Thursday, May 28, 2009

Abracadabra: How Democrats Pull A $1.17 Billion Dollar Rabbit Out of Their Hat

Posted By on Thu, May 28, 2009 at 11:32 AM

As I pointed out this week in "You Screwed Up: How Voters Have Broken Arizona's Government," the Legislature needs a two-thirds majority to pass a tax increase. Since that threshold is politically impossible to reach, Arizona's tax system hasn't changed much in the last few decades (unless you count virtually eliminating the property tax and cutting income taxes, which primarily benefit Arizona's wealthiest residents).

So how do the Democrats manage to create new taxes on a wide range of services—from haircuts to legal representation—without triggering the two-thirds requirement? They cut the overall sales tax all the way down to 3.4 percent, making the entire package "revenue-neutral." Since it doesn't increase revenue to the state, it doesn't trigger a constitutional challenge.

OK, say the Dems are right and this is viable. Since it's revenue neutral, then how do they get any more money to patch a $3 billion deficit? Here's where the financial magic comes into play: Cities, counties and other taxing districts can now extend their sales tax to cover services, too. And they're not obligated to reduce the rate to keep it revenue neutral.

In other words, the cities and counties have a sudden windfall on their hands.

So then the Democrats call on the cities and counties to lend the state about $1.71 billion dollars. (There's a complicated reason for the borrowing, but it has to do with avoiding a constitutional challenge. If anyone really cares, drop me a note in the comments and I'll explain in mind-numbing detail.)

Nutshell: The Democrats are hoping that cities and counties see an advantage in expanding the income tax across the services. It will be voluntary, so there may well be cities and towns that don't want the political trouble that could come from imposing new taxes on a wide range of services.

More details on the Democratic plan here.

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