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Marketplace Fairness Act Could Prompt State Tax Cuts

author photo of Annette Nellen

The Marketplace Fairness Act (MFA) was in the news this week because of a scheduled March 4 hearing in the House Judiciary Committee on alternative approaches. The hearing had to be postponed though, due to snow in DC! Despite the time gap between the Senate passing S. 743 in May 2013 and the March 4 hearing (now rescheduled for March 12), the Arizona legislature introduced a proposal in late January 2014 on what to do with the extra revenues that it expects from eventual enactment of the MFA.

HR 2465 (summary / website) proposes to use the sales tax revenue generated from federal legislation to allow states to collect form remote sellers, to reduce their income tax. The income tax reduction would be calculated "in proportion to the share of gross tax attributable to each of the tax brackets."

I find this interesting for a few reasons:

  1. They are acknowledging that taxpayers are not paying all of their use tax (no big surprise).  If they were, revenue would not go up with the MFA.
  2. They are planning ahead and recognizing that sales tax revenue collections should go up with a MFA.  Trying to make this a revenue neutral change should make it more acceptable to taxpayers. Without this type of action, the state will have more money to spend.  It will be like a windfall such as what happens if the stock market does well and taxpayers owe more capital gains taxes. But, rather than messing around with the income tax, why not put the money in a rainy day fund or use it to pay down debt?
  3. Why use the increased sales tax revenues to reduce income tax? Why not reduce the sales tax rate? It is good to see that they will try to reduce the income taxes for each bracket, but what about low-income individuals who don't owe income tax but do pay sales tax? Seems like a lower sales tax rate would help and it would reduce a regressive tax.
  4. Why not better encourage people to pay use tax and let them know if they do, they will reduce the sales tax rate?  After all, it still might be some time until MFA passes.

What do you think?  Btw, HB 2465 was defeated in the Arizona House on March 5, 2014 by a narrow margin (27 yes, 31 no, 2 not voting).

Other recent “Sales Tax Policy - Tales & Trends” posts by Annette Nellen, CPA, ESQ:

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