Consequences of Prop. 126: $250 million cut to Education, Future cuts to Transportation Funding and Higher Taxes on Goods

October 10, 2018

Consequences of Prop. 126: $250 million cut to Education, Future cuts to Transportation Funding and Higher Taxes on Goods


Dave Wells, Ph.D., Research Director

Max Goshert, Sr. Research Associate



Executive Summary


Proposition 126 (Prop. 126), a constitutional amendment on November’s ballot, forbids state and local governments from creating new taxes or higher tax rates on services that were not already taxed as of December 31, 2017. Currently, Arizona exempts most services from taxation, but also taxes many services such as hotel stays, restaurants and bars.


Prop. 126 would impact any tax that is reauthorized, with one tax expiring replaced by a new version of the tax.  The new version of the tax would be subject to the restrictions of Prop. 126. The education sales tax reauthorization is a good illustration. As noted by Michael Braun of the Arizona Legislative Council in a story in the Arizona Republic, “The existing (tax) is going to expire and the new one … will start after the expiration of the existing one — just a second or two, but still,” Braun said … “One expires, the next one kicks in…. Because that is a new tax, that requires Prop. 108.”[1]



The Grand Canyon Institute estimates that the education sales tax renewal will lose one-third of revenues if Prop. 126 passes, which would currently amount to $250 million annually (See Figure 1).  Likewise, counties that seek to reauthorize transportation taxes such as Maricopa by 2025 and Pima by 2026 would find that 36 percent of revenues are lost, necessitating a higher tax on goods with the heightened risk of voter disapproval (See Figures 2 and 3).  Likewise, cities would find themselves in a similar predicament should they wish to increase or reauthorize any tax, as cities tax an even larger array of services than does state or county governments such as advertising and rental housing.


Likewise, efforts at the statewide level to better fund K-12 education have included proposals from business leaders to raise the education sales tax from 0.6 percent to 1.5 percent to provide an additional $1 billion for education and restore past funding. Under Prop. 126, the revenues would be reduced by one-third undermining the explicit aim of the proposal or necessitating that the tax rise to 2 percent instead.[2]


That proposal would need voter approval. That these tax increases go to voters anyway highlights an additional reason why Prop. 126 is unnecessary.  Voters almost always have the final say on tax changes with rare exceptions.  The only time since voters required a two-thirds vote of the legislature and signatures of the governor to increase taxes that process has occurred was this March when the legislature reauthorized the education sales tax and that only occurred because of the #RedforEd movement which had wide public backing.


Due to a declining base in goods as a portion of the economy as well as growth in service areas like financial services that are not taxed, the sales tax base has dropped from about 44 percent to 37 percent of state GDP over the last 20 years, which now leads to a net revenue loss to the state of more than $1 billion annually compared to what would have been generated two decades ago.  That figure would be larger if losses to local governments were included.


If the state sales tax, technically known as a transaction privilege tax (TPT), were expanded to include services, the state could raise an additional $6.2 billion in revenues dedicated to education as well as the General Fund and improve sales collections by 90 percent.[3]


Alternatively, the state could reduce its rate of 5 percent and maintain the same education component of 0.6 percent.  Reducing the base rate from 5 percent to 3 percent so the overall rate was 3.6 percent but adding to the base all service areas currently exempt would increase state revenues by $1.3 billion, which is twice the revenue that the proposed ballot initiative Invest in Ed would have generated for schools, $600 million of that comes from just applying the 0.6 percent education sales tax to exempt services.  In addition, the city and county share of state sales tax revenue would rise an additional $190 million.


Lowering the state base sales tax rate from 5 percent to 2.6 percent would create a revenue neutral amount for the state’s General Fund if the tax base expanded to include currently exempt services. If the 0.6 education sales tax was retained with the base expanded to include exempt services the overall rate would be 3.2 percent instead of 5.6 percent with no change to the General Fund and an additional $600 million for K-12 education.  See Figure 8 in the main paper for a graphical representation.


While voters may not presently wish to expand the TPT base to include all services, removing this option from policy options makes little sense, given the state’s overall revenue situation and the desire to provide added funds to public education.


If lawmakers wished to expand the sales tax base to include some or all services, they would in all likelihood refer a proposal to voters at which point voters could evaluate the relative benefits and costs of the proposal.[4]  Prop. 126 proponents currently use innuendo about possible taxpayer costs without comparing to possible gains or admitting that voters would likely have final say on such changes.  It is for these reasons that both major party Gubernatorial candidates Republican Governor Doug Ducey and Democratic challenger David Garcia both oppose Prop. 126.[5]

Fig 1 K-12 Education Tax under Prop 126 Fig 2 Maricopa County Transportation Tax Under Prop 126 Fig 3 Pima County Transportation Tax under Prop 126 Fig 8 Lower Tax Rates with Higher Revenues


[1] Sanchez, Yvonne Wingett (2018), “Doug Ducey to sign tax measure—is he violating his pledge to never raise taxes?” Arizona Republic, March 22, Prop. 108 requred two-thirds approval in both chambers to implement a new tax.

[2] 0.2 percent increase to cover lost revenues from Prop. 301 reauthorization plus 0.3 percent increase to cover lost revenues from an increase from 0.6 to 1.5 percent.

[3] Office of Economic Research and Analysis and Arizona Department of Revenue. (2017). The revenue impact of Arizona’s tax expenditures fiscal year 2016/2017. Retrieved from GCI adjusts the figure by an additional 6% to yield an estimate for FY2018 which was the overall growth in TPT.


[4] Alternatively, lawmakers would need a two-thirds vote in the House and Senate and the Governor’s consent.  The only time this alternative has occurred in the last 25 years was earlier this year to extend Prop. 301 when thousands of teachers were protesting at the state capitol.

[5] Fischer, Howard (2018), “Arizona’s Prop. 126-a ban on taxing services-draws a diverse resistance,” Arizona Daily Star, Oct 1,