Gov. Jan Brewer’s proposed overhaul of the state’s complex sales tax collection system is moving forward in the Senate, even as negotiations continue to change it to allay fears from cities and towns and some lawmakers express concern it is too sweeping to be accomplished in one session.
The legislation passed the Senate Appropriations Committee Tuesday on a 6-3 vote, with the three opposing Democrats voicing concerns about the fate of cities and towns. Some Republicans on the committee also voiced concern, but voted to advance the bill anyway.
Municipalities worry they’ll lose millions in revenue because the overhaul eliminates a construction tax, and supportive lawmakers blocked its advancement in the House. But it was tacked onto a Senate bill last week so it would meet a deadline.
The bill is sponsored by Rep. Debbie Lesko, R-Peoria, and has been the subject of ongoing negotiations between Brewer’s representatives, lawmakers and cities and towns.
Brewer has made overhauling the current system a priority this year. It’s described as one of the most complex in the nation, with businesses required to file multiple forms, undergo multiple audits and calculate different tax rates in many of the areas they operate.
Her proposal ran into an immediate firestorm of opposition from cities and towns because of how the proposal shifts taxation of new construction and other contracting.
The current system is based on where the building is done, so developing areas get added revenue. Brewer wants it shifted to where the materials are sold and to eliminate taxes on overhead and profit, a prospect that municipalities believe would costs millions of dollars in yearly revenue.
Lesko said Tuesday that negotiators have agreed to let cities and towns continue their taxes on new construction and double the amount they get from state revenue sharing, which she said should be enough to offset the losses from taxes on trades. The shift to taxing materials at the retail level is also expected to vastly cut the number of businesses that avoid the tax, leading to increased compliance.
“So the cites will be able to get tax on materials, get the double revenue sharing, get more money that’s shared because the pot’s going to grow, plus they will be able to get this local tax on new homebuilding and new commercial construction,” Lesko said. “So some cities are going to make more money than they do now, probably Phoenix and Tucson would be my guess, and probably Glendale, because they have building suppliers in their town that they’re going to be getting the material tax on, plus they’ll still be able to do the local construction tax.”
Tom Belshe, deputy director of the League of Arizona Cities and Towns, testified Tuesday that cities were pleased with some of the progress being made in negotiations but there are still stumbling blocks, such as ensuring small cities don’t lose money. Other points of contention include who does audits. Now, cities and towns do their own audits and the state Department of Revenue audits large firms. The current bill has all audits being done by the state, but a new proposal presented to the cities on Monday will allow them to continue to employ their own auditors under state oversight, Lesko said.
Eliminating the need for businesses to undergo multiple audits and file multiple tax returns in multiple jurisdictions is one of the key reasons for the simplification push. The other is a proposed federal law that would allow states to levy sales taxes in Internet sales. Part of that law requires states to have single-point-of-collection systems in place.
Lesko said small businesses, like landscapers and plumbers, would see particular benefits. Right now, they have to figure taxes on 65 percent of their revenue from each job and file and pay monthly in each jurisdiction. Many don’t, with estimates of non-compliance hovering between 30 and 40 percent.
Under the overhaul, they’d have no filing require at all, because they’d pay sales tax on their materials at the retail level.
Another potential stumbling block is the potential loss of revenue to the state. Sales taxes, technically called the Transaction Privilege Tax, accounts for more than a third of the state’s $9 billion budget.
Two studies that came out this month, one from the Legislature’s budget staff, estimated that the change could possibly cost the general fund more than $100 million.