Not My Netflix or Yoga: A Second State Bans Service Taxes

As service taxes gain favor as a way to raise revenue, there's a growing movement to stop them. Voters in Arizona joined it on Tuesday.
by | November 7, 2018
List of streaming services on a screen.
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SPEED READ:

  • Governments have struggled to raise revenue since the recession, leading some to start taxing services in addition to sales of goods.
  • But Arizona won't be one of them: The state has become the second in the nation to ban any expansion of the tax on services.
  • The November ballot measure was supported by many industries but opposed by policy experts and politicians on both sides of the aisle, including Republican Gov. Doug Ducey.

 

It’s already rather difficult to pass a tax hike in Arizona. Now voters have completely eliminated one option for lawmakers by approving an outright ban on taxing services.

By a margin of two to one, voters opted to make Arizona the second state in the country to pass such a ban. Missouri passed a similar ban two years ago. Both initiatives were heavily funded by real estate associations in each state.

Arizona’s ban comes as more governments are looking to expand their sales tax base to include services such as Netflix and yoga classes. Already, half of the states tax gym classes or memberships, while places like Chicago, Florida and Pennsylvania have all started taxing online streaming services in recent years.

Arizona already has a very limited tax on services and only taxes certain types of software services and some transportation services. The new measure, which had been dubbed the Protect Arizona Taxpayers Act, or Proposition 126, prohibits any new tax on a service and any hikes on an existing service tax.

Supporters of the ban, which included a wide swath of industries from pet shops to child care operators to physical therapists, argued that expanding the sales tax is a threat to lower-income consumers who already pay a larger share of their income to sales taxes than the wealthy.

The proposal in Arizona was is one of a slew of tax-limiting ballot measures across the country this year. Others were also successful, such as in Florida, where voters enacted a supermajority requirement for tax hikes, and in North Carolina, where voters lowered that state’s income tax rate cap. In Oregon, however, voters rejected new restrictions on raising that state’s revenue.

Policy experts have warned that banning a tax on services limits a state’s revenue-raising options and could result in a greater burden on the poor. Across the country, states have struggled to keep up the same revenue growth as they experienced before the recession. One big reason is that consumers are spending far more on services -- most of which aren’t taxed -- than goods, which are. Without the ability to expand the sales tax base, lawmakers looking to stabilize their slowly shrinking revenue would only be left with the option to raise the sales tax rate.

“That does not portend well for the future of the sales tax as a state revenue instrument,” Scott Drenkard, the conservative-leaning Tax Foundation’s director of state projects, said last month. “It prevents Arizona from having a sufficiently broad sales tax base and is harmful to the long-term productivity of the tax.”

In fact, the centrist think tank Grand Canyon Institute issued a report last month warning that passage of Prop. 126 could make it more likely that lawmakers would let the existing taxes on services expire. If that happened, it would mean an annual $250 million loss in education money starting in 2021 and up to a 44 percent cut in regional transportation taxes in Maricopa and Pima counties when they come up for renewal in the next decade.

Even Republican Gov. Doug Ducey, who opposes any tax hike, a bipartisan group of state and local lawmakers and organizations panned the proposition.

For results of the most important ballot measures, click here.