Gov. Jan Brewer and some Arizona lawmakers are determined to pass her plan to simplify the state’s tax code this year, but municipalities are just as determined to delay at least one portion of the governor’s proposal that they argue could do irreparable harm to their finances.
Testimony at the Senate Finance Committee on March 20 on Brewer’s Transaction Privilege Tax reform proposal focused on the need to approve her plan this year. Without it, Arizona won’t be able to abide by the federal Marketplace Fairness Act and begin collecting remote sales taxes from online transactions.
The governor’s task force estimated that the state missed out on $273 million in taxes in 2009 because of its inability to tax online sales.
But the Ninth Floor has been unable to persuade Arizona mayors that Brewer’s changes to prime contracting taxes are for the best.
Municipal leaders and officials with the League of Arizona Cities and Towns released their own competing tax reform proposal just hours before the Finance Committee approved HB2111, the latest version of the Brewer’s tax proposal.
Municipalities worry that the elimination of a split of tax revenues on construction materials, which are now divided between the municipality in which the construction takes place and the point of sale, would cost them millions of dollars. Tom Belshe, the league’s deputy director, said officials don’t yet know the full extent of the harm that may be caused if changes to prime contracting are approved by the Legislature this year.
“What has been our frustration all along is to be able to know what the individual impact will be on our cities and towns,” Belshe testified. “I don’t think we’re the only group that has trouble knowing what that impact will be.”
Arizona cities and towns know there is going to be a hit to their tax revenue, Belshe said, but the problem is they don’t know how big a hit that will be. But lawmakers voted 6-1 in committee to move the bill forward.
Kevin McCarthy, president of the Arizona Tax Research Association, said reforming the state’s tax code isn’t going to be a win-win for everyone, but it remains a necessity.
“If this is going to be done by spreadsheet, and every last city is going to be held harmless down to the last dime, we can all pick up and go home. That is not possible,” McCarthy testified.
Proponents of Brewer’s proposal say it’s essential to taking advantage of an important new revenue source for the state. As is, Arizona’s complicated and cumbersome tax code, which requires businesses to remit taxes in multiple forms and places, would be unable to support the collection of remote sales taxes, said Rep. Debbie Lesko, the sponsor of HB2111.
“Arizona has the most complicated sales tax system in the entire nation,” said Lesko, R-Glendale. “Forty-six other states already do what we are proposing to do in my legislation.”
Lesko’s original tax reform bill was struck to HB2111 to bypass the House Appropriations Committee, where Rep. John Kavanagh, R-Fountain Hills, had refused to give the bill a hearing. Even if approved by the full Senate, HB2111 will still have to return to the House for a vote, where Speaker Andy Tobin, R-Paulden, has his own concerns with Brewer’s plan.
The striker amendment includes a number of concessions made by Brewer to ease concerns about prime contracting taxes. The amended bill would allow the continued tax of construction activity on commercial and residential property. And the current split of tax revenue on construction materials – those dollars are now split between the municipality in which the construction takes place and the point of sale – would remain the same for road and bridge construction projects. All other projects would only allow taxes on construction goods at the point of sale, a part of Brewer’s efforts to simplify where and how businesses remit taxes in Arizona.
A competing proposal released by mayors on March 20 actually mirrors many of Brewer’s own efforts. Local leaders proposed creating an online portal to act as a one stop shop for remitting taxes. The measure would also bring audits under the management of the Department of Revenue. Unlike Brewer’s proposal, which gives the Revenue Department the right of first refusal to audit cities and towns, municipalities proposed keeping their own auditors on staff, but allowing those employees to report to revenue authorities.
Brewer’s concessions would make the losses smaller, but would not keep municipalities whole, Belshe said. Municipalities have refused to back the prime contracting changes before the full extent of the damage to their bottom line can be assessed. A part of the mayors’
proposal includes the commissioning of an independent study to determine the true loss of tax revenue for counties, cities and towns.
Gilbert Mayor John Lewis cited a Joint Legislative Budget Committee study of Lesko’s original bill language that determined the tax code changes could cost the state’s coffers much as $137 million, while municipalities could lose as much as $61 million. JLBC analysts reported the bill’s fiscal impact was difficult to determine due to a lack of available data and differing opinions of the state’s rate of non-compliance with prime contracting tax law. JLBC made its fiscal estimates based on different rates than those provided by the Department of Revenue.
That uncertainty only highlights the concerns municipal governments have with Brewer’s plan, said Maricopa Mayor Christian Price.
“We have to take a serious look at this… If indeed the numbers are right and we get a bigger piece of a smaller pie, that’s great. But the reality here is, what if we’re wrong?” Price testified. “It could set cities back 10 or 20 years.”
Lawmakers and municipalities all expressed a desire to keep working on the bill. A hearing is being planned in the Senate Appropriations Committee for next week, another opportunity to amend the bill.
The competing proposal introduced by cities and towns would allow Arizona to begin collecting remote sales taxes, Belshe said. Prime contracting changes aren’t needed to bring in that new source of revenue.
But for now, senators kept Brewer’s proposal alive at the urging of Arizona business leaders, and her concessions so far have pleased even some opponents of the bill. Kavanagh has said he thinks the prime contracting issues can be easily resolved at this point.
Yarbrough said he was “desperately committed” to passing a simplification of the Transaction Privilege Tax system this year.
That approach was echoed by lawmakers such as Senate Majority Leader John McComish, R-Phoenix, who served on the governor’s simplification task force, and political observers such as McCarthy, who warned against requests to stall even parts of Brewer’s overhaul.
“You should not go slowly,” McCarthy testified. “We’re behind the curve on this. We ought to act as quickly as we can.”