Fiscal Note
BILL # HB 2701 TITLE: TPT; prime contracting; tax base
SPONSOR: Biasiucci STATUS: As Introduced
PREPARED BY: Hans Olofsson
Description
Under current law, the tax base for the prime contracting Transaction Privilege Tax (TPT) is 65% of the gross proceeds
from a construction contract. The 35% reduction of the tax base is to account for the cost of labor, which is assumed to
represent 35% of the amount of the contract. For this reason, this reduction is often referred to as the "35% labor
deduction." HB 2701 would reduce the tax base for prime contracting TPT to 60% in FY 2024 and 55%, beginning in FY
2025, or equivalently, increasing the labor deduction to 40% and 45%, respectively.
Estimated Impact
Table 1 below summarizes the estimated state and local revenue impact of increasing the labor deduction to 40% in FY
2024 and 45% in FY 2025. Relative to current law, the General Fund would incur an estimated revenue loss of $(73.1)
million in FY 2024 and $(153.0) million in FY 2025. The revenue impact on counties and cities in terms of the distribution
of state TPT to them as well as the impact on their own taxes are displayed in Table 1.
Table 1
($ Millions)
FY
Labor
Deduction
General Fund
Share of State TPT
County Share of
State TPT
Municipal Share
of State TPT
Municipal TPT
County Excise
Taxes
2024 40% $(73.1) $(6.8) $(4.2) $(42.9) $(11.8)
2025 45% $(153.0) $(14.3) $(8.8) $(89.8) $(24.7)
Analysis
To derive the estimated impact of the proposed change to the prime contracting labor deduction, we applied the
projected sales tax growth rates under the January Baseline, which are 4.7% in FY 2024 and 4.6% in FY 2025. The impact
on municipal TPT was based on a weighted average tax rate of 2.55% for the prime contracting classification. The
weighted average tax rate for county excise taxes, including the transportation taxes levied by the Maricopa Association
of Governments (MAG) and the Pima Association of Governments (PAG), is 0.7%.
2/18/22