Debate on tax code heats up - East Valley Tribune: News

Debate on tax code heats up

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Posted: Sunday, June 8, 2003 8:04 am | Updated: 2:11 pm, Thu Oct 6, 2011.

Economists and policymakers agree that the state’s tax system is flawed and needs a huge overhaul.

That’s good and bad news. While reform likely would mean paying lower taxes on items at stores, it also could have Arizonans paying taxes on goods and services never before taxed.

But whether taxpayers would be paying more, less or the same won’t be known until lawmakers finish rewriting the tax code.

Debate on state taxes is heating up this summer as a blue ribbon commission appointed by Gov. Janet Napolitano continues to craft a plan that could go before the Legislature in January 2004.

Napolitano has argued wholesale reform is needed because antiquated, unbalanced tax policies are at the heart of the state’s budget problems. But after four months of researching how Arizona governments are funded, the 22-member Citizen Finance Review Commission has decided to ignore the immediate budget woes and focus on drafting an "ideal" tax code, said co-chairman Bill Post, chairman of electric utility Arizona Public Service.

"You step back and say, ‘How do we build the best system?’ and then take a look at what do we have to do to get there," Post said. "As opposed to just incrementally improving the one we have."

Napolitano has been accused by some critics of creating the commission as a cover for an unannounced strategy to push for higher taxes next year.

But economists of all political stripes said it appears commission members are serious about fundamental reform. Several researchers said the debate already is creating common ground on the basic problems and the principles that should guide reform.

The cost of Arizona state government is relatively low compared to other states. But economists agree too many people and businesses aren’t paying their fair share because of the number of exemptions to sales taxes and the variety of credits and deductions for personal and corporate income taxes. People also escape taxes by shopping on the Internet, sending their money out of state.

The result is Arizona has higher tax rates than many other states, at least for sales and corporate income, to bring in enough money for the government to operate, said Stephen Slivinski, a business and economic researcher for The Goldwater Institute in Phoenix.

"We’ve got what I would call a Swiss-cheese (tax) base," Slivinski said. "We’ve got a higher rate. You can get that rate down simply by expanding the base."

Arizona also tends to tilt the tax system against businesses, hurting economic growth, said Tom Rex, director of the Center for Business Research at Arizona State University. For example, property taxes are levied on 10 percent of the assessed land value of a home, but on 25 percent of the assessed land value for a business.

The commission has received more than 100 ideas on reforming the Arizona tax code, Post said. But two competing philosophies appear to be getting the most attention.

One approach would be to balance and strengthen the mix of taxes collected by the state, as advocated by Rex in a May presentation to the commission. The state would "broaden the base" by applying the sales tax to most personal and professional services, and eliminate many of the credits and deductions that reduce how much is paid through income taxes.

At the same time, the state would lower tax rates on those areas above the national average. The result of this approach would be an East Valley resident paying less in taxes every time she shops at a discount store and a clothing boutique. But for the first time, a resident would pay taxes when she goes to the hair salon and the lawyer’s office.

Rex also suggested the state consider restoring a statewide property tax and creating a tax on the sale of real estate, which is already used in 37 other states.

"The state needs a broad number of taxes to provide stability in funding for government functions," Rex said. "Taxes usually go down during an economic recession. But different taxes will be affected differently or will drop at different times. So the impact of revenue fluctuations can be minimized."

Rex said his suggestions could be adopted without changing how much money comes to the state in a typical year. But some critics said eliminating a significant number of exemptions and loopholes would inevitably result in the average person paying a higher total amount of taxes.

Slivinski will argue for a radically different solution before the commission this week. He suggests using some type of flat tax on either income or retail sales, and then eliminating the other taxes now used by the state.

A single tax rate would be simpler to follow and enforce, eliminating much of the state’s tax collection costs, Slivinski said.

"Right now, it’s harder for a state to keep a tax system as pure as possible," Slivinski said. "It might come down to a rule that says if you’re going to carve out this hole you’ve got to raise the rate."

But Dennis Hoffman, an ASU business professor, said Slivinski’s proposals are slanted toward a goal of reducing the total amount of tax revenue, which would force state government to cut spending and programs.

Governor Citizen Finance Review Commission

When: 4 p.m. Thursday

Where: Second floor conference room, Executive Tower at state Capitol, 18 th Avenue and West Jefferson Street, Phoenix.

More information: Call (602) 542-7585 or visit www.azcfrc.az.gov

Average tax revenue State per person Rank

Connecticut $3,083 1

Hawaii 2,859 2

California 2,614 6

New Mexico 2,186 13

Washington 2,116 16

Nevada 1,827 28

Utah 2,533 31

Colorado 1,708 36

Arizona 1,594 42

Florida 1,523 44

Texas 1,377 48

South Dakota 1,289 50

NOTE: Based on fiscal 2000 - 01.

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