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Arizona Voters Prohibit Sales Taxes on Services

February 6, 2019

Arizona voters approved an amendment to the state constitution in November that prohibits the state and local governments from taxing personal or financial services.

Arizona voters approved an amendment to the state constitution prohibiting the state and local governments from enacting new taxes, or increasing tax rates, on personal or financial services.

Opponents of the measure included politicians and organizations on both ends of the political spectrum, including Gov. Doug Ducey and Ducey’s gubernatorial opponent, David Garcia.

Proposition 126, which passed with 64 percent of the vote, was placed on the ballot after a petition campaign financed by the Arizona Association of Realtors.

Arizona does not currently impose a sales tax on most services, but the state does tax most sales of tangible goods. A bill proposed in 2016 to expand sales taxes to personal and financial services would have generated more than $420 million dollars in the first year, according to a legislative analysis. The legislature took no action on the proposal.

‘Poorly Drafted’

The success of the initiative shows the power of special-interest groups, says Dave Wells, research director of the Grand Canyon Institute.

“Prop. 126 unfortunately shows that the real estate lobby with $8 million can mislead voters,” Wells said.

The language of Proposition 126 was unclear, and its passage will lead to litigation, says Wells.

“Poorly drafted, Prop. 126 bans new taxes on services, but didn't define services,” said Wells. “And [it] ignored that sales tax areas in Arizona are organized by explicit categories—for example, transient lodging—not as goods or services.

“Consequently, in 2019 expect lawsuits to define its impact as many municipalities like Mesa may find that up to 40 percent of revenue in new voter-approved sales tax levies are lost due to Prop. 126,” Wells said.

‘Preferred Treatment’

Exempting the service industry from sales taxes is an example of preferential treatment in the tax code, not tax reform, says Andrew Clark, Arizona state director of Americans for Prosperity, which opposed the measure.

“We look forward to working with the legislature to find solutions to end preferred treatment for special-interest groups who have riddled our system with subsidies, credits, and exemptions that favor these groups at the expense of Arizonans,” Clark said.

Governments should lower tax rates for everybody, instead of creating carve-outs like Proposition 126, Clark says.

“Americans for Prosperity continues to stand by Arizona’s taxpayers through advocating for a fairer, lower tax rate,” said Clark.

‘Reform That Tax Code’

Ducey, who won his 2018 reelection bid, stated his opposition to Prop 126 during the campaign.

“I think putting a permanent and unchangeable tax policy at the ballot box is a bad idea," Ducey said at an event with local business leaders in Phoenix before the election.

Instead, the tax code needs reforming, Ducey says. "I think when you look at the income tax, the sales tax, and the property tax, you can see opportunities where you can reform that tax code which brings in more revenue but makes the state even more attractive from a quality of living," said Ducey.

Sarah Quinlan (think@heartland.org) writes from New York City, New York.

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