Supporters of the one-cent tax portray it as the antidote to lawmakers’ antipathy toward cash-starved schools, but critics claim its success will come at the expense of the state’s ability to bring in taxes from remote and Internet sales.
The opponents charge that the ballot measure would derail efforts by the Governor’s Office and other policymakers to simplify Arizona’s sales tax system and prepare the state to take advantage of potential federal legislation requiring online stores to collect sales taxes.
And that, opponents of the ballot measure say, is a question worth hundreds of millions of dollars.
The initiative’s supporters say the claim is another red herring, insisting that no provision in the ballot measure precludes lawmakers from broadening the base or going after Internet sales taxes.
At the heart of the issue is a provision that seeks to guarantee that legislators won’t alter the sales tax base to diminish revenues from the one-penny-per-dollar tax. If approved by voters, the tax is anticipated to generate about $1 billion annually, with most of the money going to schools.
Critics say this provision ultimately jeopardizes the state’s fiscal health.
They note that Arizona’s governments rely heavily on sales taxes to fund their operations and they fear that this revenue, which is the state’s largest source of funds, would “decay” as more consumers buy merchandise online to avoid paying taxes.
For critics, the threat posed by Proposition 204 is two-pronged: It keeps the state’s relatively high sales tax, driving consumers to go online, and it further complicates the sales tax system, throwing a monkey wrench into efforts to streamline it.
Gov. Jan Brewer is spearheading efforts revise the tax system. She recently created a task force that has been examining models of remote sales taxation. This November, it is expected to come up with recommendations to change Arizona’s tax laws in anticipation of Congress going after remote sales taxes.
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But exactly how Prop. 204, which essentially extends a temporary tax by the same amount that’s scheduled to expire next year, will prevent legislators from overhauling the state’s sales tax system is, at best, hard to follow.
The argument is based on several presumptions about what federal legislation on remote sales taxes might ultimately look like, and about the impact of the one-penny initiative on Arizona’s sales tax system, which is among the most complex in the nation.
One of those assumptions is that for Arizona to have the right to collect remote sales taxes, it must affiliate with the national “streamlined sales tax” project. Under that approach, states would agree to simplify sales tax collections by, among other things, adopting uniform tax definitions, requiring a single tax return from businesses and having one entity administer the system.
Arizona’s problem is obvious: It has multiple sales tax bases. The state, for example, does not impose a transaction privilege tax on renting or leasing residential property and advertising sales, while many Arizona cities do.
Additionally, tax rates vary depending on the locality. Also, some cities, especially the bigger ones like Phoenix, collect and administer their own sales tax.
For businesses, this all means multiple tax bases, licensing contracts, tax returns and audits — a constant source of frustration and what Brewer’s task force is trying to remedy.
Another route for states that don’t want to sign the “Streamlined Sales Tax and Use Tax Agreement” is to come up with sufficient changes on their own to simplify their sales taxes.
Professor Dennis Hoffman, an economist at ASU’s W.P. Carey School of Business, is heading a working group under Brewer’s task force. He said the biggest challenge is to arrive at a common tax base across all jurisdictions—meaning an agreement that spells out what’s taxable or not.
He told the Arizona Capitol Times that it’s unlikely to get remote sales reform without a uniform sales tax base across all jurisdictions.
This is where Prop 204’s opponents come in. They claim it will make it virtually impossible for Arizona to go either route without going back to voters to convince them to amend or repeal the proposition.
That’s because Arizona’s voters decided years ago to prohibit lawmakers from amending measures that are approved at the ballot — unless the change has the support of three-fourths of lawmakers and it is designed to “further” the program’s purposes.
In practice, voter protection means controversial amendments to publicly-approved spending programs have zero chance of passing at the state Capitol.
Critics assert that if Arizona can’t simplify its sales tax system, it won’t be able to collect remote sales taxes, and it’s no small change.
The National Conference of State Legislatures estimated that Arizona will lose roughly $709 million in remote sales taxes this year alone.
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Kevin McCarthy, the president of the Arizona Tax Research Association and a vocal critic of Prop 204, said efforts streamline the sales tax will be complicated by the provision to prevent lawmakers from altering the sales tax base, which he described as “extraordinarily irresponsible.”
The provision says lawmakers may not adjust the state’s tax base under Title 42, which governs taxation, “in any manner” if it decreases the prior year’s revenues from the one-penny tax.
The proposal does allow lawmakers to adjust the tax base, but under a condition: Any change that results in a loss of revenue must be made up so the aggregate amount that is collected is the same or larger.
What the section appears to be seeking is a guarantee that revenues from the one-penny tax won’t decrease if lawmakers tinker with the sales tax base.
The Prop. 204 provision achieves this goal by requiring that any tweaks that result in diminished cash must be offset by changes that presumably will raise money elsewhere to make it all revenue neutral.
It gets even more complicated.
Critics earlier claimed that the provision “freezes” the entire current sales tax base — meaning legislators can’t tweak sales taxes unless they satisfy the requirements in Prop. 204.
But the Arizona Supreme Court ruled that the initiative only limits adjustments that affect the money collected under the one-penny tax and lawmakers are free to make changes to the rest of the sales tax.
Critics say this means Prop 204 will result in a bifurcated tax base, and that makes it even more complicated.
McCarthy and other critics read this provision to mean the avenues to make fundamental changes to the tax base, including efforts to simplify the state’s convoluted sales tax scheme, have been effectively shut down.
“I think it would be a little more honest for them to just say, ‘We didn’t give two shakes to the whole issue of reforming the state and local sales tax code,’” McCarthy said. “Because if they had, what would they have done? They would not have put that provision in there.”
Vince Perez, a deputy director of the Arizona Department of Revenue, echoed McCarthy’s sentiment.
For Perez, the requirement for lawmakers to ensure that revenues are the same or bigger whenever they tinker with the sales tax base only further complicates any effort toward simplification.
Perez, who is a member of Brewer’s task force, said the group’s goal is to create a uniform tax base while anticipating congressional action on remote and Internet sales.
“We need to be able to easily or readily go down those paths, make those changes, without having to worry about any offsets for any decreases in the revenue stream for the state,” Perez said.
Michael Hunter, an adviser to Brewer who is chairing the sales tax task force, said the “offset” requirement in Prop 204 makes the politics of taxation even more toxic.
In practice, to offset any decrease in revenue means increasing somebody else’s tax burden.
“Think about how hard it’s going to be to get an exemption and have to simultaneously identify some other tax increase… and what kind of (political) fight that would be,” Hunter said.
“It would stifle a lot of efforts to reform the sales tax base,” he added.
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Ann-Eve Pedersen, who is leading the campaign to pass Prop 204, explained they included the provision at issue to protect revenues generated by the one-penny tax.
Pedersen said without it, nothing prevents lawmakers from changing the tax base, such as by eliminating the tax on certain items, thereby deliberately decreasing revenues that are mostly earmarked for schools.
But the chairwoman of Quality Education and Jobs, the committee behind the initiative, doesn’t buy the assertion by McCarthy and others.
“This was part of the misinformation campaign,” she told the Capitol Times.
Pedersen said critics previously claimed that the ballot measure “locks in” the entire sales tax base, but that claim has been disproven by the Arizona Supreme Court, she said.
“It took the Arizona Supreme Court to say, yeah, you’re not reading that correctly… Now, they’ve come up with this idea. I’m still not understanding why this is preventing tax reform,” Pedersen said.
“If the state wants to broaden the tax base and tax Internet sales, that’s completely allowed by this and in fact was even contemplated when we were drafting this,” she said, adding the issue is “manufactured.”