Cities and towns across Arizona have rallied to try to block the overhaul of how the state collects and distributes sales taxes, fearing the shift will cost hard-pressed local governments millions of dollars.
Payson Mayor Kenny Evans has joined in the lobbying effort — especially a part of the proposal that would eliminate a provision that lets towns collect sales tax on construction materials used locally — even if the contractor bought the materials somewhere else.
Evans said such a provision could cost Payson an estimated $320,000 annually and more when the construction industry recovers. Major projects like the Blue Ridge pipeline and the construction of a college could generate substantial local revenues under the existing system.
He said he doesn’t believe assurances that the state will adjust other funds to make sure the towns don’t lose money.
“We’ve heard that before,” he said.
Gov. Jan Brewer is pushing for the changes, based on a report from a committee that concluded Arizona has one of the most complex sales tax collection systems in the country. The committee proposed a package of reforms that would substantially simplify the state’s sales tax, which provides the bulk of money for government in the state.
HB 2657 last week passed through the House Ways and Means Committee, but faces the opposition in the House Appropriations Committee of Chairman John Kavanagh (R-Fountain Hills). Kavanagh, whose wife is mayor of Fountain Hills, said loss of the tax on locally used construction materials amounted to “kneecapping” many local governments, especially in high-growth areas.
However, House Ways and Means Committee Chairwoman Rep. Debbie Lesko (R-District 21) hailed the measure. “Arizona has the most complicated sales tax system and in the entire nation. Let’s let Arizona businesses spend more of their time building their businesses than spending countless hours filling out mountains of tax forms.”
She predicted that the reforms would actually increase the pool of sales tax money the state shares with cities and counties. She said as a result of the reform the amount of construction sales taxes in the state’s Transaction Privilege Tax (TPT) will increase from 20 to 40 percent, construction tax revenues will increase by capturing much of the estimated 31 percent lost to under-reporting and the fund will gain money from new ways of collecting taxes from out-of-state shoppers.
Gov. Brewer pushed to include several measures to reduce the hit to local governments from the tax simplification plan, by increasing the amount of TPT money that goes into the state-shared revenue pool and making it easier to go after businesses that don’t pay the tax.
However, Mayor Evans said the best guess suggests that cities and towns will lose $132 million as a result of the changes.
In 2011, he said Payson collected $390,000 in transaction privilege taxes for construction. He estimated based on the state formulas the state shifts would offset about $107,000 of that loss. In addition, Payson would probably have lost another $39,000 because most of the construction materials used here are bought in out-of-town locations. That would have resulted in a net loss of $320,000 in 2011. The loss could rise dramatically if the housing market recovers and the town undertakes major projects like the construction of a university campus.
“This is what the governor calls TPT simplification,” said Evans.
The Arizona League of Cities and Towns also strongly opposes the measure in its current form, saying it will cost local governments millions of dollars and mostly benefit the construction industry.
The League objected to a provision in the law that would have the state take over collecting the transaction tax from many cities that now collect the taxes themselves, particularly the tax on construction materials bought elsewhere and used locally.
Currently, 18 cities collect about $1.6 billion, while the state collects about $467 million. The reforms would shift the entire job of collecting the taxes to the state. The League argues that this will add millions in costs for collection of the tax to the state’s Department of Revenue. The League predicted that this would actually result in a drop in collections, more evasion of the tax and more administrative problems than leaving in place the system that has developed over the past 80 years.
Currently, builders pay a 9.05 percent tax on 65 percent of the cost of new construction. The state gets 6.6 percent, the county in which the materials are used gets .7 percent and the town in which the materials are used gets 1.75 percent. So on a $200,000 sale, the state gets $8,580 and the town gets $2,275.
The bill promises to become among the most controversial in the current session, given the strong opposition of local government. Arizona remains heavily dependent on sales tax, which helps account for the one-third drop in state revenues during the recession, prompting the Legislature to cut billions from schools and medical programs.