Ted Simons: The state legislature made big changes to Arizona's sales tax collection system last session. Changes that will impact Arizona municipalities. I recently talked about it with Ken Strobeck, of the Arizona league of cities and towns. Thank you for joining us.
Ken Strobeck: You bet.
Ted Simons: Biggest issue to cities and towns this session.
Ken Strobeck: Well, it was by far the issue regarding tax simplification. That's so important to cities and towns because the sales taxis our primary source of revenue. Over % of the typical city's revenue comes from local sales tax and there were some major changes proposed to that whole system.
Ted Simons: What were the original concerns and how were those concerns addressed and were they addressed to your satisfaction?
Ken Strobeck: Well, very good question. There was a task force Governor Brewer appointed about a year ago. It met for about six months and came out in 2012 with some recommendations. The original bill had some fundamental changes to the system including elimination of self-collecting cities, 19 of the largest cities collecting their own sales tax. It eliminated the city auditing of businesses and also eliminated the prime construction tax in favor of a tax on materials at the retail sale. Those would have made huge changes in the way cities operate and the revenue streams that come in. We negotiated during the entire course of the session appeared we got some compromise language at the end that I would say will make it work for us but it wasn't the ideal as far as we're concerned.
Ted Simons: The contracting issue seems like the big sticking point. It is complicated. If you build a home in Maricopa or Fountain Hills, explain how those sales taxes are collected now and how they either will change or would have changed.
Ken Strobeck: The way it was done before is a contract on a home was taxed at 65% of the total value of the contract. The presumption was that 35% of what you're doing is labor and that's not taxed. Then 65% is materials, overhead, profit, et cetera, and that was taxed. It's taxed at the point where you're actually building the house. So the city would get a portion of that tax and the state would get a portion of that tax because the filing would happen where you're actually doing the construction. The proposal was eliminate that entirely and only tax materials, which is far less than 65%, and then only tax materials where you buy the materials. So you may buy them out of state, you may buy them in Phoenix, somewhere and then build somewhere else. The way the bill finally came down is the prime contracting tax stays exactly the same for homebuilders but it changes for what's called service contractors. Basically we call it the handyman rule. If somebody is coming to do a replacement or something that is simply repairing something that's broken, they will go to this sales tax at the point of sale system and will not have to file taxes with the city where they are actually doing the work anymore.
Ted Simons: I think representative less company said it changes where service contractors would help cities.
Ken Strobeck: We don't believe it will. In fact the JOBC estimate shows cities will still lose revenue off this system because remember we were talking about taxing at 65% of the total value of those contracts, now it's estimated that materials are about 21% of what the service contractors do. That's a pretty big tax cut and we're not going to recoup that through retail sales.
Ted Simons: Prime contractors return how much to cities? Isn't there a general pool where the 20% comes from?
Ken Strobeck: No, you're talking about the share revenue. That's the state part of it. I'm talking about the local part.
Ted Simons: Talk about the state part of it. I think some people say the cities will not be quite as bad off as maybe some of the cities had said.
Ken Strobeck: The 21% that will be taxed now approximately 21% on materials will go into the shared revenue system with the state shares with cities and towns. That's shared at a rate that's higher than the prime contracting shared revenue. So I don't want to get too far off into the weeds. A bigger percentage but a smaller piece of the pie to begin with, so we don’t think it's going to make up all of the lost revenue.
Ted Simons: With the change to service contractors how does it backed things like city planning?
Ken Strobeck: The sense we are able to retain the prime contracting on new home construction and on major remodel and those kinds of things, we don't think it's going to be nearly as impacting as it would have been had we had to go to the entire system where everything was changed to just a point of sale retail. So the estimate of JOBC is from one to $15 million impact statewide initially. We'll see how that shakes out. There's a lot of assumptions that are built into that projection, so we'll have to see how it actually works.
Ted Simons: There will be a fight among municipalities to build a Home Depot or Lowes in every town. A little cleanup action on this?
Ken Strobeck: Last year there was a bill passed that said all city elections have to move if they are in the spring cycle they have to move to the fall cycle of even numbered years. Over cities and towns held their municipal elections in the spring cycle. They had the primary in March and the general election in May. That's when mayors and council members were elected. That's being changed to the fall of even numbered years. So we had some issues that had to be cleaned up as a result of that legislation passing. One had to do with length of term. You were elected in the spring, your two or four years is up in the spring. We had the legislature give us permission through statute that says we can extend those terms until the next election comes up for those people. They could be extended from six months to a year and a half. Then the other issue was home rule.
Ted Simons: I want to get to that in a second but why is it important to cities to have these elections in off times? Why was it not good to consolidate these?
Ken Strobeck: We opposed that bill because there's a bit of a attention given to city elections we are worried it will get lost in the shuffle. You'll competing against Congress, against state legislators, judges, school boards. Those will all be on one ballot in the fall. Instead of being able to focus a little more on the city elections in the spring cycle we're concerned they are going to get lost in the shuffle.
Ted Simons: Proponents say it saves money. Valid?
Ken Strobeck: Perhaps. The counties usually run those elections and there was usually a fee that went with those to cities but the total number of dollars was rather small when you look at the cost of a city budget. We think the value was there to be able to have some focus on those local elections.
Ted Simons: I think those who are supporting this bill also said that because you would have them you would have more turnout so more eyes on the ballots.
Ken Strobeck: Perhaps, but again you'll be having so many issues including propositions, all the candidates at all levels, schools, judges as I mentioned, at the tail ends of the ballot you're going to have a lot of drop-off. People will vote the top part of the ballot and drop them in the mail there are 14 cities and towns that would have lost the authority to spend revenue they have been collecting because they have to go out every four years for home rule option. That would have expired. The constitution says you have to hold these home rule elections at the same time you elect candidates. Those would have expired in the spring. They would have had that period of time between the spring and the fall cycle when they couldn't have spend the money even that they have collected already. So the legislature did finally the very last bill that passed out of the Senate has waived the penalties for those 14 cities and towns if they exceed their home rule expenditure provided they put that on the ballot next election.
Ted Simons: Highway user fund and lottery funds. Are they still swept?
Ken Strobeck: Still swept. It's at the same level of last year. The impact is about $36 million to cities and towns, money we think should be put back into streets and roads. People have the expectation when they buy gas that that's where their money is going to go.
Ted Simons: That will probably be addressed next session.
Ken Strobeck: That's on our agenda. Thanks.