Back in 2018, the Arizona Association of Realtors drafted and put 8 million dollars behind what they called “The Protect Arizona Taxpayers Act,” which really should have been called ”Protect Realtor Services from Being Taxed Act,” as they were concerned that discussion to broaden the sales tax base (actually a transaction privilege tax or TPT) could be extended to realtors, even though it had no legislative momentum. They did not write it as a narrow self-interest exclusion, but as an exclusion of any new taxes on services that weren’t taxed as of December 31, 2017 or any increase on taxes on services that were taxed. However, Prop. 126 had a significant drafting problem. Neither it, nor the existing Arizona tax code, defined “services.” 

This was peculiar as legislation normally defines terms.

While both Gov. Doug Ducey and his challenger David Garcia opposed Prop. 126, little money came forward to oppose it, even though an interesting cross-section of groups opposed it from the libertarian Americans for Prosperity and Arizona Free Enterprise Club to the more progressive Children’s Action Alliance. The Grand Canyon Institute (GCI) provided key research for the effort.

While one concern with Prop. 126 relates to constraining the ability of government to tax, since in practice almost all tax increases need voter approval or on the state-level a two-thirds vote of the legislature. In that sense, it was unnecessary. However, a potentially more worrisome concern related to creating a prohibition based on an undefined term “services.”

Gilbert is no bastion of liberals; its conservative town council determined in October that it needed to increase its local TPT tax from 1.5% to 2%. They also increased the lodging bed tax from 2.8% to 5%. Gilbert has been growing and funds are needed to support infrastructure to support police, fire and park services.The higher taxes went into effect on January 1, 2025.

Now Gilbert is being sued for violating Prop. 126 by the Goldwater Institute. Yet even the Goldwater legal complaint is unclear statutorily when it comes to “services,” stating, for instance, “The term ‘service’ generally encompasses activities of and businesses in the hospitality industry, including hotels, restaurants, bars, and the like” (emphasis added).

The Joint Legislative Budget Committee, when estimating the fiscal impact of Prop. 126 in 2018 noted, “Proposition 126 would also prohibit the state from increasing any existing sales tax on services. Although the state is currently levying a sales tax on certain business activities that could be considered services (e.g., transient lodging, telecommunications, and utilities), these classifications are not specifically defined as services in statute. (There is no definition of “service” in state tax statutes.) As a result, we cannot determine the existing tax base for services” (emphasis added).

The Arizona Department of Revenue prepares an annual tax expenditure report which includes transactions that are exempt from the Transaction Privilege Tax–which in FY2024, they estimated was about $27 billion in exempted TPT transactions, including realtors’ services.

When GCI did its analysis in 2018, it applied the definition of “services” used by economists as represented by the Bureau of Economic Analysis, which represents the most intrusive  interpretation. While it has an economic basis, it has no basis in statute.

The Bureau of Economic Analysis identifies many areas that are currently subject to TPT as “services” as detailed in the table below. 

Table 1: Bureau of Economic Analysis Demarcation of Goods and Services and Arizona TPT Coverage.

The drafters of Prop. 126 chose not to define what they were regulating, which is why Prop. 126 was a bad idea. How bad is now up to judicial proceedings.

The drafters of Prop. 126 chose not to define what they were regulating, which is why Prop. 126 was a bad idea. How bad is now up to judicial proceedings.

For more information, contact: Dave Wells, Research Director, Grand Canyon Institute, at DWells@azgci.org or at (602) 595-1025, Ext. 2. 

The Grand Canyon Institute (GCI) is a nonpartisan, nonprofit organization dedicated to informing and improving public policy in Arizona through evidence-based, independent, objective, nonpartisan research. GCI makes a good faith effort to ensure that findings are reliable, accurate, and based on reputable sources. While publications reflect the view of the Institute, they may not reflect the view of individual members of the Board.