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Arizona sales tax could be 8th-highest

Saturday’s Arizona Republic article demonstrates the negative effects of a proposed tax increase to Arizona.

Arizona sales tax could be 8th-highest

Ronald J. Hansen

Arizona Republic

June 6, 2009

California and Nevada have already swallowed a sales-tax hike. Florida is looking at charging a sales tax on bottled water, and Kentucky soon will begin taxing cellphone ring tones.

Arizona is not alone in considering raising its sales tax during a deep recession that continues to sap jobs and revenue from state coffers.

But if the Legislature or voters were to adopt Gov. Jan Brewer’s proposal to raise the 5.6 percent state sales tax by 1 percentage point for three years, the state would vault up the scale of sales-tax rates: An Arizona Republic analysis found that the proposed increase would push Arizona from the middle of the nation to eighth-highest, assuming other states don’t follow suit.

When county and city sales taxes are added in, Phoenix would have the second-highest total sales-tax rate among the nation’s 10 most populous cities.

An increase in the sales tax would be in keeping with Arizona’s traditional reliance on sales-tax revenue for the cost of government services, from schools to police and prisons.

Nearly half of all the $9.5 billion in state revenue in fiscal 2008 came from sales taxes, according to Arizona Department of Revenue records. The state’s income-tax rates are lower than those of most other states, and corporate income-tax collections represent less than 10 percent of state revenue.

“Our Legislature faces really tough choices,” said Dennis Hoffman, an economics professor at the W.P. Carey School of Business at Arizona State University. “Typically, the sales tax is the least distasteful option.”

Sales-tax bills for consumers can vary wildly based on what they buy, but the Internal Revenue Service’s estimates offer a glimpse of what the higher tax might mean. A family of four in Phoenix with $60,000 in income could see its overall annual sales-tax bill climb from $1,149 to $1,290.

Revenue source

Brewer’s plan faces stiff resistance from her fellow Republicans and has led to a stalemate on Arizona’s 2010 budget. Many GOP members view any tax hike as disastrous during a recession.

On Thursday, Republicans in the Legislature passed a budget plan that leaves the sales tax as it is and relies on program cuts and maneuvers such as raiding fund balances and the sale and leaseback of state property. State Democrats favor cutting the sales-tax rate to 3.4 percent but expanding the services subject to the tax.

If necessary, Brewer would like voters to settle the sales-tax matter, although any vote wouldn’t occur for months.

David Brunori, a public-policy professor who studies state tax policies at George Washington University, said Brewer is turning to a familiar source for revenue in tough times.

“The sales tax traditionally has been the favored way of raising large sums of money,” he said. But while many states are still trying to do so, this year even more are considering income-tax hikes, he said.

“For the last 30 years, state legislatures have almost never raised (income) taxes,” Brunori said. “This year, there have been proposals in 20 states to raise the income tax.”

There has been no major proposal to raise Arizona’s income tax, although the state’s income-tax rates are relatively low, topping out at 4.54 percent after $150,000 in earnings.

Like most states, Arizona doesn’t charge sales tax on food for home consumption or prescription drugs. It also doesn’t tax certain services like car repairs or hair styling.

Hoffman, who supports Brewer’s proposal, suggests the state could also broaden the reach of its sales tax by charging a food tax on everyone except those with food-stamp cards.

Responses across U.S.

Arizona is one of 22 states that have raised their sales tax this decade, according to figures compiled by the nonpartisan Tax Foundation, based in Washington, D.C. Before 2003, the state charged 5 percent.

Because almost every state must balance its budget, the prolonged recession has meant many states have cut costs, raised taxes or done both.

In April, California temporarily raised its sales-tax rate by 0.25 percentage point to help close a $24 billion budget shortfall. Last month, voters there overwhelmingly rejected raising and extending the hike.

Massachusetts passed a 1.25 percentage point sales-tax hike that will raise its rate to 6.25 percent. Nevada’s rate will climb 0.35 percentage point to 6.85 percent.

New York has dueling plans to either raise the sales tax by 0.25 percentage point or begin taxing cable TV and satellite broadcasts and clothing sales on items less than $110.

But other states that are tinkering with their sales taxes prefer a more surgical approach.

In Florida, lawmakers are considering stripping away several sales-tax exemptions largely for businesses, as well as taxing bottled water. The provisions would boost state revenue by about $80 million in 2011.

Illinois is considering extending sales taxes to coffee and some tea products as well as personal-hygiene products like shampoo.

Pennsylvania is considering taxing political-advertising expenses, while Washington is now taxing online gambling and some other online commerce.

Cities have also felt the budget squeeze.

Philadelphia is raising its sales tax for five years beginning this summer. With state tax included, it will go from 7 percent to 8 percent. Chicago has the highest sales-tax rate among the nation’s major cities with 10.25 percent when state and local rates are added.

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