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High sales taxes hurt Arizona’s lure to business

Arizona’s tax structure puts it in the middle of the states for being friendly to businesses, but its ranking was dragged down by sales taxes considered too high and exclusionary, according to a Tax Foundation report released today.

Overall, the state ranked 24th in the Washington, D.C.-based foundation’s 2009 State Business Tax Climate Index, a drop from 22nd in the 2008 index.

The state got high marks for having relatively low property-tax and unemployment-insurance rates, said Joshua Barro, a staff economist. Arizonans, for example, pay an average of $993 in property taxes compared with a national average of $1,313.

But the average resident pays about 7.7 percent in state and local sales taxes on many items. That’s the sixth-highest in the country, he said.

Barro also considers the state’s sales tax too dependent on a narrow base and discretionary items and not enough on necessities. While cities and towns usually charge a sales tax on groceries, the state does not. There is a state excise tax on gasoline to pay for road construction and maintenance, but not a general sales tax.

“A lot of the things that are excluded tend to be necessity items where expenditures change less in a downturn,” he said.

Arizona faces a possible deficit in the state budget this year of $550 million to $1 billion, largely because of cutbacks in sales-tax revenues from high-priced vehicles and appliances. Taxable sales of motor vehicles fell 30 percent in August, to $501 million, compared to a year earlier.

Barro said the state could probably reduce its tax rate and collect more revenues by taxing more items and services and spreading out the burden.

Taxing food is politically sensitive, Barro added. Idaho gets around that by taxing food but offering low-income people a tax credit, he said.

Wyoming was judged to have the best tax systems for “business friendliness” and New Jersey, the worst. California ranked 48th, but some other Western states ranked in the top 10: Alaska, Montana, Nevada and Oregon.

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