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New Democratic budget calls for sales tax on services

Consumers and homeowners would pay higher taxes under a new budget proposal from legislative Democrats, but they say it will protect middle-class families more than Republican proposals and will stabilize future state revenues.

Homeowners also would pay higher taxes under the Democratic proposal, which would raise the statutory qualifying tax rate (QTR) that determines how much education funding is generated through local taxes and how much is paid by the state. The proposal would raise the rate by $1.50, a change Democrats said would save the state $730 million.

That change would result in an added tax burden of about $140 annually for a property owner whose home is worth $150,000, House Minority Whip Chad Campbell said. Conversely, he said a hike in the sales tax by one cent — a plan supported by Gov. Jan Brewer — would cost the average household $438 a year.

The proposal, which was crafted by Democrats in the House and Senate, would remove almost all exemptions to the state’s sales tax. Right now, consumers don’t pay a sales tax on services such as haircuts, house cleaning and dance classes, or when they buy items such as lottery tickets and warranties. But those exemptions would be removed under the Democratic plan.

Exemptions would remain for health care, prescription medication and food.

In order to avoid generating additional state revenue by broadening the tax base, which would trigger a constitutional provision that requires a higher level of legislative support for the budget to be passed, the proposal would cut the state sales-tax rate to 3.4 percent from 5 percent.

“The average consumer will not be impacted in any major, significant way by expanding the base,” said Campbell.

While some new services would be taxed, major purchases, such as a car, would be significantly cheaper.

“I’m pretty sure the money you save on your new car will offset the extra money you pay at the barbershop,” he said.

Cities would have the option to expand their sales tax base to match the state’s, which would allow them to apply local sales taxes to new items and generate more revenue for municipalities. The Democratic plan proposes suspending $1.2 billion in state revenue-sharing payments to cities for two years because of the additional revenue they would generate from the expanded tax base.

“We’re borrowing the money for two years, and it will be paid back,” said Sen. Ken Cheuvront, a Phoenix Democrat.

Democrats also want to restore a state property tax on individuals and businesses that has been suspended since 2006. That would generate another $250 million in revenue.

The plan cuts $670 million from state spending and raids $147 million from specialized funds. But it also restores $724 million in funding, and it actually increases state spending by $132 million in fiscal 2010 compared to fiscal 2009.

It also relies on $990 million in federal stimulus funds given to Arizona for education and other uses.

But Republicans, who control both legislative chambers, criticized the proposal for relying too heavily on tax increases, a move they have avoided at all costs in their budget drafts.

“It looks like a huge tax increase,” said House Majority Leader John McComish.

And House Speaker Kirk Adams said he was alarmed at the paucity of cuts in the Democratic plan.

“What’s perhaps most concerning in their package…is that there are very, very, very little real reductions in spending,” he said.

Adams said GOP leaders may incorporate some smaller elements of the Democratic budget proposal into their budget, but not the tax proposals.

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