Arizonans paid $2.5 billion in income taxes in 2005, up 34 percent from the last year. What should the state legislature do with the unexpected $700 million? Senate Minority Leader Linda Aguirre, among others, is eager to "invest in Arizona" in other words, let government spend it.
Here's another option: Return it.
Almost 80 percent of Arizona small business owners file personal rather than corporate income tax returns. These men and women generate the vast majority of new jobs in Arizona. Yet the state tax code punishes these job producers. If an Arizona entrepreneur earns $50,000, the state government takes $1,700 off the top. Meanwhile, if the same person were to move across the state line to Nevada, that $1,700 would be his to keep.
You don't need to be a math wizard to recognize the better deal.
Arizona should use the surplus to permanently reduce the personal income tax rate and, even better, consider phasing it out all together. Among other benefits, phasing out the personal income tax would increase personal income by an estimated 40 percent and spur 600,000 jobs over the course of ten years.
In Thomas Friedman's "flat world," Arizona is not only competing against zero income tax states like Nevada, Texas and Washington, but low-cost labor countries like India. By cutting taxes, Arizona will attract more entrepreneurs, produce jobs, and raise living standards. That's an investment Arizonans can live with.