Arizona has a flat 2.5% income tax on all income — one of the lowest flat rates in the USA, effective since January 2023. Property taxes average just 0.63%, among the lowest nationally. Sales tax (TPT) is 5.6% state plus local add-ons. No estate tax, no inheritance tax. Military retirement income is fully exempt from Arizona income tax.
At a glance
Key Facts
State Income Tax
Flat 2.5% on all income — effective January 1, 2023 (Prop 132); prior system had brackets up to 4.5%
Property Tax
Effective average ~0.63% — among the lowest in the USA; varies by county and property class
Estate and Inheritance Tax
None — Arizona has no estate tax and no inheritance tax
Transaction Privilege Tax (Sales Tax)
5.6% state rate; with city/county add-ons: Phoenix 8.3%, Tucson 8.7%, Scottsdale 8.05%, Mesa 8.3%
Social Security and Military Retirement
Social Security fully exempt; military retirement income fully exempt; private pensions generally taxable
Introduction
Arizona made a landmark tax change in 2023 — switching from a multi-bracket graduated income tax system to a flat 2.5% rate on all income. This single move placed Arizona among the most competitive income tax states in the Southwest, undercutting California’s top rate of 13.3% and even surpassing Texas and Florida in simplicity (though those states have zero income tax). Combined with some of the lowest effective property tax rates in the country at approximately 0.63%, Arizona offers a relatively light state tax burden for most residents.
This guide covers everything Arizona residents and prospective movers need to know about the state’s 2026 tax landscape: the flat income tax, Transaction Privilege Tax (Arizona’s version of sales tax), property tax rates by county, retirement income rules (Social Security is fully exempt), and how Arizona compares against Nevada, Texas, and California for total tax burden.
Section 01
Arizona’s Flat 2.5% Income Tax: What Changed and What It Means
Arizona’s flat income tax is the direct result of Proposition 132, passed by Arizona voters in November 2022, which required a 60% supermajority for any future income tax increase — effectively cementing a low-rate flat tax as the default. The legislature had already passed the flat rate; Prop 132 made it much harder to reverse. The rate took full effect January 1, 2023.
How the Flat Rate Compares to the Old System
Under the prior graduated system, Arizona rates ranged from 2.59% to 4.5%. For taxpayers in the highest brackets, the flat 2.5% represents a meaningful reduction. For lower-income taxpayers who were already in the 2.59% bracket, the change is marginal.
Annual Income
Old AZ Top Rate (approx effective)
New Flat 2.5%
Annual Saving
$75,000
~3.8%
2.5%
~$975
$200,000
~4.3%
2.5%
~$3,600
$500,000
~4.5%
2.5%
~$10,000
$1,000,000
~4.5%
2.5%
~$20,000
Arizona vs Neighboring States
State
Income Tax
Effective Rate at $150,000
Arizona
2.5% flat
2.5%
Nevada
None
0%
Texas
None
0%
California
1–13.3% progressive
~8.5%
New Mexico
1.7–5.9% progressive
~5.2%
Colorado
4.4% flat
4.4%
Arizona does not impose local income taxes. The flat 2.5% is the only state income tax you pay, regardless of whether you live in Phoenix, Tucson, Scottsdale, or a rural county.
Section 02
Arizona Property Tax and TPT (Sales Tax) Explained
Property Tax
Arizona’s effective property tax rate of approximately 0.63% is among the lowest in the nation. However, Arizona uses a classified property tax system — different types of property are assessed at different ratios of their full cash value, which affects the taxable value before the millage rate is applied.
Owner-occupied primary residence (Class 3): assessed at 10% of full cash value
Rental and non-primary residential (Class 4): assessed at 10% of full cash value
Commercial and industrial: assessed at 18% of full cash value
Agricultural: assessed at 15% of full cash value
The practical effect is that residential property owners pay relatively modest rates. A $400,000 primary residence assessed at 10% full cash value = $40,000 assessed value, multiplied by a typical millage rate of approximately 10–15 mills = roughly $400–$600/year in property tax. This is dramatically lower than New Jersey, Illinois, or New York.
Property Tax by County
County
Approximate Effective Rate
Example: $400,000 Home Annual Tax
Maricopa (Phoenix area)
0.59%
~$2,360
Pima (Tucson area)
0.82%
~$3,280
Yavapai (Prescott area)
0.60%
~$2,400
Coconino (Flagstaff area)
0.54%
~$2,160
Arizona Transaction Privilege Tax (TPT)
Arizona does not technically have a “sales tax” — it has a Transaction Privilege Tax, which is a tax on the privilege of doing business and is levied on the seller rather than the buyer. In practice, sellers pass this cost to consumers and it functions similarly to sales tax. The state TPT rate is 5.6%. Cities and counties add their own rates:
Phoenix: 8.3% total (5.6% state + 2% city + 0.7% county)
Tucson: 8.7% total
Scottsdale: 8.05% total
Mesa: 8.3% total
Tempe: 8.1% total
Chandler: 7.8% total
Most groceries (unprepared food) are exempt from the TPT. Prescription drugs are exempt. Restaurant food and prepared meals are taxable.
Section 03
Retirement Income, No Estate Tax, and Arizona’s Tax Advantages for Movers
How Arizona Taxes Retirement Income
Arizona is attractive for retirees due to several exemptions:
Social Security income: Fully exempt from Arizona income tax at all income levels. You pay only federal tax on Social Security — Arizona adds nothing.
Military retirement pay: Fully exempt from Arizona income tax. This makes Arizona particularly popular with military retirees choosing between Sun Belt states.
Arizona public employee pensions (ASRS — Arizona State Retirement System): Partially exempt. ASRS pensions are taxable, but Arizona allows a subtraction for a portion based on contributory vs non-contributory amounts.
Federal Civil Service pensions (CSRS, FERS): Partially taxable — the portion of contributions that were already taxed (not deducted) can be recovered tax-free; the remainder is taxable.
Private pensions and IRA/401(k) distributions: Generally taxable at the flat 2.5% rate.
No Estate Tax and No Inheritance Tax
Arizona imposes no state estate tax and no inheritance tax. For estates of Arizona residents, only the federal estate tax applies — with the 2024 federal exemption of $13.61M (indexed for inflation), the vast majority of estates pass completely free of transfer taxes. This contrasts sharply with states like Oregon ($1M threshold), Massachusetts ($2M), and Washington State ($2.193M), making Arizona significantly more favorable for multi-generational wealth transfer.
Who Should Consider Arizona?
Profile
Arizona Advantage
High-income earner from California
Income tax drops from up to 13.3% to flat 2.5%
Military retiree
Military pension fully exempt; low property taxes
Social Security retiree
SS fully exempt; low cost of living vs coastal states
Remote worker from Northeast
No local taxes; property tax fraction of NJ or NY
Business owner
No B&O tax; flat income rate on pass-through income
Whether you’re moving to Arizona from California, planning for retirement income exemptions, or need help with Arizona TPT compliance, TaxHub connects you with licensed CPAs who understand Arizona’s tax system.
⚠ Not for simple single-state returns. Free filing is fine for straightforward W-2 situations.
Arizona has a flat 2.5% income tax on all taxable income, effective since January 1, 2023. This applies to wages, self-employment income, rental income, capital gains, and most other income. There are no brackets or higher rates for higher earners — everyone pays the same 2.5% flat rate. This makes Arizona one of the most competitive income tax states in the country, well below California (up to 13.3%), New Mexico (up to 5.9%), and Colorado (4.4% flat).
Q
Is Social Security income taxed in Arizona?
No — Social Security benefits are fully exempt from Arizona state income tax at all income levels. You pay federal income tax on Social Security at the normal federal rates (0–85% of benefits may be included in federal taxable income depending on your combined income), but Arizona adds zero state tax on top. This makes Arizona very attractive for retirees who rely heavily on Social Security income compared to states that partially tax SS.
Q
How does Arizona’s sales tax (TPT) work?
Arizona uses a Transaction Privilege Tax (TPT) rather than a traditional sales tax. The state rate is 5.6%, and cities and counties add additional rates, bringing total rates to 7.8–8.7% in most major Arizona cities. The TPT is technically paid by businesses on the privilege of selling in Arizona, but is almost always passed on to consumers. Most unprepared grocery food is exempt. Prepared food (restaurants, fast food) is taxable. Prescription drugs are exempt. Arizona has over 90 cities with their own TPT rates, so the rate varies depending on where you make a purchase.
Q
Are property taxes low in Arizona?
Yes — Arizona’s effective property tax rate averages approximately 0.63%, well below the national average of around 1.1%. For a $400,000 home in the Phoenix metro area (Maricopa County), expect to pay roughly $2,000–$2,500 per year in property taxes. Arizona uses a classified assessment system where primary residential property is assessed at 10% of full cash value before the tax rate is applied, which keeps bills relatively low. In contrast, New Jersey homeowners on a comparable property might pay $8,000–12,000 annually.
Q
Does Arizona tax military retirement pay?
No — military retirement pay is fully exempt from Arizona income tax. Arizona is one of the states that provides a complete exemption for military pension income, making it a popular choice for retiring service members. Combined with the Social Security exemption, warm climate, low property taxes, and no estate tax, Arizona consistently ranks as one of the most military-retiree-friendly tax states in the country.
Q
Does Arizona have an estate tax or inheritance tax?
No — Arizona has no state estate tax and no state inheritance tax. Arizona eliminated its state estate tax in 2005. For residents, only the federal estate tax applies, which has an exemption of $13.61M per individual (2024, indexed for inflation). This means the vast majority of Arizona estates pass with no transfer tax at any level. Compare this to Washington State, which taxes estates above $2.193M at up to 20%, or Oregon, which starts at $1M. Arizona is an excellent state for estate planning and generational wealth transfer.
Q
How does moving from California to Arizona affect my taxes?
Moving from California to Arizona can produce very significant tax savings, particularly for high earners. California’s top income tax rate is 13.3% on income above $1M (12.3% at $625,370 for single filers). Arizona’s flat 2.5% rate means a $500,000-per-year earner would save approximately $10,000–20,000 in state income tax annually. However, Arizona’s TPT (sales tax) rates in major cities (8.3–8.7%) are actually higher than California’s base 7.25% (though local additions can push CA rates to 10%+). Property taxes in Arizona are significantly lower. You must properly establish Arizona domicile — California aggressively audits high-income taxpayers who claim to have left the state. Spending more than 546 days in California over two years can trigger California residency claims.
Disclaimer:This guide provides general tax information for educational purposes only. Arizona’s flat income tax rate, Transaction Privilege Tax rates, property tax assessment ratios, and retirement income exemptions can change by legislative action. City TPT rates vary and are subject to change. Always consult a qualified Arizona CPA or tax professional before making significant financial or relocation decisions.