(Source: AZCentral): Robert Robb – The Arizona Legislature is engulfed in a debate over esoteric minutia in tax policy. Such as the distinction between a “digital good” and a “digital service.” And whether the bytes flowing into and out of our computers are “tangible,” and thus subject to the sales tax as “tangible personal property.”
Meanwhile, the Association of Realtors is aiming a howitzer at tax reform in Arizona, and no one is paying the least bit attention.
Realtors want no sales tax on services
The realtors took out an initiative petition to prohibit the sales tax from applying to services. The petition was pulled on March 9, which is a bit late to be starting an initiative drive. Particularly one for a constitutional amendment, which is where the realtors would place their prohibition.
But the realtors are a serious political outfit. In 2008, they circulated an initiative to prohibit a real estate transfer tax. Given Arizona’s robust real estate market, many public finance experts thought a real estate transfer tax would be a nifty and appropriate way to broaden the tax base. Voters, however, approved the realtors’ ban with a thumping 76 percent “yes” vote.
So, despite the late start, the safe assumption is that the realtors qualify their service tax ban for the November ballot.
But a tax could restore K-12 funding
Economists and public finance experts almost uniformly believe that expanding the sale tax to include services is a good idea. As does this amateur kibitzer on such topics.
Services constitute a growing portion of overall economic activity. Including them in the sales tax base would enable government revenues to more easily keep up with the pace of the economy. And it would mitigate the erosion in the sales tax of goods from the migration to internet sales.
Last year, the state collected $4.5 billion for the general fund from the sales tax on goods. The same rate, 5 percent, on services would have fetched an additional $4.1 billion, based on a report by the state Department of Revenue.
If the sales tax base were expanded to include services, the state could generate the same revenue it currently receives with a rate of around 2.6 percent. The additional billion dollars needed to restore K-12 funding to its pre-recession level could be procured with a rate of 3.2 percent.
Arizona keeps raising taxes on goods
A discussion of expanding the sales tax base to include services is particularly ripe in Arizona, given how high the sales tax rate on goods has become.
In 1980, the combined tax rate – state and local – throughout the state was only 5 percent. Today, it exceeds 9 percent in many Valley cities. Remember that next time you hear what tax-cutting maniacs we are in Arizona.
Although economists, public finance experts and amateur kibitzers think expanding the sales tax base to include services is a swell idea, the body politic tends to find it considerably less agreeable. The idea of paying a sales tax on a haircut rubs people the wrong way, although if they buy a hair product while in the shop, they will pay a sales tax on that.
If successful, this ban won’t be as clear-cut as the realtors’ last effort. The conveyance of real property is a pretty unarguable event. What constitutes a service less so, as the Legislature’s esoteric debate illustrates.
Why set back efforts to make revenue more stable?
There are at least three ways a computer can be induced to do a particular thing. Software can be purchased and downloaded on the computer. Software can be obtained over the internet and downloaded on the computer. Or the computer can access software via the internet and perform the function in the cloud.
Which of these activities is a taxable good and which is an untaxable service? Since they all produce the same result, should there be a different tax treatment of the events?
And who knows how many similar complications the future will bring?
Passage of the realtors’ initiative wouldn’t actually preclude expanding the sales tax base to include services in the future. What the voters have done they can undo.
But it would be a setback to the goal of more sound and stable government finances. Those who care about such things shouldn’t sleepwalk through this campaign, as they did on the ban on a real estate transfer tax.