Arizona Should Expand Its Sales Tax Base Instead of Raising the Rate

June 15, 2017

In November 2000, Arizona voters approved Proposition 301, increasing the sales tax rate from 5 to 5.6 percent to help fund public education. Advocates in the state are seeking to both extend and expand the rate, but lawmakers should instead address the state’s dwindling tax base.

Governor Ducey (R) has indicated his willingness to support a ballot initiative to extend the rate, which expires in 2021. Arizona Superintendent Diane Douglas and business leaders want to go further and increase the sales tax rate.

However, these calls for a higher sales tax rate increase are indicative of a larger, structural problem in Arizona’s tax code. As the chart below shows, services are accounting for a growing portion of economic activity, but are typically not subject to the sales tax which has led to a narrow sales tax. States have generally shied away from expanding their tax base to include services. As a result, the sales tax base has narrowed in many states. As the tax base narrows, the rate must increase to generate the same amount of revenue. Due to exemptions for particular goods and most services, the sales tax only applies to 41 percent of Arizona’s economy.

Percent of Total Personal Consumption Expenditures - Goods vs. Services - Sales Tax

Another rate hike is only a short-term solution to Arizona’s revenue concerns. The long-term solution is to expand the tax base by including all final consumer goods and services. By broadening the sales tax base instead of raising the rate, Arizona can improve its tax code and stabilize its revenue stream to fund policy priorities.

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