The cost of cuts: Arizona tax carve-outs last year hit $13.7B
By Jim Small and Evan Wyloge | Arizona Center for Investigative Reporting
PHOENIX – Teachers who marched on the Capitol this past week in support of doubling the salary boost that lawmakers were considering went home empty handed, as Republican lawmakers backed a budget proposal that grants them a two-percent increase over the next two years, saying there simply wasn’t money available.
The cost of doing so would have been an additional $34 million per year in the first year and $68 million in the second, a tiny fraction of the $9.8 billion spending plan approved May 5.
But that figure is dwarfed by how much tax revenue the state doesn’t collect each year: In fiscal year 2016, state law allowed $13.7 billion in taxes to go uncollected through a litany of exemptions, deductions, allowances, exclusions or credits. And that number is likely to grow by another $1-to-2 billion once individual income tax deductions are tallied.
According to data compiled by the Arizona Department of Revenue, more than half of all state taxes haven’t been collected for at least the past ten years. Called “tax expenditures,” they amount to $136.5 billion since fiscal year 2007 – roughly equivalent to sum of state budgets spanning the past 15 years.
2007 – 2016 tax expenditures by type
The bulk of the tax expenditures come from a variety of carve-outs to the transaction privilege tax, Arizona’s version of a sales tax. In fiscal year 2016, nearly $12.3 billion was excluded from TPT collections, about half of which was due to services being exempted. Since fiscal year 2007, that figure is $110 billion. During that time, the state actually collected only $50 billion in TPT.
Tax carve-outs on individual income taxes, corporate income taxes and property taxes account for almost all of the rest of the tax expenditures.
Because of an amendment to the state constitution passed by Arizona voters in 1992, any change to the tax code that would result in an increase in revenue, such as removing a carve-out or reducing the expenditure it creates, would require approval by a two-thirds supermajority in each legislative chamber instead of a simple majority.
Sen. Steve Farley, a Tucson Democrat, and Sen. David Farnsworth, a Mesa Republican, introduced Senate Bill 1144 this year, which seeks to require a review of the hundreds of carve-outs, specifically to TPT, every ten years.
“One company buys a high-priced corporate lobbyist to come down, one time, in front of one committee, pass one bill, and they get a tax break into perpetuity,” Farley said of his proposal.
Farley offered recent examples, such as a law passed and signed by Gov. Doug Ducey in 2016, which exempts art gallery sales to out-of-state purchasers. The law is expected to cost $1.3 million each year in tax revenue. Another, which passed but was vetoed by Ducey this year, would have lessened sales tax for private airplane purchases. The bill was sponsored by Rep. Jill Norgaard, a Phoenix Republican, at the behest of Netjets Inc., which sells partial ownership of private jets. Legislative staff were unable to provide a concrete estimate for the cost of the proposed carve-out, but estimated that each plane it applied to would cost the state’s general fund between $470,000 and $2.2 million.
“So, we want to give special breaks to private jet owners and out-of-state art connoisseurs?” Farley asked.
In 2011 and 2012, lawmakers passed a major tax-cut plan that reduced several different corporate and capital gains taxes, phased in over several years. Advocates touted the reforms as needed to drive economic growth and create new jobs. However, legislative budget analysts say that, in the first three years, it the state has foregone $235.8 million in revenue because of those tax cuts.
2015/2016 TPT expenditures by deduction
Farley contrasted the value of those cuts with what he estimated is a roughly $100 million price tag for restoring Arizona’s cash assistance program for needy families to a two-year lifetime cap, instead of the reduced one-year cap passed in 2016. Reducing the amount of time allowed for anyone receiving the assistance was intended to save $3.8 million, but actually cost the state about $9 million because of federal matching requirements that were no longer met.
“If we weren’t giving away so much in tax exemptions, we could have a lower sales tax rate and have more revenues go to things we want to pay for,” Farley told the House Ways and Means Committee in March. “Or, in some cases, I’ve heard from friends of mine on the other side of the aisle saying we would have enough money to lower the state income tax or get rid of it entirely, if we took away enough of these exemptions.”
Rep. Vince Leach, R-Tucson, opposed SB 1144 and took particular issue with referring to the review committee established by the bill as a the Joint Legislative Tax Expenditure Review Committee, because the name would include the word “expenditure.” Leach said during the committee hearing that name would give the impression that the Legislature is making an appropriation toward each different carve-out, rather than never collecting it.
“I have concerns about telling people that we are spending $12.1B (from TPT) on that,” Leach said.
Arizona law defines tax expenditures as “any tax provision in state law which exempts, in whole or in part, any persons, income, goods, services or property from the impact of established taxes,” including things like exclusions, exemptions, credits and deductions. The Department of Revenue is required to write a report for the governor and Legislature each year detailing “the approximate costs in lost revenue” from all tax expenditures.
House Ways and Means Committee Chairwoman Michelle Ugenti-Rita, R-Scottsdale, said she has repeatedly been surprised to see new tax carve-outs being scheduled for consideration.
“Every time I’m in my agenda setting meetings, I’m shocked to find out about another break or some kind of carve-out (being proposed),” she said during the March 15 committee hearing on SB 1144. “It’s very difficult to make a decision when you don’t understand, or you don’t have the bigger, broader picture and the scope. You need that context so that, when you are considering something, you can fit it into a larger picture. I like the bill.”
The bill was approved by House Ways and Means, but is awaiting a constitutional check by the House Rules Committee before it can be considered by the full House. With the legislative session likely to end in the next week, the fate of SB 1144 is unclear.
After learning about SB 1144, Rep. Paul Boyer, R-Glendale, said he researched examples of states moving to recover carve-outs, and found an instructive example in Florida from the 1980s.
In 1987, Florida lawmakers adjusted how the state determined whether certain services were taxable – in particular, regarding in-state and out-of-state transactions – and the state expected it to produce $1.2 billion in revenue from the change. But after the bill was passed and signed, the business community protested and public opinion polls showed a shift toward opposing the tax, and the plan was repealed after six months.