Sales Tax Reform Impact on Cities

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The Governor’s plan to reform Arizona’s sales tax has cities worried that they will lose revenues. Ken Strobeck, Executive Director of the Arizona League of Cities and Towns, will tell us more about the concerns of cities and bring us up to date on negotiations to resolve the issues.

Ted Simons: The governor's plan to change the state's sales tax system continues to meet resistance from cities and Towns that say some of the changes would cut into Municipal revenues. Here to talk about those concerns is Ken Strobeck, president of the Arizona League of cities and towns. Good to see you again.

Ken Strobeck: Thank you, thank you for inviting me.

Ted Simons: Let's start with the idea of reforming or changing the state sales tax -- does it need reform?

Ken Strobeck: I think it probably does. A system that has been place for over years. Take a step back, 30,000 foot view of the whole system and talk about why we are even in this situation. The state and the cities over time have made a policy decision that we are going to be dependent on sales tax in the state. That is what our main bread and butter is going to be. We have a lot of things that play into that. Tourism, home building, all of the things that built our economy based on sales tax as a revenue source. We are not like a lot of other states that are dependent on property tax for local government or have a very high income tax. Over time, we have put a lot of things on to the sales tax, and, yeah, it is probably time to take a look back and do reforms on it.

Ted Simons: Arguments are, too much paper work? Too many jurisdictions, too many interpretations for auditors? Are all of those things valid?

Ken Strobeck: To some extent. Model city tax code, different tax base than the state does. Everyone of the 91 cities and towns can adopt their own tax base and rates on a variety of different taxable items. That is where people say the confusion comes in. And that is what needs reform. But, again, I go back to the system that we don't have property tax. Half of the cities in Arizona do not have any property tax at all. You will not find that in any other state. When a lot of critics come out and say we have a complex tax system and it is unlike any other state. My answer is yes, it is unlike any other state and we built it that way on purpose -

Ted Simons: can you then simplify it? For more use. We know what the governor thinks. We know what those who think that it is a good idea to simplify and get one form and one point of contact and one audit and keep the small business especially from having to deal with all this different cities and the different model compacts. Is there a way to streamline it? Get everything through one portal and then let it spread out as so chooses.

Ken Strobeck: I'm glad you used that word, portal, because that's one of our proposals, and it actually builds on a bill that was passed last session that established an online portal for the 18 self-collecting cities in the state. There are 18 of the largest cities that have their own sales tax system, and the complaint among small business owners is that we have to go file different tax forms for each of these self-collecting cities. Couldn't we do that at one stop online? And so this bill was passed last session, Representative Rick Gray pushed this bill and it was signed into law that creates an online portal for the self-collecting cities. Our proposal, and our negotiations this year has been, let's build on that. Let's take that from the 19 self-collecting cities and expand that to all 91. That's 73 more and get all 91 cities onto this plan.

Ted Simons: That becomes the one point of contact that the governor is looking for.

Ken Strobeck: Right. And that would be where businesses would have one point of licensing and one point of remittance for their taxes, whether going to a different city, multiple cities, the state. It would go through this online portal. We think this really does work. Actually, we have a tentative agreement with pretty much all of the stakeholders that is a direction we will be going down. This is something that I think will be beneficial for businesses going into the future.

Ted Simons: Can the same thing happen regarding audits? There is a lot of concern out there that everyone and their brother is doing an audit on these businesses, they don't know if it is up or down and it is a complete burden.

Ken Strobeck: Yes, I think this is another one where we have stream lining that can be done. Original proposal in the bill now moving through the legislature, all audits are done only by the department of revenue and no one else. We have a big problem with that. We are very, again, sales tax dependent state and a lot of cities have supplemental auditors or staff auditors that do auditing of local businesses that the DOR never gets around to because they concentrate on the large multi-city businesses. We are in negotiations on this issue and we are -- our proposal let the DOR be the lead in every audit. Let cities participate as additional resources and help and using their standards and have one point of contact for audit.

Ted Simons: Why not expand the DOR, department of revenue and let them handle everything --

Ken Strobeck: Why not let the people who know the local community, local businesses, answer to the local officials, why not let them handle the audits in the local communities? It is a much better system than let's rent an auditor from the DOR --

Ted Simons: Big concern, three of them here. The biggy is the construction sales tax. Changing the tax on materials at point of sale. Why is that a bad idea?

Ken Strobeck: Because again, our system is built when it comes to home building. We had talked about impact fees in the past. Same issue applies in this particular tax. The tax is designed to mitigate some of the impacts of building and growth on the communities. So, a tax is assessed on a house or a commercial building once it is built, 65% of the total sales price. 35% is deducted for labor, and then that tax goes to the state and to the cities and the cities use that to pay for infrastructure, to pay for personnel, etc., that will be serving the new communities. It is part of a system that is built on growth. Changing to a materials-only retail system says that you may be building a house in the town of Gilbert, but you are buying all of your materials in Phoenix or buckeye or somewhere else, and they're getting the sales tax benefits and the community where the house is being built is getting nothing.

Ted Simons: Is there a system, can you do something along the lines, well, yes, you keep it at the point of sale. The tax money itself is redistributed in ways that cities like the Gilberts, fountain hills-- obviously they would get hurt by this. Is there a way to redistribute the money at a later date?

Ken Strobeck: Argument on the other side it does go through the state sales tax revenue sharing system. If the pie is expanded with more purchases happening in state, we will get a piece of that. Cities and towns get some of the state sales tax revenue distributed back to them in the form of revenue sharing. The issue with that, it wouldn't go to where the growth is. Revenue sharing distributed on a population basis. Additional revenue would go where the population is, not necessarily where the growth is happening, and furthermore, there is a big hurdle that we have to get over which is a disagreement about how much now is in noncompliance. The DOR and some of their studies say that there is 31% in noncompliance now. We have auditors in cities who say it is closer to maybe 5 to 10 %. The difference between those two numbers is huge in terms of revenue.

Ted Simons: Is there a way looking at the whole ball of wax, is there a compromise, a way for you guys to get what you are concerned about, about the governor and proponents of a simplification plan to do something to help small businesses?

Ken Strobeck: I think definitely there are in at least two of the three areas. Administration, auditing, jury is still out on whether we can come to a resolution on construction sales tax. Another element that has to do with administration, and that is to comply with the federal marketplace fairness act which would allow the taxation of internet sales. We have to be in compliance with that. There are some differences between our interpretation of what is in compliance and also the other side.

Ted Simons: Would you prefer to see no changes at all, if it means some of the things you are concerned about, regarding construction?

Ken Strobeck: I believe that we can reach a compromise on those issues. And if it comes to construction, I would probably say we are better off to hold off, not do anything that would be irreversible in the future. Let's do a study, get more data and address that issue later. Let's take the two issues we can work on and fix those this year.

Ted Simons: Thank you for joining us.

Ken Strobeck: Thank you.

Ken Strobeck:Executive Director, Arizona League of Cities and Towns;

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