Arizona Tax Guide: Flat 2.5% Income Tax Rate

Tax Overview

Arizona has become one of the most tax-competitive states in the country after transitioning to a flat income tax rate of 2.5% in 2023. Previously, Arizona used a progressive system with rates up to 4.5%, but legislative changes dramatically simplified and reduced the state's income tax burden. This flat rate applies to all taxable income regardless of amount, making Arizona particularly attractive for higher earners.

The state's Transaction Privilege Tax (TPT), which functions like a sales tax, has a state rate of 5.6% with additional local rates that push the combined average above 8%. Unlike traditional sales taxes, the TPT is technically levied on the seller rather than the buyer, though the economic effect is the same. Arizona does not tax groceries at the state level, providing some relief for household budgets.

Property taxes in Arizona are relatively moderate, with effective rates below the national average. The state offers several property tax relief programs, including exemptions for seniors, disabled veterans, and widows/widowers. Arizona also does not tax Social Security benefits, making it a popular retirement destination alongside its favorable climate and overall low tax burden.