The state House voted Monday to reduce individual income taxes if the state finally starts collecting sales taxes it already should be getting.
HB 2465 says if Congress approves the Marketplace Fairness Act to tax online sales, the state would compute how much additional revenue comes in. Then the Department of Revenue would automatically adjust individual income tax rates downward on a dollar-for-dollar basis, ensuring no windfall for the state.
But Rep. Bruce Wheeler, D-Tucson, said that also means Arizona effectively is giving up on forcing its residents to pay the taxes they already owe. He said the state should use the funds to restore cuts made during the recession.
Current Arizona law requires retailers to collect the state's 5.6 percent sales tax plus any local taxes for items sold to residents. That also covers online retailers that already have a presence in the state like Target.
The law also says any Arizonan who buys a product online where the retailer does not collect the tax is supposed to report that and remit the funds directly to the state.
Enforcing that, though, has been virtually impossible, especially for individual transactions. The result, according to “bricks and mortar” retailers who have to charge the tax, is that they are losing business – and the state is losing needed dollars.
The federal Marketplace Fairness Act seeks to rectify that by requiring online retailers to start collecting what's owed and pay that to the state where the items are being shipped.
No one knows how much is out there. Given the increasing level of online purchases, the amount is likely in the millions of dollars.
Only thing is, HB 2465 would not use the extra funds to restore programs cut during the recession – and potentially because of the loss of sales taxes due to Internet sales. Instead, Rep. J.D. Mesnard, R-Chandler, wants to use those new revenues to cut other taxes.
Mesnard did not dispute that taxes on Internet sales are owed and that, technically speaking, it's a violation of state law for Arizonans to refuse to report and remit what is due. But he insisted that no one in the Legislature really expects anyone to follow the law.
As proof, he cited a 2012 law which added a spot to the state income tax form for Arizonans to compute and pay what they should on out-of-state purchases. That provoked such an outcry from taxpayers that legislators repealed the form, retroactively, the following year.
Mesnard conceded, though, legislators never repealed the tax and that, even without the form, the requirement to report and pay remains. But he said that's irrelevant.
“I don't know of anyone being prosecuted for not paying it,” he said.
Since the state's not expecting the money, Mesnard said he sees anything that gives Arizona a way to collect the funds directly from retailers as a tax hike.
Wheeler, however, said that's looking at the issue backwards.
“It will be an unknown cost,” he said of the legislation, with the state forever giving up what is already owed. “We're going to take a hit.”
Mesnard said if there's a “hit'” – and he's not conceded how his legislation is being described – it is a temporary one.
He said HB 2465 requires a one-time adjustment of individual income tax rates the year after the Marketplace Fairness Act is approved and Arizona starts getting revenues from online sales. But he said there will be no future adjustments if Internet sales continue to explode and Arizona gains more cash over current levels.
Rep. Mark Cardenas, D-Phoenix, still was not satisfied. He said if Arizona is going to be collecting more sales taxes, then any increase should be used to trim the 5.6 percent tax rate. Cardenas said sales taxes are the most regressive, with those at the bottom of the income scale paying the highest percentage of their earnings in taxes.
Mesnard defended cutting income taxes, calling it “a policy decision.” Mesnard said he believes cuts in income taxes do more to promote economic development than lower sales taxes.
The measure needs a final roll-call vote in the House before going to the Senate.