Arizona’s combined sales tax rate is second-highest in the nation

Cronkite News
Friday, February 17, 2012
Salvador Rodriguez

WASHINGTON – Vans Trading Co. has been around since 1946, but it’s only in the last decade that customers at the Tuba City general store have yelled at the cashiers after they get their receipts.

That’s because Vans is in the town with the highest sales tax in the nation and the town, in turn, is in the state with the second-highest combined sales tax burden in the nation, according to two recent reports.

“After we ring up the total in the product and the tax comes up, they’re not happy with it,” said Vans owner Lucky Mokhcia. “But I tell them I have no control over that.

“They just yell at my cashiers,” he said. “They’re saying it’s too much.”

The Tax Foundation reported this week that the average combined sales tax in Arizona at the start of this year – adding up state, county, city and tribal taxes – was 9.12 percent, second only to Tennessee’s average rate of 9.45 percent.

In Tuba City, a $1 purchase comes with a 13.725-cent sales tax bill: 6.6 percent for the state, 1.125 percent for Coconino County tax and another 6 percent tribal tax levied by the Navajo Nation’s To’Nanees’Dizi local government. Tuba City’s No. 1 ranking was confirmed by both the Tax Foundation and a separate report from Vertex Inc.
Some experts say the high sales tax reflects Arizona’s decision to rely on less on income taxes for state revenues and more heavily on the purchase of goods and some services.

“We’ve always been heavily reliant on sales taxes,” said Kevin McCarthy, president of the Arizona Tax Research Association. “Different states might rely more on other taxes.”
The Tax Foundation report backs that up, saying Arizona relies on sales taxes for almost 36 percent of its revenue and on income taxes for about 13 percent. Nationally, the average is 22.9 percent of state revenue from sales tax and 21.3 percent from income tax.
McCarthy said Arizona has long had high sales taxes. He said polls have shown that property and income taxes tend to be less popular with people than sales taxes, so when Arizona has needed money, that’s where its lawmakers have turned.
“They have a tendency to lean toward the sales tax because they view that to be the least offensive,” McCarthy said. “As a result, that’s where we’ve gone and we continue to go back to the well.”

Sales taxes are also less likely to scare off potential businesses than property and corporate income taxes, said Garrick Taylor, spokesman for the Arizona Chamber of Commerce and Industry. But while Arizona’s sales tax is not necessarily driving away businesses, it could be driving away their customers – or at least driving down sales.

“High sales taxes might make the consumer think twice before making a purchase,” Taylor said.

Stephen Slivinski, senior economist at the Goldwater Institute, said Arizona’s high ranking on its sales-tax burden should serve as a wake-up call for the state to reform its tax system.
“Arizona has a tendency to just look at one tax at a time and make policy on an ad hoc basis, and that’s just not good for anybody,” Slivinski said.

Slivinski pointed to the state’s approval of a temporary 1 percent increase in the sales tax in 2010 to deal with a budget shortfall. He said state lawmakers should use the expiration of the temporary increase early next year as an opportunity to reform the whole tax system, not just one part of it, and streamline the process.

“You can still have a high sales tax and have a good tax system, but it requires looking at all the taxes simultaneously,” Slivinski said. “There’s no need to continually tweak a broken system. It’s going to remain broken despite the tweaks.”

Slivinski noted that some relief is on the way: If the 1 percent sales tax increase lapses next year as scheduled, he said, the state would drop from second-highest combined sales tax burden in the nation to 11th.

McCarthy agreed that making Arizona’s taxes more uniform would help the state, especially since the rise of online shopping has given consumers a way to avoid paying taxes on many of their purchases – something that could be harmful for the state.

Since Arizona has “decided to put the highest reliance on sales taxes,” that could drive people to do more of their shopping online, McCarthy said. “The state of Arizona needs to simplify its sales tax code to put itself in a position to tax online purchases.”
In Tuba City, Mokhcia said he has already seen what high taxes can do to sales.

“They don’t shop here anymore,” said Mokhcia of his customers. He said that many of the town’s people don’t mind driving 80 miles to Flagstaff to avoid high taxes at home.

“This is a low-income community,” he said. “It creates a bad situation.”