Two scenarios forecast widely different effects of sales tax reform

Luige del Puerto//March 13, 2013

Two scenarios forecast widely different effects of sales tax reform

Luige del Puerto//March 13, 2013


The Joint Legislative Budget Committee said HB2657, which Rep. Debbie Lesko, R-Glendale, sponsored on behalf of the governor, could either increase state revenues by $19 million or negatively affect the state’s finances by $137 million.

JLBC said both scenarios are equally plausible.  They would apply to fiscal 2016, the first full year  after the changes take effect.

The committee, however, offered several caveats to its analysis, citing the lack of definitive data and the resulting speculative nature of its methodologies.

The governor contends that simplifying the tax base would ease the burden on businesses, which deal with one of the country’s most complicated sales tax systems.

But the proposal has met with fierce resistance from cities, where officials worry that some of the provisions would hit their bottom line hard.


Specifically, the cities are opposed to eliminating the prime contracting classification under the sales tax system.


JLBC said the bill’s impact would depend on three factors:  the level of non-compliance with the prime contracting sales tax, the cost of materials relative to overall construction, and increases in the retail sales tax base as a result of the proposal.


JLBC offered two estimates. One replicated the assumptions by the Arizona Department of Revenue, which estimated revenues would increase by $19 million, largely because of a projected increase in the retail sales tax base and greater benefits from reducing the rate of noncompliance.  The second used another set of assumptions that led to the forecast of of  a loss of $137 million.


The committee said that in both estimates, local governments’ shared revenues will likely increase – by $50 million under one scenario and $102 million in the other scenario.


But the bill will also likely negatively impact local governments’ sales tax collections by $24 million or by $61 million, depending on which equation is used.


The estimates yielded different numbers because JLBC and the revenue department employed a different set of assumptions.  Since the prime contracting tax base is sizable, any tweaks in the equations will likely yield considerable swings in the estimates.


The impact of the JLBC numbers is difficult to gauge, particularly since the governor has recently offered a compromise on the bill’s biggest sticking point. The estimates did not factor in Brewer’s proposed fix.


On March 1, the governor proposed to allow municipalities to continue taxing construction activity while the tax on materials would be collected up front – at the stores where they are bought.


The governor’s apparent concession on this issue appeared to have softened the opposition to her goal of simplifying the sales tax system,


So far, mayors are encouraged by the governor’s latest action, and some acknowledged that she has gone out of her way to address their worries.


“Everyone, myself included, for sure, felt it was a substantial movement on her part,” said Mayor Jim Lane of Scottsdale.


The proposal already received a House committee’s approval, but it has yet to get the Rules Committee’s nod, which is needed before it can advance to the floor for a debate.