Arizona must reform its sales-tax code

The Arizona Republic
Saturday, December 17, 2011
Kevin McCarthy

For the better part of the past decade, the Arizona state budget has been on a historic roller coaster. Significant budget increases between 2003 and 2008 were followed by a recession that stripped 35 percent of the revenue from the state general fund.

The good news is that the fiscal 2012 state budget is the first structurally balanced budget in four years. The bad news is that it contains roughly $950 million in temporary sales-tax revenue that will be gone after fiscal 2013.

That makes the budget decisions in the upcoming legislative session critical if Arizona hopes to sustain a stable fiscal environment at the state level.

Gov. Jan Brewer, the chief advocate for the three-year temporary sales tax, has made it clear she is planning for a balanced fiscal 2014 budget without the benefit of the temporary tax. Republican legislative leadership appears committed to the same.

Fairly or unfairly, considerable criticism was directed at state policymakers in 2007 and 2008 for not responding quickly enough to the impact that the recession was having on state finances.

Today, policymakers are in a different position. They know we are operating with $950 million in revenue that will not be there in fiscal 2014. There is simply no excuse for not developing a multi-year budget plan that avoids destabilizing state finances once again.

The Arizona Tax Research Association supported the temporary sales tax primarily to stabilize a hemorrhaging state budget and eliminate budget gimmickry that was undermining any long-term plans for a balanced budget. It would be an understatement to say that it will be regrettable if the temporary tax backfires and, instead of serving as a bridge, it only creates a cliff.

Notwithstanding opposition from the governor and legislative leaders, we can expect efforts to continue the temporary tax. There are at least two major threats associated with continuing the tax.

First, if it is continued through a voter initiative, it will likely earmark the funds outside the budget process.

This type of "ballot-box budgeting" has been proved to do long-term damage to state planning and budgeting, and we should avoid that mistake again. If the tax is continued, it should be placed in the state general fund without earmark.

Second, Arizona should not permanently increase the state sales tax without first reforming the state and city sales-tax codes.

For decades, Arizona has relied heavily on a sales-tax code that is arguably the most complicated and burdensome in the country for businesses to comply with. The lack of uniformity in the state and city codes adds unnecessary compliance costs for both taxpayers and tax collectors.

In addition, Arizona state and local sales-tax rates now rank second-highest in the country. Making matters worse, our high rates are incentivizing citizens to simply evade those taxes through online purchases.

The Arizona Tax Research Association opposes a tax policy that puts Main Street businesses at a tax disadvantage with online vendors. However, Arizona will never solve this major tax-policy issue until we simplify our sales-tax code.

Kevin McCarthy is president of the Arizona Tax Research Association.