Policy blog: Crouching 'Tax Exemptions,' Hidden 'Revenues?'

E.J. Perkins, Policy Analyst

E.J. Perkins

"Crouching Tiger Hidden Dragon" is more than a movie. It’s a Chinese proverb that means people often harbor amazing talents that go unseen by the casual observer.

Arizona’s budget masters take notice. Now is time for legislators to dig deeper and thoughtfully seek supplemental options that are hiding in plain sight.

Two untapped revenue sources – sales-tax exemptions and taxing services – have the potential to add billions to the state’s coffers.

As The Arizona Republic recently reported: “Arizona last year could have collected $10 billion – an amount greater than the entire state budget – if it had removed dozens of exemptions to the state’s sales tax.” But, as The Republic notes, the subject is a political hot potato since any move to eliminate exemptions is quickly painted as a tax increase by opponents.

It’s a similar story with taxing services. A Morrison Institute report found that “Arizona forgoes billions in potential sales tax dollars each year by not taxing most services, relying instead on sales tax applied to tangible goods.” Yet, legislative leaders continue to ignore this untapped revenue resource.

To be sure, reducing exemptions and taxing more services is a challenge in our contentious political climate. Aggressive anti-tax lobbying, fairness issues (i.e., which services should be taxed and which should not) and avoiding unintended consequences for the business community are just a few of the hurdles to overcome.

A review of the role of user fees and how Arizona is using/not using them to provide additional revenue, as Morrison Institute did in a briefing last year, also is advised.

Legislators should face Arizona’s fiscal dragon with a fuller array of fiscal tools, including the substantial revenue that exemptions and service taxes can potentially provide. We can no longer afford not to.