PHOENIX — Saying it would send the wrong message, Republican lawmakers voted Wednesday to kill legislation that would simply require them to review the $12 billion a year the state could potentially collect in sales taxes if all exemptions and exclusions were eliminated.
The vote by the House Ways and Means Committee came after Kevin McCarthy, president of the business-backed Arizona Tax Research Association, derided the idea that the state is somehow forgoing that much money.
McCarthy conceded that special-interest lobbyists do come in from time to time to get lawmakers to spell out that they should not have to pay the state’s 5.6 percent sales tax on various things their company or industry has to purchase. And he told lawmakers that, in general, ATRA supports a broad-based tax with the lowest possible rates.
But he said the whole idea that a state with a $9.78 billion budget is giving away $12 billion a year in possible income — what the Department of Revenue for legal reasons calls “tax expenditures” — is flawed.
“‘Tax expenditures’ is grounded in the notion that everything, all wealth, in Arizona is subject to tax, that which we get to keep is a ‘tax expenditure,’” he said. Instead, McCarthy said, it represents some basic decisions by lawmakers historically that certain activities are not subject to taxes.
For example, he argued, Arizona generally taxes only the purchase of goods but not services. McCarthy said claims that these are expenses that result in lost revenues only result in headlines that alarm readers.
And then there are exemptions that were adopted by lawmakers for public policy reasons, like the decision that people should not have to pay state sales taxes on food they purchase at grocery stores for home consumption. The “cost” to the state from that exemption — what McCarthy calls “exclusions” — is $356 million a year.
“The notion that there’s this massive amount of money that’s leaving the state coffers because of exemptions is a wild exaggeration,” he said.
Sen. Steve Farley, D-Tucson, who crafted SB 1144 and shepherded it through the Senate, sought to calm fears of Republican lawmakers that this was a wholesale attack on tax breaks.
He said it simply would require a special panel of lawmakers to review the exemptions on the books once a decade and determine if they still have merit. Farley said if some don’t make sense the full Legislature could eliminate them, creating a “fairer and flatter” sales tax system.
“If we weren’t giving away so much in tax exemptions we could have a lower sales tax rate and we could have more revenues for things we want to pay for,” he said. And Farley said more sales tax revenues could support the Republican goal of lowering personal income tax rates.
“The problem is, once these things get in place, no one ever looks at them again,” Farley argued.
There is a long history of lobbyists seeking — and getting — special exemptions.
For example, years ago the hospitality industry convinced lawmakers that hotels should not have to pay sales taxes on those little bars of soap they buy and provide to guests, bars of soap that are taxable if bought by anyone else at the grocery store. That change, according to the Department of Revenue, is worth about $214,000 a year in revenues.
Airlines don’t have to pay $637,000 in sales taxes on food they purchase to serve their customers.
And Farley said the only reason the state does not tax the purchase of 4-inch diameter pipe, a levy that would bring in $746,000 a year, is because of lobbying by Southwest Gas. Yet anyone buying pipe in other sizes pays the tax.
Rep. Vince Leach, R-Tucson, said he likes the idea of a review. But he refused to vote for it.
“My concern is painting a picture that isn’t exactly what it seems to be,” he said. Leach said he didn’t want people to believe that by giving certain exemptions the state was effectively spending that money by giving it away.