Prop. 126 narrows tax burden

Who doesn’t want to avoid more taxes?

That’s the appeal of Proposition 126, which would prohibit imposing a sales tax on services in Arizona.

The proposal is particularly appealing if you’re a business operator providing said services — or a consumer of the services.

The services cover everything from child care and health care to home repairs and financial assistance, such as banking or accounting.

So, Prop. 126 is a no-brainer then? Far from it.

Why? Because in shielding services from being taxed, the Protect Arizona Taxpayers Act could expose Arizonans to higher taxes elsewhere when new revenue must be raised.

It may mean, for instance, a hike in marginal income-tax rates. Or a higher sales tax on goods.

Talk of new revenue took on greater urgency this year following the #RedForEd movement that prompted Gov. Doug Ducey to pledge a 20 percent raise in teacher pay and more money for schools over the next few years. Even with an improved economy, it’s uncertain whether there will be sufficient tax revenue to pay for it all.

The issue gains more relevance now that an education-funding initiative involving raising income taxes on the rich has been knocked off Tuesday’s ballot.

If all services were taxed at the same 5.6 percent state sales-tax rate for goods, the state could generate about $5 billion in new revenue, according to projections by the Arizona Department of Revenue. This would range from $454 million in doctor visits and $185 million in legal services to $18.7 million from beauty salons and $13.7 million from chiropractors.

Prop. 126 is a preemptive strike, spearheaded by the state’s Realtors association. For the most part, there’s no tax on services now.

Backers of the proposition say lowand middle-income Arizonans would be helped because some services, such as health care and child care, disproportionately impact them. Proponents argue that small service providers would be spared from having to pass costs on to consumers, or to eat some of the costs to maintain business.

They also say that a service tax would effectively stifle entrepreneurship and slow Arizona’s economy.

The campaign by Prop. 126 proponents seeks to portray greedy lawmakers out to prey on unsuspecting consumers. They point to a growing number of states, including North Carolina and Washington, that have in recent years levied or raised taxes on services. They say Arizona lawmakers considered similar legislation as recently as 2016.

But while North Carolina did impose a tax on services, that state also cut income tax rates at the same time. The 2016 Arizona House bill essentially aimed to take the same approach — expand the tax base by taxing services but minimize the impact on business operators by reducing the income-tax rates. The bill, proposed by a group of Republicans, went nowhere.

And in Washington, the controversy was over Seattle’s head tax proposal — a tax on the jobs of giant employers — to help pay for for homeless programs. The city council there reduced the proposed tax by almost half after Amazon and other companies pitched a fit.

Prop. 126 aims to amend the state Constitution which, if passed, means the change would be voter-protected — that is, the Legislature would not be able to ever impose a new or increased tax on services.

The measure also doesn’t include any legal definition of “services,” which may freeze at the current level some sales taxes on goods that could be argued in court are actually services — taxes we pay at restaurants and bars is an instructive example.

As columnist Robert Robb points out, that could mean “that the sales tax the Legislature approved to replace the existing dedicated education sales tax ... would produce a third less of the revenue expected.”

More important are the unintended consequences. By banning one kind of tax, the measure exposes Arizonans to other types of new or increased taxes.

That’s not a small point. Not when Arizonans already face sales taxes on goods of 9 percent on more in Phoenix and other cities. Not when goods constitute a declining percentage of economy activity and services an increasing percentage.

And not when the Legislature must have a full range of options when considering new revenue — for education or any other pressing need. They don’t need to be handcuffed.

Proposition 126 is built on the notion that politicians are scheming to tax unsuspecting Arizonans and relies on misleading claims to scare them to impose a service-tax ban. And to do so by enshrining the ban in the Constitution.

The measure is the wrong approach on consumption taxes. We need to broaden the base and spread the burden among taxpayers, not narrow it.

We recommend a “no” vote on Prop. 126.