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Tue, Feb. 25

State to focus on sales tax loopholes

PHOENIX — State lawmakers took the first steps Wednesday toward potentially eliminating exemptions from sales taxes that now cost the state more than $12 billion a year.

On paper, SB 1144 does not cut any one of the hundreds of tax breaks that have been shepherded through the legislature, many decades ago, often at the behest of special interest lobbyists. Instead it simply requires that each of these exemptions be regularly reviewed to see which still make sense.

“If you don’t look at these things in the first place, you can’t get rid of the bad stuff in the tax code,’’ said Sen. Steve Farley, D-Tucson, who crafted the legislation approved unanimously by the Senate Finance Committee.


Some of the existing sales tax exemptions and their cost to the state:

Legal services — $180.5 million

Architectural and engineering — $200.7 million

Physicians — $437.9 million

Dentists — $117.6 million

Prescriptions and medical oxygen — $604 million

Investment advice — $34.0 million

Securities brokerage — $111.6 million

Hospital services — $781.4 million

Assisted living facilities — $55.6 million

Beauty salons — $18.2 million

Nail salons — $3.1 million

Parking lots and garages — $10.7 million

Technical and trade schools — $31.9 million

Auto repair services — $102.3 million

Wholesale trade — $4.0 billion

Food for home consumption — $356.4 million

Food sales to airlines — $637,000

Soaps, shampoos sold to hotels for guests — $214,000

Requiring college texts — $976,000

Sale of lottery tickets — $43.6 million

Seeds for agricultural crops — $1.8 million

Livestock feed — $5.0 million

Machinery used for manufacturing, job printing — $30.7 million

Sales of Internet access services — $1.3 million

Gasoline and fuel — $161.8 million*

Warranty and service contracts — $19.1 million

Pet care (not veterinary) — $3.4 million

Death care services — $9.0 million

*Subject to separate 18-cent-a-gallon levy

“But that’s how these lobbyists have made a mint for decades: They stash this stuff deep in the thicket of the tax code so no one ever sees it,” he explained. “So no one ever thinks it’s there except for it’s hemorrhaging $12 billion a year from our revenues.”

Those exemptions dwarf the $4.3 billion the state collected last year in sales taxes to support a $9.6 billion spending plan.

Equity aside, Farley said he is promoting SB 1144 for a more practical reason.

He estimates at least $2 billion of those exemptions are low-hanging fruit that, once reviewed, will not withstand scrutiny. Farley figures half of that would provide needed dollars for education while still giving relief to Arizona residents by lowering the overall tax rate from its current 5.6 percent.

SB 1144 drew bipartisan support, with Sen. David Farnsworth, R-Mesa, who chairs the Senate Finance Committee signing on as a cosponsor.

But Farnsworth conceded his motives are different than Farley’s desire to fund education. He figures the more money Arizona can generate from sales taxes means the less the state would depend on individual income taxes.

“I see personal income tax as something I would love to eliminate,” he said. “Income tax discourages people from greater effort.”

But Farley and Farnsworth said that’s a debate for a future legislature to debate — assuming any of the exemptions actually go away.

Both lawmakers conceded the chances of eliminating all the exemptions are slim, with some likely to remain, albeit for different reasons.

For example, Arizona taxes only a final purchase. That compares with a European system of “value-added’’ taxes, where every transaction is taxed each time a product or service changes hands.

That exemption for wholesale trade equals $4 billion.

The state could collect more than $356 million if grocery store purchases of food for home consumption were subject to the levy. Eliminating that exemption could prove politically unpalatable, though Farnsworth said it would be “healthy” to at least look at the issue.

There also is likely to be little support for requiring people to pay sales taxes on prescriptions even though that would generate another $604 million annually.

But Farley said there are those that make little sense, like the $746,000 the state does not collect on the sale of four-inch pipe used to transport oil, natural gas, water or coal slurry.

He pointed out there is no similar exemption for pipes of other sizes. The reason: Farley said lobbyists from Southwest Gas said they should not have to pay a sales tax to buy pipes to deliver their product.

Farley sniffed at that logic.

“The guy that installs carpet for a living has to buy a truck to deliver his product to market,” he said. So why the difference?

“He can’t afford a lobbyist to come down here and get him out of paying sales tax on his truck,” Farley said.

There also is the separate question of whether services, now exempt, should be taxed.

That covers not just medical and legal services but the cost of installing new brakes on a vehicle, with the parts subject to the levy but not the part of the bill attributable to labor.

Broadening the sales tax base to include services would generate more than $5.1 billion.

Nothing in Farley’s bill, which now needs Senate approval, would actually guarantee that a single exemption would be eliminated. It simply requires regular review of each by a special legislative panel.

“But let’s look at them all,” he said, saying that putting credits on auto pilot once they’re enacted results in lawmakers “driving blind’’ in setting state fiscal policy.

That review committee would have to look at the history, rationale and estimated revenue of each credit.

Potentially more significant, the panel would need to determine whether the credit has actually provided a benefit for the state — things like economic development, new investment, creating new jobs or retaining existing ones.

Farley actually had wanted an automatic self-destruct for various exemptions after eight years unless they were affirmatively retained by lawmakers.

But the Arizona Constitution requires a two-thirds vote not only for new taxes but anything that eliminates an existing tax break. The scaled-back version for simply a review by the Joint Legislative Income Tax Credit Review Committee means Farley needs only a simple majority for his measure to become law.

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