Voter Approval of Prop. 126 will Cut Education and Road Funding

If voters approve Prop. 126 on Nov. 6, the state will lose $250 million annually in current funding for education and counties will have a dramatic shortfall in money for road improvements.

The Grand Canyon Institute estimates that the education sales tax renewal will lose one-third of
revenues if Prop. 126 passes, which would currently amount to $250 million annually. See Consequences of Prop. 126: $250 million cut to education, future cuts to transportation funding and higher taxes on goods

The Protect Arizona Taxpayers Act would amend the Arizona Constitution to restrict state and municipal governments from imposing any taxes on services which were not already in place as of Dec. 31, 2017.

What are “services”

Currently, “services” encompass 33 percent of revenues for statewide sales taxes. When this 33 percent exclusion is applied, prospective education sales tax revenues decrease $250 million annually. The “service” category includes hotels stays, bars, restaurants, amusements such as tickets to sporting events and movies, insurance premiums, and rentals of cars and real estate.

One consequence of Prop. 126 is the elimination of any taxes on services included within sales tax measures that are scheduled to be renewed in the future. Prop. 126 would reduce revenue by a third from Prop. 301, the 0.6 cent education sales tax set for renewal in 2021.

A similar problem occurs for counties that use the sales tax to fund road improvements. Maricopa and Pima counties have measures expiring in 2025 and 2026, respectively. If Prop. 126 passes, any renewal of those taxes will lose almost 40 percent of their revenue, likely meaning they will seek to raise the tax on goods even higher.

“Voters should not be fooled.  Passage of the proposition would limit opportunities for the state and municipal governments to increase revenue by expanding the sales tax to include more services at some point in the future. Currently, Arizona exempts most services from taxation,” said Dave Wells, research director with the Grand Canyon Institute (GCI).

Too many special tax exemptions

Prop 126 is a special interest proposition has been supported entirely by realtors.  Opposition to Prop 126 includes the conservative Americans for Prosperity, the centrist Grand Canyon Institute (GCI) and Arizona League of Cities and Towns, and the liberal Arizona Center for Economic Progress and the affiliated Children’s Action Alliance.

“Lawmakers have consistently reduced taxes and increased tax exemptions over the past 25 years, leading to a reduction in state revenues by $4 billion annually,” says George Cunningham, chair of the Grand Canyon Institute. “GCI has taken a position against Prop. 126 because Arizona can’t afford to permanently close the door on additional sources of revenue needed for education, roads, public safety, and other essential services.”

Rejection of the ballot measure leaves open the opportunity for taxing services – a broad category of items that could be taxed individually such as child care, nail salons, or financial services, or as an entire category.

Currently, the state sales tax includes goods and some services but together they have become a smaller portion of the economy. As a consequence, the state sales tax brings in $1 billion less in revenue than it did two decades ago.