4 years later, loopholes still remain in tax news

Posted on October 07, 2006 | Type: In the News
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Janet Napolitano ran for governor on a platform that included closing tax loopholes.

Nearly four years later, most of those loopholes remain, as well as several new ones that Napolitano signed into law.

The new tax breaks include $12.4 million in savings for state university research infrastructure projects, sales-tax exemptions for the motion-picture industry that totaled an estimated $600,000 in 2005-06, and an undetermined amount of sales-tax savings for timber-cutting businesses, according to state reports.

In each of those cases, proponents argued that the tax exemption was needed to bring a project or an industry to the state, thereby creating new tax revenue, not robbing the state's general fund.

For example, the sales-tax breaks permitted in "healthy forest" legislation signed in 2004 won't hurt the state budget because the incentives are designed to stimulate an industry that is not operating in Arizona, state tax officials said.

Napolitano acknowledged that the quest to close loopholes is a lost cause.

"They're not getting anywhere," she said in a recent interview. To close a sales-tax loophole on a certain product, for example, the hotel shampoos that she often discussed in her 2002 campaign, would amount to a tax increase unless lawmakers could make an offsetting cut.

And any tax increase, even if done in the name of restoring equity to the tax code, would need a two-thirds vote in the state Legislature. That's a virtual impossibility, especially in a Republican-dominated body populated by many who have taken no-tax-increase pledges.

Although candidate Napolitano complained that tax loopholes "have made Swiss cheese of our tax code," Gov. Napolitano defends the additional breaks she has signed into law.

"I think the ones I signed were ultimately geared to saying 'Will this help the state?'"

In the case of the healthy-forest bill, the idea was to attract timber companies into the state's thickly grown forests and encourage them to thin out the undergrowth, which has fueled massive forest fires. (The bill did not stimulate much interest, leading to a second round of tax breaks in 2005.)

The sales-tax breaks, as well as accompanying tax credits, rankle economists at the Goldwater Institute, who argue that it would be better to lower taxes overall.

After her election, Napolitano appointed the Citizens Finance Review Commission, which, among other things, examined loopholes.

The commission made several recommendations, including expanding the tax base by closing loopholes, but the ideas were never pursued.

"Major changes in the tax structure, such as this, require additional analysis and education as well as a broad consensus among Arizonans," commission members wrote in their report.

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