Public Policy

The Legislative Session

While we did not get everything we wanted, this was a strong year for the business community at the State Capitol. At times it appeared as though the session (traditionally 100 days, but this year closer to 160 days plus special sessions) would never end. There were entrenched battles regarding Medicaid. The budget debate prompted everything from television ads with the Governor to vetoes of key legislation to threats of ballot initiatives to overturn the Governor’s preferred legislative outcomes. And all of this came from within her own party! We are grateful to be represented at the State Capitol by the Dorn policy Group, who have worked for many years with the East Valley Chamber of Commerce.

Transaction Privilege Tax (TPT sales tax)

A Governor’s task force on TPT reform made several recommendations for improving and simplifying Arizona’s arcane sales tax laws, most of which were not controversial and add greatly to the goal of simplification. Other aspects were very controversial and caused substantial consternation among many of the cities and towns – among them Scottsdale.

Among the non-controversial reform elements is a call for the Department of Revenue to create a new web portal through which a business may remit all sales taxes, an improvement over the individual payment system to most municipalities in the valley by check. One portal makes payment more convenient and saves a business time and money. The controversial elements involved construction sales tax and the audit system.

Audits

Under the current system, a business with locations in multiple jurisdictions could be subject to TPT audits from the state and from any or all municipalities it serves. In short, a business with locations, say, in Mesa, Scottsdale and Tempe could conceivably be audited by three municipalities and the state simultaneously with each city applying its own definitions and procedures to the audit, causing substantial business disruption  in the process.

This expensive and duplicative process has been replaced by a compromise measure that allows a jurisdiction to require and execute an audit, but triggering a single state audit methodology if other municipalities or the state wishes an audit as well. A potential of four audits in the example above would be replaced by a single audit.

Some municipalities were concerned that DOR lacked the capacity to execute the audits as needed and bristled at a potential lack of local control, but the compromise above ultimately prevailed over an original attempt to make all audits conducted by the state.

Construction TPT (Sales Tax)

The construction industry under the current system has not paid transaction privilege tax at the point of sale of materials but rather are exempt in that transaction from any sales tax liability. Instead, there is a formula applied to value of the construction of a building or a house upon its completion upon which a sales tax is based. The formula assumes 65% materials costs and 35% labor cost and the tax is paid to the state and the municipality in which the construction project resides, regardless of the origin or value of the purchased materials from which it was built. Confused yet?

The Governor proposed a simplification with dire consequences for many communities, including Scottsdale. The recommendation was to tax purchases on their sales value at the time and point of sale. Materials purchased in Apache Junction would bring sales tax revenue to Apache Junction and the state and the place where the new project was built would be cut out of the revenue stream unless it was also the spot where the materials were purchased.

For now, this provision remains in place as is, because there wasn’t an adequate compromise that left cities without construction yards whole. The Governor may make another effort to achieve a solution in the next session, but in order to get all of the rest of the proposals largely through, it was necessary to delete this part of the legislation. The point of sale taxation for materials for trades, however, like plumbers, HVAC repair persons, etc. was included in the package of reforms.

Medicaid (AHCCCS)

The Governor proposed expanding the state’s Medicaid system (AHCCCS) to include all individuals and Arizona families whose incomes fall at or below 133% of the federal poverty line. Her decision was in part philosophical and in part practical since inclusion of that group above 100% of the federal poverty line triggered massive federal dollars that would be unavailable to the state if it remained at the 100% mark. 

There was within the Republican caucus of the Legislature massive opposition to this expansion of Medicaid, and the Governor proposed a “trigger” such that if federal aid for Medicaid drops below 90% of current levels in subsequent years then Arizona would drop the expansion and retreat back to the 100% line for low income healthcare.

For many legislators, this expansion was perceived as imprudent and philosophically repugnant. Many argued that by accepting these funds from the federal government, Arizona would be contributing toward the national debt and despite the trigger would find itself dependent on a shrinking pool of federal monies and be left to fund the program itself which would require tax increases, etc. 

This is a significant business issue since all Arizona businesses and individuals who carry health insurance end up paying a “hidden health care tax” in the form of higher premiums which in the form of higher costs resulting from uncollectable hospital debt and delayed care that leads from ordinary preventive medicine to acute care for the uninsured. There were no easy answers to this challenge, and there was (well-insured) blood on the floor of the Capitol as the Governor squared off against her own party’s majorities in the House and Senate.