The Arizona Republic
There are two propositions on the November ballot to limit state taxation and spending.
That is something I customarily thump the tub for. However, both propositions are problematic.
Proposition 100 would constitutionally prohibit a real estate transfer tax. The wisdom of doing this can only be considered in the broader context of Arizona’s fiscal structure.
Virtually all economists believe the tax structure most conducive to economic growth involves low rates on broad bases. Conservative economists also generally believe that reliance on sales taxes rather than income or property taxes is more conducive to growth.
Arizona does have relatively high reliance on sales taxes. But Arizona’s sales tax base is rather narrow, basically sales of goods to end consumers.
In 2007, state government collected $5.7 billion in sales taxes. According to the Arizona Department of Revenue, expanding the tax to services would have netted another $2 billion.
Now, most economists, liberal and conservative, would agree that expanding sales taxes to services would be a good idea. It would allow a lower rate on a broader base and hitch state revenues more to the faster growing portion of the economy.
Voters, however, tend to say it’s spinach and they aren’t going to eat it. Sales taxes on services tend to be very unpopular and few states impose them.
Nevertheless, the discussion about expanding the sale tax base in Arizona and using the revenue to reduce other taxes – the sales tax rate on goods or preferably income taxes – should remain open. And a real estate transfer tax should be part of that discussion.
Most other states (35 by most counts) impose a real estate transfer tax. At the median rate of other states (four-tenths of 11 percent), a real estate transfer tax would raise north of $200 million in Arizona.
Advocates of Proposition 100, primarily the Realtors’ association, complain that a real estate transfer tax is double taxation, since homes and businesses already pay property taxes.
There is some merit to that argument and if Arizona ever got serious about fundamental tax reform, it should be taken into account.
However, virtually all excise taxes involve double taxation, and a tax on a tax, to some extent. The current sales tax certainly does. The property and income taxes producers and retailers pay are imbedded in the cost of the good to which the sales tax is applied.
Given that having a real estate transfer tax is the prevailing practice among the states, having one wouldn’t put Arizona at a competitive disadvantage. And using the proceeds to reduce other taxes could make Arizona’s economy more productive. Don’t take it off the table.
Proposition 105 would require initiatives that raise state revenues or mandate spending to be passed by a majority, not just of those voting, but of those registered to vote.
Although the proposition applies only to initiatives put on the ballot by petition, and not to measures referred by the Legislature, no ballot proposition in the last 10 years, initiative or referendum, has gotten a majority of registered voters.
So, as a practical political matter, Proposition 105 would abolish initiatives that raise taxes and establish new state spending programs.
I’m actually in favor of that. How much the state takes from the economy in taxation, and where it spends that money, is an inherent balancing act, requiring a comprehensive perspective. That can only be achieved in the Legislature. It cannot be achieved in the context of a ballot proposition focusing on just one program.
Unfortunately, Proposition 105 is loosely drafted, applying to any initiative that raises any state revenue or “mandates a spending obligation” on any public or private entity.
This is highly likely to catch up initiatives not customarily thought of as primarily taxation or spending measures, such as the increase in the state minimum wage and the smoking ban.
Even the ballot measure abolishing bilingual education would have likely fallen victim to the increased requirement, since it mandated more student testing.
All initiatives require someone to do something, and doing something almost always requires spending some money. Liberally construed, Proposition 105 threatens to do away with initiatives entirely.
Taxation and particularly spending in Arizona needs to be restrained. Unfortunately, these two measures either miss or overshoot the mark.