Gov. Jan Brewer’s plan to simplify Arizona’s sales tax system could undercut revenues for growing communities through changes in how construction materials are taxed, according to a report by the nonprofit Grand Canyon Institute.
While raw materials currently are taxed where construction occurs, Brewer’s plan would tax the materials when and where they are purchased.
Dave Wells, research director at the Grand Canyon Institute, said that under Brewer’s plan sales tax revenue from raw materials wouldn’t go to the community where the construction is taking place but to the location where materials are bought, which is oftentimes out of state.
“It (the tax) might go to a different community, which means that the tax revenue, especially the local part of the tax money, may not go to the community that’s actually experiencing the population growth,” Wells said.
The governor’s goal is simplifying the state’s transaction privilege tax, which is technically assessed for the privilege of doing business in the state but is commonly passed on to consumers. Brewer has said the privilege tax process is “complicated and overly burdensome” for businesses and is among the most complex in the country.
Most changes would not go into effect until Jan. 1, 2015.
While applauding the goal of a simplified system, the Grand Canyon Institute’s report also raised concerns about a proposal to transfer tax collections and auditing responsibilities from localities to the state.
Wells said the state isn’t as well-positioned to audit sales taxes stemming from construction because officials in communities have a better handle on what’s being built to make sure taxes get paid. The report said that could cut into state tax revenues.
Much like people who buy products online, construction firms that buy materials from out of state are supposed to pay a use tax. Wells said Brewer’s Transaction Privilege Tax Task Force, which developed the recommendations, seems to have assumed that use taxes are going to get paid.
“We think that’s an assumption that’s not warranted because you’re having a state oversee the permitting or inspection process they’re not even connected with,” he said. “So they don’t really know what materials are actually being purchased at all.”
Ken Strobeck, executive director of the League of Arizona Cities and Towns, said he supports simplifying the system but is concerned about claims that the change would generate revenue for cities and towns in other ways such as use taxes.
“We don’t believe cities and towns will be made whole by what they (the reforms) propose will be additional revenue generated through the retail sales process,” he said.
Brewer’s proposals are contained in HB 2657, authored by Rep. Debbie Lesko, R-Glendale, which won approval from the House Ways and Means Committee and was awaiting action by the Appropriations Committee.
A spokesman for Brewer didn’t respond to messages seeking comment on the Grand Canyon Institute’s findings.
Marshall Vest, director of the Economic and Business Center at the University of Arizona’s Eller College of Management, said that even though standardization of the tax base is long overdue, he suggests removing construction from the plan and letting communities impose impact fees on developers.
“It would be a much cleaner and defensible way of taxing that activity,” he said.
Stephen Slivinski, senior economist for the Goldwater Institute, an independent watchdog group that promotes limited government and free enterprise, said the state would benefit from simplifying the system.
“Growth won’t be negative in any way; it will always be positive,” he said. “We’ll be collecting substantially more revenue, and three or more years down the line it might seem kind of silly that we’re arguing about numbers small in comparison.”
Dennis Hoffman, professor of economics and director of the L. William Seidman Research Institute at Arizona State University’s W.P. Carey School of Business, said tax simplification would ultimately generate more revenue for cities.
“Cities concerned about the loss of revenue should not lose sight of the fact that this is one provision in a major piece of legislation that will open up the opportunity to online and remote sales taxation, leading to more revenue for all,” he said.
Spencer Kamps, vice president of the Home Builders Association of Central Arizona, said he also foresees greater compliance among businesses reporting taxes if the changes become law.
“At the end of the day, simplification is good and we need to continue the debate to minimize the impact on local jurisdictions,” he said.