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Nothing is So Permanent as a Temporary Tax Increase

2 min readBy: Scott Drenkard

A new group in Arizona is raising money for a ballot initiative in Arizona to continue the temporary sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. increase that passed back in 2010. The group, known as Quality Education and Jobs, filed paperwork last Friday to start raising money for the measure.

Let’s recap the 2010 experience and see if we can learn any new lessons. In a special election on May 18, 2010, Arizona voters overwhelmingly (64.3 percent in favor) voted to increase their statewide sales taxA 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. from 5.6 percent to 6.6 percent. The measure was heartily endorsed by Governor Jan Brewer (R), who argued that the hike was absolutely essential to avoid an impending budget crisis that would lead to cuts in education, health care and public safety. In her words, without a sales tax hike, “2012 will be a major catastrophe.”

The measure took effect on June 1, 2010, and Arizona vaulted from a rank of 9 in our state and local sales tax study to a rank of 3 (you can compare the reports in 2009 and 2010, and see our blog coverage here and here). After accounting for local sales taxes, the average sales tax rate consumers saw in Arizona jumped from 7.92 percent in 2009 to 9.01 percent after the ballot measure.

Many Arizonans, even some which might normally be against tax hikes, supported the measure because it was temporary, and after all, the money was going to education. Others, including my former colleagues at the Goldwater Institute, argued that the state had a poor track record on sending the revenues where they originally claimed they would. My former boss Byron Schlomach warned the readers of the Arizona Republic before the initiative:

“Ten years ago, Arizonans voted to raise the state sales tax with the commitment that the extra money would go to classroom spending. But, earlier this year, the state auditor general reported that just over half of that money is getting into the classroom.”

This story is illustrative of the folly of being duped by “temporary” tax increase proposals. Politicians often make the case that quick patchwork is needed to save from impending disaster (see our work on the “Washington Monument Ploy“), but once additional revenues come in to the government, public officials find new uses for that money.

Milton Friedman used to say, “nothing is so permanent as a temporary government measure.” I’m tempted here to paraphrase him and say “nothing is so permanent as a temporary tax increase.” Hopefully, Arizona will be an exception to the rule.

More on Arizona here.

Our latest state and local sales tax study here.