The unanimous vote that Gov. Jan Brewer’s sales tax reform bill received in the House Ways and Means Committee is far from a sign of smooth sailing ahead.
The committee’s three Democrats were part of the 8-0 vote for HB 2657 in committee on Monday. But all said they would oppose the bill on the floor if it didn’t do more to address concerns from cities that say they stand to lose from the proposal.
And a bigger problem may keep the governor’s prized bill from the floor altogether. The legislation has also been assigned to the House Appropriations Committee, where Chairman John Kavanagh said he won’t even hear the bill if it doesn’t replace millions in tax revenue that some cities will lose due to changes in the way that sales taxes on construction materials would be collected and distributed.
“I am not in the habit of kneecapping my municipalities,” Kavanagh, R-Fountain Hills, said.
The biggest problem many municipalities, as well as the League of Arizona Cities and Towns, have with the bill is a proposed overhaul of the prime contracting formula. The bill would scrap the current system, under which sales taxes on construction materials are split between the city where they’re purchased and the city where they’re used. Under HB2657, all sales taxes would be collected at the point of sale, which would cut high-growth cities out of the loop on the distribution of the revenues.
“I will have as many information hearings as possible to try to ferret out solutions to the problems that were identified but not solved today. And if we can work out the solutions, then I’ll hear the bill,” said Kavanagh, who sat through the four-hour Ways and Means hearing.
“But if… the informational hearings can’t produce any sort of reasonable compromise, then I will not hear the bill.”
The bill is the result of Brewer’s Transaction Privilege Tax Simplification Task Force, which drew up 10 proposals last year for overhauling Arizona’s sales tax system, which Brewer and others say is the most complicated in the United States. Only three of the 10 require proposed changes legislative action, but those three have drawn fire from many cities and lawmakers.
Along with the prime contracting provision, the bill includes a proposal to have the Arizona Department of Revenue collect sales taxes for all cities in Arizona, including 18 that currently collect their own TPT, and it would eliminate cities’ abilities to conduct their own TPT audits of businesses. That function would also shift to DOR.
Prime contracting has been the biggest point of contention, and several mayors testified Monday about the revenue their cities would lose. Kavanagh’s wife, Fountain Hills Mayor Linda Kavanagh, did not testify, but was one of four East Valley mayors to sign a letter to Brewer protesting her task force’s recommendations.
The committee passed an amendment by Rep. J.D. Mesnard aimed at easing some of the burden on cities. The amendment would give some cities an extra chunk of state-shared revenue from TPT, based on the amount of construction they have.
“This is going to have a revenue impact on the cities. Obviously, we’re trying to find the fairest solution to it,” said Mesnard, R-Chandler. “I offered my amendment because I’m trying to find solutions.”
Brewer’s bill seeks to ease the fiscal hit to cities in two other ways – by increasing the amount of TPT money cities receive under Arizona’s state-shared revenue system, and by eliminating noncompliance with the contracting rule that businesses either willfully ignore or overlook due to the system’s complexity.
Some cities said Mesnard’s amendment wouldn’t make up for the revenue they’ll lose. Surprise Mayor Sharon Wolcott said the amendment not only doesn’t help, but may make things worse. She estimated that Surprise would lose about $4.4 million in TPT revenue under the bill, but would only get about $700,000 in return.
“That is hardly holding us harmless,” Wolcott said. “We are largely a bedroom community. Most of our purchases we purchase outside of our city lines.”
The mayors of Litchfield Park and Maricopa echoed Wolcott’s statement, saying they too would lose revenue due to their lack of stores like Home Depot, Lowe’s and other places to purchase the materials used to build homes in their towns.
Kavanagh also said he had concerns about DOR’s ability to take on the cities’ workload without additional resources. Additionally, he questioned the fairness of a provision giving 14 of 15 counties – all except Maricopa – the ability to levy use taxes.
DOR Deputy Director Vince Perez, however, said it wouldn’t actually be that difficult for the agency, which already oversees a lot of taxation duties for the cities.
The bill has 42 co-sponsors, but not all may support it in its current form. Democratic Reps. Mark Cardenas, Ruben Gallego and Bruce Wheeler all co-sponsored the bill and voted for it in Ways and Means, but threatened to oppose it down the line if changes aren’t made.
Gallego, the assistant House minority leader, said he wants to hold cities harmless for the potential loss of TPT revenue. He told the bill’s supporters that HB2657 will likely need bipartisan support to get out of the House, and said he would urge other House Democrats to vote against the bill on the floor if changes aren’t made.
“There is work to be done,” Gallego said. “Hopefully, Rep. Mesnard’s approach is the start of that.”
Cardenas, D-Phoenix, also said the bill has problems. But he said he voted for it in the interest of keeping the bill moving through the legislative process so it could be improved.
No one disputed the need to reform Arizona’s TPT system. Michael Hunter, a top aide to Brewer who spearheaded her push for the bill, said 46 other states already have the reforms that the governor’s bill aims to implement.
Hunter said Brewer supports Mesnard’s amendment.
“The governor really encourages legislative creativity and problem solving,” Hunter said.
A plethora of speakers who testified in favor of the bill said it would make it easier for businesses to comply with TPT laws. If businesses have a one-stop-shop in which to pay their sales taxes and no longer have to shoulder the responsibility of collecting taxes for the state, it would free them up to create jobs and economic growth, they said.
Rep. Debbie Lesko, the committee chair, said she asked to be the bill’s prime sponsor because it’s such an important issue. But she said the amended version of HB2657 the committee debated Monday was only a first step.
“This is a bill that will evolve. And we will continue to talk to the cities and the counties and all of those involved,” said Lesko, R-Glendale.
Representatives of companies such as Apollo Group and Salt River Project testified about the problems they face from the current system. SRP lobbyist Gretchen Kitchell, for example, said her company collects TPT in 20 different jurisdictions in Arizona, including nine “non-program cities” that collect their own sales taxes.
“When we’re busy trying to adhere to a complicated system, we’re not generating economic activity,” Kitchell said.
Other supporters said the bill would help bring Arizona into compliance with recent federal laws, primarily the Marketplace Fairness Act of 2013, and would help set the stage for future taxation of online sales.