Tax Justice Digest stories about Arizona

Arizona's Proposition 105 won't immediately change any taxes, but its implications for tax policy in the state are potentially severe.  The question seeks to amend the state's constitution to require that any tax increase be approved by a majority of registered voters.  This would be in addition to the requirement that tax increases enacted through the legislature be approved by 2/3 of legislators.

Under this new proposal, if, for example, only half of registered voters took the time to vote in an election where a tax increase was on the ballot, every single one of them would have to vote in approval of the tax measure for it to become law.  Essentially, any registered voter that fails to vote will be counted as in opposition to the measure.  As one observer puts it, "anyone who wants to vote no can just stay at home."

For some perspective, no ballot initiative (tax related or otherwise) has received approval from a majority of registered voters in Arizona since 1974. In fact, it's possible that at majority of registered voters do not even vote in some elections.

The passage of Proposition 105, coupled with the 2/3 majority requirement in the legislature, could perhaps bring to an end the possibility of any future tax increases occurring in Arizona. Needless to say, this would be a very irresponsible arrangement, given the recent budget troubles in the state.

The runup to the 2008 elections has given us plenty of reminders of why direct democracy is generally not the best approach to tax reform. In North Dakota, a typo in the language of a proposed tax cut may actually result in a tax increase for some families. In Nevada, the failure of supporters to properly file thousands of signatures in favor of an (ill-conceived) property tax cap resulted in that measure being thrown off the ballot.

But while both of these rather innocent mistakes are undoubtedly serious, neither is as serious as the rampant dishonesty often involved in the signature collection process.  In Arizona, for example, a staggering 42% of signatures for a transportation ballot proposal this year were found to be invalid.  In North Dakota, though problem wasn't quite as rampant, one signature collector this week was found guilty of faking potentially hundreds of signatures for their regressive income tax cut.

While there may be compelling reasons rooted in democratic theory for allowing citizens to take matters directly into their own hands, it is also important to remember the benefits of representative democracy.  A badly written ballot proposal backed by thousands of fraudulent signatures is hardly an improvement over whatever flaws the legislative process may have.  The problems with the initiative process illustrate that there are good reasons for having those who we have elected (and whose salaries we pay) writing our laws.  

In a surprising development, Arizona’s proposed one percent hike in the state sales tax rate was kept off the November ballot after falling short of the number of valid signatures needed.  The secretary of state found that a startling 47% of submitted signatures were invalid -- a finding the state's Supreme Court recently upheld.

Though Arizonans undoubtedly would have benefited from the influx of transportation dollars that this measure could have provided, the sales tax is arguably the worst method possible for funding transportation.  Two competing principles exist for evaluating any tax proposal: the “ability-to-pay principle” and the “benefits principle”.  Even if you’re unfamiliar with these principles by name, it’s not at all difficult to see how the sales tax fails them both.

Under the “ability-to-pay principle”, those best able to afford to pay for government should be asked to contribute the most.  This is the standard by which most taxes are judged.  Progressive income taxes that ask the most of society’s wealthiest members fulfill this principle, while inherently regressive sales taxes do not.

In contrast, under the “benefits principle”, taxes should be paid by those individuals who receive the benefits the government provides.  In the realm of transportation, multiple options exist for fulfilling this principle, including the gas tax, tolls, vehicle sales taxes, registration/license fees, and in some cases even property taxes.  The sales tax is only loosely (if at all) related to how much one benefits from the transportation infrastructure, and thus fails this principle as well.

Many (perhaps most) in the policy community believe the “benefits principle” to be the proper standard for judging transportation finance measures.  But even if they’re wrong, the fact that the sales tax fails both of the above mentioned principles means there is little or no reason to support such a measure.

Unfortunately, the attractiveness of the sales tax in the eyes of many lawmakers has grown as states seek to fill transportation funding shortfalls with anything but an increase in the gas tax.  For example, a Minnesota bill that passed earlier this year allowed for several counties to raise their sales taxes for transportation. A Los Angeles transportation-related sales tax hike appears close to the ballot. Finally, numerous sales tax ideas have been floated in Virginia as a way of plugging a massive transportation funding shortfall.  More state and local governments can be expected to follow this trend soon if gas tax revenues don’t rebound.

Facing a $2 billion budget deficit and a looming transportation funding shortfall, Arizona is planning to consider a 1-cent increase in its sales tax this fall.  Backed primarily by business leaders along with Governor Janet Napolitano, a sales tax hike would make worse an already highly regressive tax system.  With a modest income tax and one of the highest sales taxes in the nation (the tax would be over 10% in some localities if the proposed increase is enacted) Arizona’s tax policy disproportionately burdens its low-income residents.  Legislators in the Grand Canyon State are looking to use the tax hike to relieve transportation woes, including road and mass-transit projects.  But at a time when the economy is sluggish, depending solely on an unreliable, high-rate sales tax to fund key infrastructure projects is foolish.  Rather than making low-income Arizonans (whose budgets are markedly tighter in this economic climate) foot the bill for the much-needed improvements, Arizona should consider re-vamping its income tax system to generate more revenue and distribute the responsibility for paying taxes more fairly.

And if comprehensive income tax reform is off the table, there is something to be said for a gas tax hike coupled with carefully designed, offsetting income tax provisions.  For more on the relative merits of sales versus gas taxes for financing transportation, see this article in this week's Digest.

Arizona Governor Janet Napolitano last week affixed her signature to HB 2515, an innovative piece of legislation aimed at curbing self-destructive tax incentive competition among municipalities in the Phoenix metropolitan area.  The new law will reduce state-shared revenue to any city or town entirely in Maricopa or Pinal Counties that provides tax giveaways for retail development.   While the new law won't undo such abuses as the $100 million tax break previously granted for Phoenix's CityNorth development, it could serve as a model for other states seeking to put an end to this inefficient and unsound approach to economic development.