According to our blog stats, the most searched and shared post during this election has been my post No on Prop. 126, the false and purposefully misleading Protect Arizona Taxpayers Act. Because there is no organized opposition to Prop. 126 spending money on television ads, I am guessing that individuals and organizations have linked to this post as a grassroots No on Prop. 126 campaign. Somebody had to do it.
The Arizona Republic‘s Robert Robb, the former flak for the “Kochtopus” Death Star, the Goldwater Institute, and the Arizona Chamber of Commerce and Industry, has added his voice in opposition to Prop. 126, albeit to promote his Libertarian hobby horse of a consumption tax, which is bad tax policy.
While we approach this from different perspectives, we both conclude that Prop. 126 is bad public policy that will have dire consequences for the fiscal health of Arizona, and we urge voters to vote no on Prop. 126.
Proposition 126 is intended to shut the door on an important discussion before it has a chance to get started. And it may have even more devastating consequences than that.
Bankrolled by the realtors, Prop. 126 would amend the state Constitution to prohibit the imposition of a sales tax on services.
For the most part, sales taxes in Arizona are limited to the final sale of a retail good. If you go to a barber shop, a sales tax isn’t charged on your haircut. But if you purchase some styling gel while there, a sale tax would be tacked on to that purchase. The haircut is considered a service. The styling gel is the final sale of a retail good.
Consumption taxes are more compatible with economic growth than income or property taxes. But Arizona has increased the tax rate on retail goods to a troublingly high level.
Big hikes in the sales tax on goods
In 1980, the sales tax rate in Arizona was pretty uniformly 5 percent: 4 percent for the state and 1 percent for the city in which the transaction occurred.
Today, the sales tax rate exceeds 9 percent in many Valley cities, and 10 percent in one, Guadalupe.
If government wants more money, an increase in the sales tax has almost always been the course with the best chance of political acceptance. The state rate has increased to 5.6 percent. The rate in most cities has more than doubled. And counties have been permitted to get into the sales tax business.
The trend continues. This election, both Flagstaff and Mesa have sales tax increases on the ballot.
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The current high rate on retail goods is at least mildly economically distorting. And it creates difficulties for the stability of government finances.
Goods constitutes a declining percentage of economic activity. Services an increasing percentage. Expanding the tax base to include some services would enable government revenue to more closely track the economy, reducing volatility and easing pressure on rate increases.
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The existing sales tax base could be at risk
Constitutional amendments often have unintended consequences, and Prop. 126 may have a doozy.
Prop. 126 prohibits any new or increased sales taxes on services. But it doesn’t include any legal definition of “services” or create a legal demarcation between a good and a service.
As the Grand Canyon Institute points out in a new study, although the current sales tax is generally limited to the final sale of a retail good, it does apply to things that could arguably be considered services instead. That includes utilities, restaurants and bars, and the lease of personal property.
The restaurant category is a good illustration of the lack of what the lawyers call a bright line between goods and services. At the end of the meal, the bill you get, and on which sales taxes are owed, in part reflects the price of food consumed. But it also reflects the value of various services rendered: taking your order, cooking the food, bringing it to your table, and cleaning up afterwards.
The institute estimates that as much as a third of the existing sales tax base could be described as consisting of services, rendering them exempt from any new or increased sales tax. That means, for example, that the sales tax the Legislature approved to replace the existing dedicated education sales tax, established by Prop. 301 but expiring in 2021, would produce a third less of the revenue expected.
Legislature couldn’t fix this problem
The Legislature couldn’t fix this. It would require litigation to establish the contours of the problem, and another constitutional amendment to remedy it.
Arizona needs to have a serious discussion about
broadening the consumption tax base tax reform and modernization. But a constitutional amendment, particularly an ambiguous and potentially risky one, isn’t the context in which to have it.
As the caption of Robb’s commentary says, Prop. 126 is a preemptive strike to prevent any serious discussion of tax reform and modernization in Arizona. This is fiscally irresponsible and reckless.
Arizona has not returned to pre-recession (2007) levels of state funding, adjusted for inflation, which means we have had a lost decade under Governors Jan Brewer and Doug Ducey and our Republican controlled legislature, and we are eating the seed corn investments of future generations of Arizonans. As the Arizona Republic reported last year, Arizona’s budget: Just who are the winners and losers when cash is scarce?
This latest tug of war between what the public wants and what lawmakers decide the state can pay is a reminder of how tight Arizona’s budget remains a decade after the housing boom ended and the Great Recession cut a path of destruction through the economy.
With no significant tax increases and a series of tax cuts behind it, Arizona has in the past 10 years seen state government’s buying power weakened and its priorities shift.
Prison spending — including privately owned facilities — and child services have seen significant spending surges compared with 10 years ago. Medicaid and K-12 education have gotten much smaller bumps. Meanwhile, other areas of the budget, ranging from public safety to higher education, endured sharp cuts during the recession that have not been restored.
Today’s improved finances are still fragile and expected surpluses are small. The state is forecast to collect about $24 million more than anticipated spending in the next year, or about 0.02 percent of spending.
Lawmakers are planning for a fiscal 2018 budget that could top the $9.6 billion general-fund spending plan the Legislature passed for 2007. Recent estimates suggest the 2019 budget reaching $10 billion from the general fund.
Those figures, however, don’t account for the effects of inflation. When that is factored in, the initial 2007 budget was more like $11.2 billion today.
Tom Rex, associate director of Arizona State University’s Center for Competitiveness and Prosperity Research, traces the state budget’s erosion back to a series of tax cuts over the past 25 years.
“Relative to the nation, both K-12 and higher-education funding have been cut significantly, both during the first 15 years of the tax cuts and during the last decade,” he said. “Per-pupil funding is nearly the lowest in the country for K-12 and is considerably below average for higher education. But the need for K-12 funding is above average, due to the state’s high poverty rate.”
The nonpartisan Joint Legislative Budget Committee expects Arizona’s budget will reach $10.5 billion in 2020, suggesting the growing state will continue to offer less to its residents long after the funding crisis has ended. And Arizona has added more than 500,000 residents just since 2010, meaning leaner budgets have provided services to a state that has grown by more than 8 percent.
Republicans say the budget recovery will come from economic growth, rather than tax hikes that would increase state revenues.
[But] “Revenues have not returned (to prior levels). State-agency budgets in total are $970 million lower than they were before the recession,” she said. “Universities have been decimated. Community colleges have been cut. We have a long way to go.”
Prop. 126 would lock Arizona into a perpetual fiscal crisis, unable to meet even the state’s basic funding needs for health, education and public safety.
Economists Nouriel Roubini and Brunello Rosa recently analyzed that We are due a recession in 2020 – and we will lack the tools to fight it.
When the next recession comes, and it will, the state’s hands will be tied and Arizona will fall back even further than the lost decade we have just endured. This is insanity.