Photograph by Morgan Carmen
PHOENIX—This election season, realtors in Arizona organized to fight an invisible demon, and they won. They wanted constitutional protection against any taxes aimed at service industries. Their fear: new taxes on anything from home purchases to hair cuts.
In the most expensive election season in American history, the Realtors Issues Mobilization Fund, a subsidiary of the Arizona Association of Realtors, injected approximately $6 million to fight for Proposition 126, a ballot measure designed to permanently eliminate service taxes in the state of Arizona. The initiative would amend the state’s Constitution to “prohibit the state and each county, city, town, district or other political subdivision in Arizona from imposing a new or increased tax on services that was not already in effect on December 31, 2017.” The prohibition could not be reversed by a legislature.
Yet, the legislature has never imposed a broad-based tax on services. The state does tax bars, restaurants, and hotels, in the form of sales taxes. Opponents of the Proposition, such as former Democratic Rep. Ron Barber, view it as “a solution looking for a problem-there is no problem.” Barber sees no reason to ban service taxes because they simply do not exist.
Backers of Proposition 126 saw a real danger in the very potential of a service tax. Their campaign was spearheaded by the realtors of Arizona and got a boost from a $2 million contribution from the National Association of Realtors. Steve Huffman, the Director of Government Affairs for the Tucson Association of Realtors, believes that a service tax is “not just one tax. You can have one transaction that can get taxed eight, nine, ten times.” He points to a “vanilla real estate transaction,” explaining that, if all services were taxed, a buyer could be taxed on a house inspection, the appraisal, title search, even termite inspections, and repairs. Huffman further argues that if future service taxes are as unlikely as opponents of Prop. 126 claim, government officials should have no problem banning them.
However, recently, the state has seen a decrease in goods-related economic activity and an increase in services. If services were taxed state-wide at the same rate as sales (5.6%), the state would gain approximately $5 billion in new revenue, according to an Arizona Department of Revenue report.
Without the option to tax services, Arizonans could face higher sales or income taxes, particularly given that Proposition 126 may deprive the government of much needed tax revenue. Nowhere does there exist a legal definition of “services.” So, if the voters approve the measure, taxes on restaurants, bars, and hotels could be challenged in court as taxes on services rather than goods.
The passage of Prop. 126 could affect another ballot measure, passed in 2000: Proposition 301, which provided $600 million each year in sales taxes to pay teachers and improve classroom resources through 2021. Since the state legislature renewed that tax In March of this year, after Prop. 126’s December 2017 deadline, some–including the Grand Canyon Institute (a self-described non-partisan think tank)–argue that the state could stand to lose one third of its tax revenue– about $250 million each year–if the Proposition were to pass. Also in potential jeopardy could be a promise by Republican Governor Doug Ducey to increase teacher pay by 20%. The pledge came after the 6-day #RedforEd teacher strike earlier this year. If the state were to lose one third of its existing tax revenue and a possible source of new tax revenue, it is unclear how Arizona will honor its commitment to students and teachers.
The loss of a possible source of revenue is frightening to those like Barber, who says “if there came a time when the legislature actually had to tax any of those services to bail us out of a financial emergency or economic problem, then they will be barred from doing so because this puts that restriction into the constitution.”
On November 6th, Arizona voters passed Prop. 126 in a decisive 64.3% to 35.7% vote.
