite.

I had the chance recently to with the American Enterprise Institute’s Dr. Michael Strain, one of the most thoughtful minds in fiscal policy today, who discussed how states like Arizona should be approaching their economic policy during this pandemic-induced downturn.

“If you are a state government, if you are the federal government, now is the time to be doing everything you can to support existing businesses, to encourage new businesses to start, to support consumer spending,” Dr. Strain said. “State governments should be doing everything they can do to avoid countercyclical policies, to avoid raising taxes and making it harder for businesses at a time when the economy is weak.”

Proposition 208 ignores that prescription by taking the capital that supports private enterprise out of the private sector, which only prolongs our recovery and exacerbates the struggles of so many small businesses.

No reforms, no results

Also joining my conversation with Dr. Strain was Dr. Rick Hess, AEI’s director of education policy studies. He’s an all-star in the K-12 education reform movement. Count him as a skeptic that Proposition 208, which doesn’t call for any improvement in academic outcomes or educational attainment, will result in a better education for Arizona’s K-12 students. The record of states that spend more on education and simply hope for the best isn’t a good one, he says.

“Can more money help? Of course it can,” Dr. Hess said. “Would I be confident that a big increase in state spending was going to make a big difference for kids with no other attention to reform or improvement? I’d be hugely skeptical.”

Dr. Hess also doesn’t buy the argument proffered by the proponents that Proposition 208 will help solve the teacher shortage.

“That suggests that the opportunity here is part of the initiative would be creating new pathways in the teaching profession, where folks work a 12-month year, are paid like 12-month professionals, rather than simply putting a lot of resources into districts and hoping they get spent,” Hess said.

In case you were wondering, no such new thinking on attracting new entrants to the teaching profession is included in Proposition 208.

“If you’re talking about a package of reforms, thinking differently about teacher retirement benefits and health care, you’re talking about staffing differently, you’re talking about holding schools responsible for serving kids well, then I am wide open to the argument that we ought to be increasing investment in schools,” Hess said. “But the idea that we ought to just be throwing a lot of dollars and saying, ‘Boy, we hope these get spent differently than the money that’s gone before,’ I tend to be real unenthusiastic about that approach.”

Like everything else about Proposition 208, there is no new thinking, there are no new reforms, and there is no increased accountability for outcomes.

Taxpayers, teachers and students all deserve more than Proposition 208’s empty promises. It’s terrible policy with even worse timing.

Glenn Hamer is president and CEO of the Arizona �鶹��ýӳ�� of Commerce and Industry. 

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We know Proposition 208 will cost Arizona jobs. The question is simply how many.

A  by the Goldwater Institute says under the most conservative scenario job losses will reach a minimum of 124,000 over the course of a decade.

An  by national economists Steve Moore and Dr. Art Laffer is even more pessimistic,finding that an estimated 200,000 jobs would be eliminated over 10 years.

The dean of Arizona’s delegation of economic soothsayers, Elliott Pollack,  the “new tax rate would put the state at a significant competitive disadvantage.”

Even the left-of-center Grand Canyon Institute  the job losses at 10,000.

Left, right, or center, the consensus is that Proposition 208 will lose jobs.

It could be your job.

Proposition 208 raises the state’s top individual income tax rate by nearly double. It doesn’t touch the corporate tax rate.

It’s an important distinction. Small businesses pay their taxes on the individual portion of the tax code. Proposition 208 raises the top rate by 77.7%, which means small businesses will pay a top rate of 8%—much higher than the corporate rate of 4.9%.

That’s not fair, and it’s not smart.

Small businesses’ contribution to the Arizona economy is significant and it’s a sector that will be essential to the state’s post-pandemic economic recovery. Fifty-eight percent of Arizonans employed in the private sector work for an employer who pays their taxes via the individual income tax. They get absolutely walloped by Proposition 208. Their ability to keep and grow jobs is put in doubt. It could be your job that’s at risk.

We’re in the middle of a pandemic that has done tremendous damage to the Arizona and national economies. Arizona has clawed back a little more than half of the more than 290,000 jobs it’s lost during the pandemic, but we’re still down nearly 140,000 overall. Do we really want to risk even more damage to the economy? Proposition 208 makes the economic recovery more difficult.

Proposition 208 is not a mainstream proposal. It was not crafted as part of a dialogue between lawmakers, the education community, and job creators. Proposition 208 is extreme. Bernie Sanders has endorsed it. That’s an endorsement that speaks volumes. No one will mistake Bernie Sanders as an advocate for job creators and small businesses. He certainly doesn’t know Arizona.

In fact, nothing about this proposition is Arizona-grown. This is a science experiment gone bad cooked up by out-of-state activist groups.

The proponents’ coalition is paper thin. A handful of the usual suspects who never met a tax increase they didn’t like.

Meanwhile, the opposition to Proposition 208 is broad and deep. , urban and rural, representing industries small and large, from real estate to agriculture to tourism and everything in between opposes Proposition 208. Small business, the sector of our economy targeted by the initiative, is solidly against the proposition’s passage. The Arizona Small Business Association, the National Federation of Independent Business, and local chambers of commerce across the state are some of the measure’s most vocal opponents. Even national powerhouse the U.S. �鶹��ýӳ�� of Commerce  Proposition 208.

Vote no on Proposition 208. Arizona can do better than to put its economy and thousands of jobs—maybe your job—at risk.

Glenn Hamer is president and CEO of the Arizona �鶹��ýӳ�� of Commerce and Industry. 

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