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Posted Apr 2, 2010, 8:57 am
PHOENIX — A 1 percent sales tax hike is coming to a ballot near you this spring. Meanwhile, things like parking garages, driving schools and dog grooming will stay tax-free.
Arizona's tax laws include $9.1 billion in exemptions, according to a report released late last year by a division of the state Department of Revenue. Add more than $400 million for items taxed at less than 5 percent and about $19 million for credits, and the grand total for potential revenue is at least $9.5 billion.
Democrats in the Arizona Legislature think it's time to close some of those loopholes to help ease the state's budget woes.
"Modernizing and updating our tax code is key to the long-term success of Arizona," said Rep. Chad Campbell, D-Phoenix.
According to the Department of Revenue report, businesses that provide a service—ranging from dental care to dry cleaning—are exempt from a type of business tax paid by vendors called the transaction privilege tax. So is a long list of miscellaneous products.
Textbooks required by a state university or community college, implants used to promote the growth of livestock or poultry and personal hygiene products used at hotels are exempt from the business tax and a tax on products purchased out of state but used in Arizona, the report said.
Democratic lawmakers say taxing some of these products and services could save programs that have been cut in the budget process.
Rep. Kyrsten Sinema, a Phoenix Democrat and the assistant minority leader, said that with $10 billion from closing the loopholes, legislators could bridge the budget gap for any number of programs currently facing cuts.
"My opinion is we should definitely look at loopholes before cutting $765 million of funding from public education," Sinema said.
Sinema, though, does not believe every exemption should be closed. For example, business-to-business services should not be taxed, she said, because it would stifle economic growth.
"You should tax things when they get to the retail market, but you shouldn't tax them over and over again when they're at the non-retail level," she said. "If you tax it every step of the way, then by the time it gets to the consumer they're paying like $1 million for something that they should only have to pay $10 for."
But when it comes to a lot of other loopholes, Sinema said, "it's stupid not to close them."
She cited club memberships, dog grooming prices and 4-inch pipes as examples of exemptions that should be eliminated.
During budget meetings a few weeks ago, Campbell said that taxing 4-inch pipes and beauty salons could raise enough money to protect programs such as KidsCare from the budget ax. The state's share of the budget for the health insurance program for lower-income children is $20 million.
According to the Department of Revenue's report, putting a tax on 4-inch pipes used to carry fuel and water would produce $12.4 million. Taxing beauty salons would generate $17 million.
"Adjusting these things and closing these loopholes, it just seems to me like a no-brainer," Campbell said. "And if it's more important to exempt 4-inch pipes from sales tax than it is to give children health care, that's lost on me."
Still, there's little chance these exemptions will be closed anytime soon, because Republicans outnumber Democrats by 10 in the House and six in the Senate. Budget talks nearly always break down along partisan lines, and this proposal is no exception.
"Unfortunately the majority party—the leadership in the majority party—has been unwilling to work on this with us and have been unwilling to even look at these options," Campbell said.
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Rep. John Kavanagh, R-Fountain Hills, chairman of the Appropriations Committee, said the Democrats talk about tax loopholes but don't provide details.
"Democrats were told that they could present their budget bills to Appropriations and they refused. They were told that they could present their budget bottom lines without complex bills in Appropriations; they refused," Kavanagh said.
"They criticize the budget that was passed, but when asked to actually go on the record at a committee hearing to promote what they want, they are never there," he added.
Campbell said "that's just not true," adding that he hand-delivered the list of exemptions to his Republican counterparts in the House.
Sinema said last year when Democrats pushed their own bills, they were attacked and their proposals were shut down.
"I did it over and over and over between January and August of last year," Sinema said. "But I'm thinking I'll do it again."
Rep. John McComish, an Ahwatukee Republican and the majority leader, explained the reason Republicans don't want to close tax loopholes.
"What they refer to as a tax loophole, we say is a tax increase," McComish said. "That's the difference—their loophole is our increase."
He also said that taxing services, as opposed to increasing sales tax, creates a new category of taxing.
"And if you start with a few services, then you're on a slippery slope," McComish said.
But Sinema said she thinks the Republicans won't accept these proposals because the loopholes benefit the wealthy and big businesses. She said the majority party would rather negatively affect the average person than "ask rich people and corporations to pay their share."
"If you have enough money to belong to a country club, then you should be able to pay a tax on it," Sinema said. "Just like everyone else does when they have to buy tires for their car."
Alec Nielson is the Bolles Fellow for the University of Arizona’s School of Journalism.