Monday, February 25, 2013

A Bad Idea: Changing Where Construction Taxes Are Collected

Several weeks ago, Council Member Joe Hornat reported at a council meeting that there is a move afoot, at the state legislative level, to change where construction sales taxes are collected.  He noted: "The construction sales tax would be collected by the community where the product is being purchased, rather than in the community where  the construction is taking place."

A change like this would cost Oro Valley $2 million annually.  "That would be a big hit the Oro Valley budget."  This is because Oro Valley has only one supplier of construction materials,  Home Depot.  Most larger contractors, however, purchased from other sources.

We were intrigued by Joe's comment.   Our research found that, yes indeed there is a move afoot for just such change.   Apparently the idea arose from a special task force appointed by the  Governor.    The reforms "...would have contractors pay sales taxes where they buy materials. That’s a big change from the current system that assesses sales taxes on a percentage of the project’s value."(source)  The result  would be a significant shift in revenues from one town to another.   The idea being considered as a way to simplify the sales tax system.

Really?  Simplify the sales tax system? Seems to us that it merely transfers sales tax revenue from one community to another. Its list "rearranging the deck chairs on the Titanic." Worse. It pits one community against another.

Fortunately, the impact on some very significant Arizona cities and towns is such that  this idea is likely never see " light of day."   Scottsdale would lose $14  million,    Gilbert would lose 7.5 to 10 million.  Goodyear would lose $7 million.   These are the most immediate impacts during low construction periods.   In addition, League of Arizona Cities and Towns  has weighed in on the issue.

The idea of taxable simplification always sounds great. The problem is that there is always an unintended consequence. In this case, robbing cities and towns of a key revenue stream is simply a bad idea, especially in these difficult economic times.

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