Bill review: Millionaire Income Tax Surcharge (AZ)

[PavelMakarchuk]

Bill Review: Millionaire Income Tax Surcharge (8% above $1M)

Reform ID: az-hb2636 | State: AZ
Bill text: https://www.azleg.gov/legtext/57leg/2R/bills/HB2636P.htm
Description: Replaces Arizona's 2.5% flat individual income tax with a two-bracket progressive structure: 2.5% on the first $1M of taxable income, 8% on income above $1M. Same threshold for all filing statuses. Effective TY2027.

Note: Democratic-sponsored bill (15 sponsors), currently in House Ways & Means Committee. Requires 2/3 supermajority under AZ Constitution Article IX §22.

Merging this PR will publish the bill to the dashboard.

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What we model

Provision	Parameter	Current	Proposed
Income tax rate (≤$1M)	gov.states.az.tax.income.main.{status}.brackets[0].rate	2.5%	2.5% (unchanged)
Income tax rate (>$1M)	gov.states.az.tax.income.main.{status}.brackets[1].rate	2.5%	8.0%
Second bracket threshold	gov.states.az.tax.income.main.{status}.brackets[1].threshold	N/A (flat tax)	$1,000,000

(× 4 filing statuses: single, joint, head_of_household, separate)

Validation

External estimates

Source	Estimate	Period	Link
JLBC fiscal note	None — bill hasn't advanced past committee	—	—
Prop 208 (2020, comparable)	~$827M/year (3.5pp on $250K+/$500K+)	Annual	JLBC Analysis
Grand Canyon Institute	Flat tax costs ~$2B/year vs prior graduated system	Annual	Report

Back-of-envelope check

AZ PIT revenue ~$5.5B at 2.5% → $220B total taxable income base
Income above $1M ≈ 6% of base → $13B (cross-checked via Prop 208 $250K+ scaling)
Surcharge = 8% - 2.5% = 5.5pp
Revenue = $13B × 5.5% = **$715M/year** (static)

PE vs External comparison

Source	Estimate	vs PE	Difference
PE (PolicyEngine)	+$3.60B	—	—
Back-of-envelope	+$715M	+404%	⚠️ Large gap
Prop 208 (scaled to 5.5pp)	~$1.3B	+177%	⚠️ Large gap

⚠️ DATA QUALITY WARNING: PE's estimate (+$3.6B) is approximately 5x the back-of-envelope (+$715M). This strongly suggests the Enhanced CPS overweights very high-income Arizona observations. The CPS data implies ~$65B in taxable income above $1M (30% of the total base), while IRS SOI data suggests 6-15% nationally. Arizona's wealthy Phoenix/Scottsdale metro may push this somewhat higher, but 30% is implausible.

Verdict: The directional impact is correct (tax increase concentrated entirely in the top decile, 1.6% of households affected, zero poverty impact), but the magnitude is likely overstated by 3-5x. A reasonable range based on external data is +$700M to +$1.3B/year.

Parameter changes

Parameter	Period	Value	Bill Reference
gov.states.az.tax.income.main.single.brackets[1].threshold	2027-01-01 to 2100-12-31	$1,000,000	Section 1, ARS 43-1011(A) ¶10
gov.states.az.tax.income.main.single.brackets[1].rate	2027-01-01 to 2100-12-31	0.08 (8.0%)	Section 1, ARS 43-1011(A) ¶10
gov.states.az.tax.income.main.joint.brackets[1].threshold	2027-01-01 to 2100-12-31	$1,000,000	Section 1, ARS 43-1011(A) ¶10
gov.states.az.tax.income.main.joint.brackets[1].rate	2027-01-01 to 2100-12-31	0.08 (8.0%)	Section 1, ARS 43-1011(A) ¶10
gov.states.az.tax.income.main.head_of_household.brackets[1].threshold	2027-01-01 to 2100-12-31	$1,000,000	Section 1, ARS 43-1011(A) ¶10
gov.states.az.tax.income.main.head_of_household.brackets[1].rate	2027-01-01 to 2100-12-31	0.08 (8.0%)	Section 1, ARS 43-1011(A) ¶10
gov.states.az.tax.income.main.separate.brackets[1].threshold	2027-01-01 to 2100-12-31	$1,000,000	Section 1, ARS 43-1011(A) ¶10
gov.states.az.tax.income.main.separate.brackets[1].rate	2027-01-01 to 2100-12-31	0.08 (8.0%)	Section 1, ARS 43-1011(A) ¶10

Key results

Metric	Value
Revenue impact	+$3,600,831,862 ⚠️ likely overstated
Poverty rate	25.11% → 25.11% (0.00%)
Child poverty rate	22.33% → 22.33% (0.00%)
Winners	0.0%
Losers	1.6%
No change	98.4%

Decile impact

Decile	Relative Change	Avg Benefit
1	0.00%	$0
2	0.00%	$0
3	0.00%	$0
4	0.00%	$0
5	0.00%	$0
6	0.00%	$0
7	0.00%	$0
8	0.00%	$0
9	0.00%	$0
10	-2.49%	-$18,876

Impact is entirely concentrated in the top decile, with 16.4% of top-decile households affected (15.4% losing >5% of income, 0.9% losing <5%).

District impacts

District	Avg Benefit	Winners	Losers	Poverty Change
AZ-1	-$3,376	0%	3%	0.00%
AZ-2	-$770	0%	1%	0.00%
AZ-3	-$680	0%	1%	0.00%
AZ-4	-$2,185	0%	2%	0.00%
AZ-5	-$1,339	0%	1%	0.00%
AZ-6	-$840	0%	1%	0.00%
AZ-7	-$606	0%	1%	0.00%
AZ-8	-$1,784	0%	2%	0.00%
AZ-9	-$719	0%	1%	0.00%

AZ-1 (Scottsdale/NE Phoenix) and AZ-4 (Chandler/Gilbert) show the highest impact, consistent with their concentration of high-income households.

Reform parameters JSON

{
  "gov.states.az.tax.income.main.single.brackets[1].threshold": {
    "2027-01-01.2100-12-31": 1000000
  },
  "gov.states.az.tax.income.main.single.brackets[1].rate": {
    "2027-01-01.2100-12-31": 0.08
  },
  "gov.states.az.tax.income.main.joint.brackets[1].threshold": {
    "2027-01-01.2100-12-31": 1000000
  },
  "gov.states.az.tax.income.main.joint.brackets[1].rate": {
    "2027-01-01.2100-12-31": 0.08
  },
  "gov.states.az.tax.income.main.head_of_household.brackets[1].threshold": {
    "2027-01-01.2100-12-31": 1000000
  },
  "gov.states.az.tax.income.main.head_of_household.brackets[1].rate": {
    "2027-01-01.2100-12-31": 0.08
  },
  "gov.states.az.tax.income.main.separate.brackets[1].threshold": {
    "2027-01-01.2100-12-31": 1000000
  },
  "gov.states.az.tax.income.main.separate.brackets[1].rate": {
    "2027-01-01.2100-12-31": 0.08
  }
}

Versions

• PolicyEngine US: 1.527.0
• Dataset: policyengine-us-data v1.67.0
• Computed: 2026-02-19T01:11:26Z