In case you forgot, Gov. Jan Brewer has other priorities this year besides getting the Legislature to approve Medicaid expansion.
The Republican governor also wants to completely overhaul the state’s sales tax collection system, which is described as the most complicated in the nation. Like Medicaid expansion, her plan stalled in the Legislature, this time because cities and towns were concerned they would lose revenue. But after Brewer made a series of major compromises, the sponsor says she has the votes in the Senate and the House of Representatives to move the measure forward.
Maybe, maybe not, according to the executive director of the League of Arizona Cities and Towns. He said many lawmakers still oppose the overhaul because the compromise language would still cost cities and towns millions. And that’s a non-starter.
“If you look at the latest (Joint Legislative Budget Committee) analysis, the state actually stands to make money, the counties stand to make money and the cities and towns are projected to lose money,” executive director Ken Strobeck said Monday. “And that is just unacceptable for a tax policy to be pushed down to cities and towns that causes us to lose revenue for no particularly good reason. And it is not making it that much simpler.”
Rep. Debbie Lesko, R-Peoria, who is carrying the legislation, disagreed that cities and towns stand to lose big. She also pointed out that income tax revenue shared with cities and towns rose by about $80 million last year.
“Right now in the most recent fiscal note from JLBC it says that the cities could possibly, as a whole, could possibly lose between $2.3 million and $19 million,” Lesko said. “And we started out as a lot bigger fiscal impact.”
The overhaul won’t affect average consumers, who will still pay sales taxes as before. Instead, it targets the state’s complex system where businesses are taxed on their revenues, at different rates by different entities, including the cities, counties and the state. The tax on contractors and other business transactions is known as the Transaction Privilege Tax, and the state alone is estimated to collect $3.8 billion of the state’s total revenue of $8.6 billion this budget year.
The biggest worries for cities and towns is the proposal to change how they collect from builders and other contractors. Currently, they pay based on 65 percent of the cost of the total job, 35 percent of which is for labor costs. Much of that tax now flows to the community where the building is done, helping offset increased costs of providing services.
Brewer’s original proposal would have eliminated the contractor tax system in favor of one where they pay taxes on supplies when they buy them and eliminated tax on labor. That would have sliced a huge chuck of revenue from growing cities which don’t have major retail or wholesale operations.
Brewer’s latest proposal allows the construction sales tax to continue but still follows the same principal for tradesmen who do home repairs like plumbers and air conditioning repairmen. They would pay sales tax just on parts and equipment when they buy it.
Rep. John Kavanagh, R-Fountain Hills, said his small town will lose more than $300,000 under the current proposal.
“This relief act for plumbers and electricians rests on too many vague assumptions that could have very serious economic effects on medium and small municipalities,” Kavanagh said. “I really think that’s something that should go to an independent study commission. Pass the rest, but keep this potential economic hit … in abeyance until we know for sure what the real result will be
The League of Cities and Towns wants the tax collected at the time and in the city where the repairs are done.
Strobeck also said compromises on two other major parts of the overhaul – a single point of administration and auditing, have been taken out of the latest bill language.
Those two components are key to bringing the state in line with proposed federal legislation that will allow sales taxes to be collected by most online retailers.
“We’re very, very close if we could just get a couple of changes on the auditing and administration back to where we thought we had agreement, and either carve out the construction entirely, or we have even agreed to do something with the trades provided there’s a real hold harmless for the cities,’ Strobeck said.
But Lesko and Brewer spokesman Matthew Benson both said they’ve already made major compromises and don’t expect to yield more.
“The governor’s made significant concessions to the concerns of the cities and town and she’d ready to push forward,’ Benson said. “She has the votes in both chambers – that’s what it takes to get say bill through these days.”