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Cities, lawmakers, gov. seek deal on tax overhaul

PHOENIX -- A group of lawmakers was meeting Friday with representatives of cities and towns and Gov. Jan Brewer's office as they try to reach a deal on a portion of Brewer's sales tax collection overhaul proposal that has brought intense opposition from municipalities.

Brewer's proposal ran into a firestorm of opposition from cities and towns which would be hurt because of how the proposal shifts taxation of new construction and other contracting. It's currently based on where the building is done, so growing areas get added revenue. Brewer wants it shifted to where the materials are sold and to eliminate taxes on overhead and profit, a prospect that municipalities believe would costs millions of dollars in yearly revenue.

The meeting is the latest between the parties as they try to reach a deal on the big sticking points of sales taxes on construction, who performs audits and who does the collections.

The idea is to simplify a tax collection system that is considered among the most complex in the nation, with businesses required to file multiple returns, undergo multiple audits and pay multiple jurisdictions. The overhaul won't affect what average Arizonans pay at the checkout counter.

Lawmakers interviewed in recent days were optimistic that a deal had been reached on the construction sales tax portion, but the executive director of the League of Cities and Towns disagreed that an acceptable deal was on the table.

"There's a great deal of energy from some quarters to make a deal right now and close it," the League's Ken Strobeck said this week. "We're not willing to say that we're willing to jump off the cliff until we have a few more answers and a bit more detail."

Republican Rep. John Kavanagh, of Fountain Hills, said Wednesday that he believed a deal on the construction tax was very close, and Rep. Karen Fann, R-Prescott, agreed. Both have been involved in the negotiations.

"We're not lock solid, but I think we're pretty close to honing in on the final details," Fann said Wednesday.

Rep. Rick Gray, R-Sun City, also said a deal on the contractor sales tax appeared close.

"We've come to what we think is agreeable," Gray said. "I haven't heard the cities come back with a 'yes, we're agreeable with that.'"

Brewer's proposal excludes labor and overhead currently subject to the "Transaction Privilege Tax," the formal name for the taxes, meaning taxes would be assessed on about 41 percent of the value of a new home instead of the current 65 percent. The governor's task force that came up with the proposal estimated that increasing collection from those who currently evade the tax would make up the difference. Strobeck doubts that.

Municipalities have proposed a halt to the overhaul on construction sales taxes until a study is done, saying the risks to both the state general fund and the cities and towns are just too great, because the state's proposal relies on incomplete and outdated analysis.

"Our position has been we just don't have data, the numbers are too uncertain about evasion and about where materials are purchased, to say why should we make this huge tax policy that could have hundreds of millions of dollars of ramifications for both state and local without state data," Strobeck said.

The latest proposal from lawmakers and the governor's office would have the construction sales tax split into three parts: road and other "horizontal" construction would remain subject to the tax based on a percentage of the final value, and tradesmen now subject to the construction tax would stop paying based on the value of the job and instead pay regular sales taxes when they buy materials. Commercial and residential builders would see the state portion of the sales tax eliminated, but keep paying cities and towns their portion.

"It's an interesting idea, and the effort is to try to make cities whole so that we're not losing," Strobeck said. "And in fact what the state is saying is they're willing to bet 100 percent of their construction sales tax that their numbers are right."

The other major sticking points are who does audits, and who administers and collects the taxes. Audits are now split between cities and the department of revenue, and the overhaul bill puts it all in the hands of the state. Cities worry there's not enough state staffing or desire to watch small companies that might try to evade taxes.

Cities are proposing that the state have first chance to do an audit, and cities can step in if the state declines. That one audit would be for all sites a business operated, meeting the goal of simplifying the system. Strobeck said that was rejected.

Dealing with the concerns of the cities and towns is required, because lawmakers won't pass the overhaul if they are not on board.

"I can tell you that every single person on the floor here at the House, and I can probably say the same thing over in the Senate, our No. 1 goal is to make sure cities and towns are kept whole," Fann said. "No matter how we fix it, our No. 1 goal is we do not want to hurt cities and towns and that's what we're working on right now."

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