Voters on Tuesday resoundingly approved Proposition 126, which amends the state Constitution to bar lawmakers (and voters) from imposing any new taxes on services – things ranging from haircuts to health care, from accountants to attorneys.
The question now is, how long will it be before they regret it? What the flood of voters who headed to the polls almost certainly didn’t know is that their votes for Prop. 126 actually cut future funding for K-12 schools, and made it even more difficult to find additional permanent education funds.
The taxes that Prop. 126 barred don’t currently exist in large scale, and although there have been proposals floated at the Legislature in recent years to expand service taxes, none have gained any traction.
And even if there was some political will to expand the sales tax base beyond physical goods, getting anything actually passed is a Sisyphean ordeal, given another constitutional requirement that any tax increases be approved by two-thirds of legislators in both the state House and Senate.
While voters clearly responded to the pro-126 campaign’s rhetoric that voting yes would help keep taxes low, there will be profound ramifications from the constitutional amendment that will be seen in the short-term and further out in the future.
For starters, the voters just unwittingly decreased the amount of money for K-12 funding beginning in 2021. The Legislature this year actually managed to cross that two-thirds threshold to approve an extension for Proposition 301, a sales tax that directly funds public education that voters approved in 2000 and was set to expire in mid-2021.
You see, Prop. 126 was written to ban any new taxes on services that weren’t in place at the end of 2017. Because the extension of Prop. 301 doesn’t go into effect until 2021, the component of Prop. 301 that taxes some services, like utilities, restaurants and bars, won’t be able to go into effect.
The Grand Canyon Institute, a centrist think tank, estimated in a September report that Prop. 126 would wipe away $250 million in estimated K-12 funding a year from the Prop. 301 extension – a full third of the estimated $750 million it was to collect for schools each year.
And that’s to say nothing about the shrinking sales tax base as our economy continues to rapidly shift from goods (like physical copies of albums) to services (like subscribing to Spotify or Pandora) in the digital marketplace.
Most directly, this constitutional ban on service taxes takes away a possible option for lawmakers to better fund K-12 schools. There have been calls from both the right and the left to expand Arizona’s sales tax base, while at the same time lowering the tax rate, as a way to capture some of the $6 billion in exemptions granted to services because doing so would stabilize the government’s revenues during economic recessions, when purchases of goods go down far more than services.
The only options remaining on the table for increasing K-12 funding are increasing the existing sales tax, increasing income taxes or instituting a property tax.
It will be a cold day in hell before Arizona lawmakers decide that a statewide property tax – for as much economic and fiscal sense as it might make – is the right prescription. I’m not sure voters would have the appetite for instituting one, either, unless perhaps it was narrowly focused on large companies that can’t relocate.
Since Arizona has some of the highest sales taxes in the nation – the Tax Foundation this year ranked Arizona No. 11 in average combined state and local sales taxes – and that type of tax on goods alone is inherently regressive, increasing it higher is politically difficult.
Income tax increases, particularly those aimed at the very wealthy, have broad public support. There was wide consensus that the Invest in Ed ballot measure, which would have significantly increased income taxes on the wealthiest Arizonans to directly fund public schools, would have won voter approval had the state Supreme Court not removed it from the ballot in August.
To the extent that the Republican-controlled Legislature was ever serious about going beyond the 20×2020 plan the Gov. Doug Ducey successfully managed to have included in last session’s budget, the job of lawmakers to find more revenue to fund education just got that much tougher with Prop. 126’s passage.
And that’s to say nothing of the limited options that remain for legislators when the next recession arrives and state sales tax collections stumble. Decades of cuts to corporate income taxes have turned a three-legged stool into a two-legged stool, with only sales taxes and individual income taxes remaining as major revenue sources.
But one pot of money the Legislature may turn to if tax revenues falter after 2021? The Classroom Site Fund, where the Prop. 301 extension sales tax money goes, will no longer be voter-protected.