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Updated Mar 14, 2013 - 3:47 pm

Report: Brewer's sales tax plan may hit general fund

PHOENIX -- Two new reports have raised more questions about Gov. Jan Brewer's contentious effort to overhaul the state's complex sales tax collection system, both raising the prospect the state's general fund could take a big hit to revenues if it is enacted.

A study released this week by the Arizona Legislature's independent financial analysts shows the overhaul could cost the state general fund nearly $140 million a year. An outside study released Thursday puts the number at $125 million.

Both raise questions about whether the state can risk the overhaul as it is currently proposed, since the amount is about 1.5 percent of state revenues and there's little wiggle room to absorb cuts required to deal with those potential losses.

The reports come as lawmakers and Brewer's representatives negotiate with cities and towns concerned that the plan will hurt municipal revenues. Those questions have stalled the bill, but negotiators say they are closer to a deal.

The lawmaker carrying the bill in the House, Rep. Debbie Lesko, R-Peoria, said Thursday the questions raised by the Joint Legislative Budget Committee may force revisions that could include a phase-in of the overhaul or ``circuit-breaker'' language that would kick in if revenues dropped precipitously.

Lesko also called the JLBC analysis a ``worst-case scenario.''

Brewer has made overhauling the current system a priority this year. It's described as one of the most complex in the nation, with businesses required to file multiple forms, undergo multiple audits and calculate different tax rates in many of the areas they operate.

Her proposal ran into an immediate firestorm of opposition from cities and towns that would be hurt because of how the proposal shifts taxation of new construction and other contracting.

The current system is based on where the building is done, so developing 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 construction tax changes are also the source of concern for the state.

The JLBC report looked at two scenarios using different assumptions, including better compliance, materials/overhead split and an increase in retail collections because contractors would pay at the point of sale.

One report estimated the general fund could see an increase of about $19 million in revenue from taxes levied on contractors and other business transactions, called the Transaction Privilege Tax. Another estimated a $137 million drop in revenue for the 2015-2016 budget year.

That drop would equal to 1.5 percent of the state's revenue that year. Brewer told The Associated Press in January she hoped the overhaul of the state's complex sales tax collection system would be revenue-neutral.

Lesko said the loss figure assumes that all three components put into the estimate fell below previous projections, but she acknowledged that state analysts thought both the gain and loss projections were plausible.

``Is it something that we need to think about, of course, but it's also just a range of possibilities, and their estimate ... is just if all three factors were the worst case scenario,'' Lesko said. ``Obviously we need to think about ways to address it, whether it's phasing it in so we see the impact from one year to the next or some kind of circuit breaker. Of course we don't want to lose money from the state general fund. That is certainly not the governor's purpose or my purpose.''

The second study was from the Grand Canyon Institute, a centrist think tank. It warned of ``serious questions whether the state can afford this lost revenue, especially as one considers the possibility of another economic downturn by the end of the decade.''

Brewer's policy director, Michael Hunter, said the Grand Canyon study left out a critical component that would have changed its outcome, and that the JLBC report assumed a ``perfect storm'' of factors the governor's office believes are highly unlikely.

``Gov. Brewer came into office with a multibillion deficit, she spent the last four years clawing the state's way out of that deficit and getting us back into a balanced fiscal budget, and she's not going to take any steps that are going to jeopardize the state's long-term fiscal health,'' Benson said.

Rep. John Kavanagh, a Republican who heads the House appropriations committee responsible for state spending policy, said the two reports increase the worry that Brewer's plan puts the general fund at risk.

``The possibility of revenue losses so large are of great concern,'' Kavanagh said. ``And for me, they suggest that we need to put some safety device into the bill to prevent general fund losses.''

Kavanagh said there are ways to protect the general fund, including delaying enactment of the contractor overhaul until the state can begin collecting taxes on Internet sales, which would depend on passage of federal legislation. He said those taxes would easily replace potential losses from the overhaul.

``More controversial but also possible would be to trigger cuts to identified tax credits to offset cuts, or to decrease budget increases if revenue drops,'' Kavanagh said.

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