Facing a $2 billion budget deficit and a looming transportation funding shortfall, Arizona is planning to consider a 1-cent increase in its sales tax this fall. Backed primarily by business leaders along with Governor Janet Napolitano, a sales tax hike would make worse an already highly regressive tax system. With a modest income tax and one of the highest sales taxes in the nation (the tax would be over 10% in some localities if the proposed increase is enacted) Arizona's tax policy disproportionately burdens its low-income residents. Legislators in the Grand Canyon State are looking to use the tax hike to relieve transportation woes, including road and mass-transit projects. But at a time when the economy is sluggish, depending solely on an unreliable, high-rate sales tax to fund key infrastructure projects is foolish. Rather than making low-income Arizonans (whose budgets are markedly tighter in this economic climate) foot the bill for the much-needed improvements, Arizona should consider re-vamping its income tax system to generate more revenue and distribute the responsibility for paying taxes more fairly.
And if comprehensive income tax reform is off the table, there is something to be said for a gas tax hike coupled with carefully designed, offsetting income tax provisions. For more on the relative merits of sales versus gas taxes for financing transportation, see this article in this week's Digest.