Arizona Governor Signs Bevy of Tax Bills, Offering Something for Everyone

May 25, 2017

Jared Walczak

Jared Walczak

Arizona’s legislative session concluded in a flurry of activity, including passage of several pieces of tax legislation. Personal exemptions were raised. Tax referenda were restricted. Business exemptions were extended. Gold coinage was exempted from capital gains taxation.

The theme, if there was one: something for everyone.

Legislation signed by Governor Doug Ducey (R) modestly increases the state’s personal exemption, by $100 over two years, and thereafter indexes the exemption amount to inflation. The existing personal exemption, set at $2,100, had not been adjusted for decades. Annual inflation-indexed adjustments help avoid unintentionally exposing taxpayers to higher effective rates as time passes.

The state’s unique sales tax, called a transaction privilege tax, borrows elements from gross receipts tax regimes: it is imposed on a very broad base which includes a wide range of business inputs, and levied at different rates on different classes of transactions. Local governments have the option of imposing their own transaction privilege taxes, but only with the approval of the voters by referendum. Newly signed legislation limits these referenda to even-numbered years (corresponding with campaigns for state and federal office), which tend to have higher turnout.

The debate about election timing is not new. Across the country, municipal elections and ballot issues often fall in off-years, or even in spring elections, to allow them to stand on their own and not allow local issues to be drowned out by federal politics. In theory, those turning out for municipal elections may be more informed on local issues, and not simply driven to the polls by national concerns. Critics on both sides of the aisle have often challenged the notion that low turnout off-year elections should be favored, arguing that these decisions should be presented to a larger electorate where possible.

Other bills expand and clarify business incentives at the cost of tax neutrality. The quality jobs tax credit, a job creation incentive, is extended through 2025 and broadened to cover more businesses, while the period of eligibility to claim a credit for relocation and expansion has been increased. Job and investment credits, along with other targeted incentives, lower tax liability for some businesses and industries at the expense of others, essentially picking winners and losers through the tax code while eroding the tax base. Most economists tend to regard such programs as inefficient and see them as providing a poor return on investment.

Finally, Arizona adopted legislation exempting profits on the sale of gold, silver, and other precious coins from state capital gains taxation. Proponents argued that bullion should be understood as a hedge against inflation and not treated like other investments for tax purposes, while detractors countered that gains and losses from the sale of precious metals should be treated like those from any other investment.

The legislature’s tax bills have a scattershot quality to them this year; they are disparate proposals, not part of a larger tax package or in service of a singular goal. For sheer number of tax bills adopted, though, in 2017, Arizona stands out.

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A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.

Inflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power.

The tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.

A gross receipts tax is a tax applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding.

A capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. Capital gains taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment.