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Report ranks Arizona ninth nationally in state, local reliance on sales taxes

Arizona ranks ninth nationally in its reliance on sales taxes to fund its state and local governments, according to a report by a nonpartisan tax research organization.

The Washington, D.C.-based Tax Foundation found that 48.4 percent of Arizona’s tax base came from general sales taxes and from selective sales taxes on motor fuel, tobacco, insurance premiums, public utilities, amusements and alcoholic beverages.

The report, which combined state and local tax collections, drew from U.S. Census data for fiscal 2007.

Dennis Hoffman, a professor of economics at Arizona State University’s W.P. Carey School of Business, said states relying too heavily on one type of tax may expose themselves to economic fluctuations.

“If you have some balance in tax sources, especially more reliance on property tax, you can be more resilient in hard times,” Hoffman said.

Hoffman said selective and general sales taxes are a fairly reliable source of revenue, but he called property tax the most stable because it doesn’t rely on a transaction of goods and services.

According to the report, property tax accounted for 26.7 percent of Arizona’s tax base, individual income tax 16.1 percent, corporate income tax 4.2 percent and licenses and other taxes 4.6 percent.

“The problem with our tax structure,” Hoffman said, “is we are enduring a significant economic downturn and our major sources of revenue have all taken a substantial hit.”

State Treasurer Dean Martin said that general and selective sales tax is a stable revenue source.

“People think that people stop buying during a recession, but really people shift their buying habits,” Martin said. “Even if someone loses their job they still have expenses.”

Martin said that Arizona leaders need to recognize the state’s heavy reliance on sales tax and prepare for fluctuations by saving money.

“Regardless of what stream you have there will always be ups and downs,” Martin said. “What you need is a budgeting process that recognizes that. No matter what revenue sources you select you need a plan for that volatility. And that is what Arizona has not done.”

Ken Strobeck, executive director of the League of Arizona Cities and Towns, said that Arizona relies more heavily on sales tax at the state level because the public objects the least when that tax goes up. He said that in general cities have more balanced revenue streams because they depend more heavily on property tax.

“If we rely on one source then you have the potential of upswings and downswings,” Strobeck said. “Just like any other investment you’re supposed to have a balanced portfolio, and I think the same is true for revenue sources.”

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