Wed, July 17

Brewer cuts deal with GOP lawmakers over tax cuts for business

Flanked by state commerce chief Don Cardon and House Speaker Kirk Adams, Gov. Jan Brewer on Monday explains a package of tax cuts she believes will lure businesses to Arizona. (Capitol Media Services photo by Howard Fischer)

Flanked by state commerce chief Don Cardon and House Speaker Kirk Adams, Gov. Jan Brewer on Monday explains a package of tax cuts she believes will lure businesses to Arizona. (Capitol Media Services photo by Howard Fischer)

PHOENIX -- State lawmakers are poised to approve huge tax cuts for business this week -- but delay them from taking effect.

A deal announced Monday between Gov. Jan Brewer and Republican legislative leaders would:

• Cut the corporate income tax rate from just below 6 percent to 4.9 percent, giving Arizona the fifth lowest rate in the nation;

• Allow some multi-state corporations to pay no corporate income taxes at all;

• Altering how businesses are assessed for property tax purposes, potentially reducing their liability by 10 percent;

• Creating new state tax credits for firms that create jobs which pay at least the median wage for the county where located, up to $3,000 per job for three years;

• Permitting companies to write off new equipment purchases faster, reducing their state income taxes;

• Increasing the amount of equipment that businesses can exempt from being assessed for property tax purposes.

The plan also increases how much of local school taxes for homeowners are paid by the state. John Arnold, the governor's budget director, said that should ensure that the reduction in what businesses pay in property taxes is not shifted to homeowners.

And the biggest tax cuts -- particularly the $200 million in reductions in the corporate income tax rate -- will be phased in, but not until in 2014. Brewer said this keeps faith with the promise she made voters last year, when she asked them to approve a three-year hike in state sales taxes, that the proceeds would not be used to finance tax cuts for others.

House Speaker Kirk Adams, R-Mesa, said the package will send a strong message to companies that Arizona is an attractive state to do business.

The move comes as state lawmakers continue to debate and approve controversial measures aimed at illegal immigrants, measures that have gained national attention. And Adams said the state does need to pay attention to its image and reputation.

"But I'll tell you this: When their CFO sits down with them, he puts (on) the green eyeshade, he starts calculating the numbers, and he says, 'This is what we can do in Arizona now,' that will have more impact than anything at all,' he said. "That CEO has a fiduciary responsibility to his shareholders to get the best return on their investment.'

Arnold pegged the lost revenues when fully implemented in 2018 at more than $400 million. That was enough to convince House Minority Leader Chad Campbell, D-Phoenix, that Democrats should not support it.

"I don't know how you can justify that right now when we can't fund education, can't fund health care, can't fund organ transplant programs,' he said.

Adams said that $400 million figure is based on a "static analysis,' assuming that the changes do not end up generating more business and, by extension, more tax revenues. He predicted there actually will be higher tax collections are companies expand here. Campbell was skeptical.

"Show me a study that shows that actually happens and I'll support it,' he said. "But I haven't seen that study.'

Campbell said he does agree with Republicans that business taxes are too high. But he said the only way he could support what Republicans want is if the tax cuts were paid for through other changes in the tax system.

For example, Campbell said Arizona could lower its overall corporate tax rate by eliminating a host of special credits and deductions. But that has political implications, as firms which take advantage of those credits will fight to keep them.

Campbell also said he's not convinced the increase in homeowner rebates will make up for that reduction in business property taxes.

Under current law, businesses pay property taxes based on 20 percent of their value. The package will reduce that to 18 percent.

For schools, cities and counties dependent on property taxes, though, this is a zero-sum game: Any reduction in the taxes paid by one type of property owners is, in effect, picked up by others. And that largely means homeowners.

Arnold said the increase in the school tax rebate should make the reduction in business property taxes all but invisible to most homeowners. But the package also includes some new safeguards designed to ensure that those who are not actually living in the homes do not get the favorable tax treatment.

Sen. Ron Gould, R-Lake Havasu City, said that doesn't go far enough. He wants to also protect owners of rental properties and vacant land from having the corporate tax burden shifted to them.

Aside from reducing the corporate income tax rate, the plan is set up so that some large firms could end up owing Arizona nothing at all.

Most multi-state firms compute their Arizona income based 50 percent on sales made within the state and 25 percent each on the amount of property and the size of the payroll. Existing law permits companies that want to use a formula based 80 percent on sales here; this would take that figure to 100 percent.

That means a firm which exports all of its products to other states or countries would have no corporate tax liability.

Adams said this would provide a powerful incentive to lure major manufacturers, which, in turn, will have a "multiplier effect.'

"When you have companies like Intel and Boeing and Raytheon that are incentivized now to open up their new product lines here, not in Huntsville, Ala., where Raytheon recently did, the effect on all the businesses in that area, not even counting the effect on local school systems, property taxes, sales taxes and so forth, is tremendous,' he said.

Senate President Russell Pearce, R-Mesa, said the package, negotiated for the last few weeks behind closed doors, could be approved and on Brewer's desk by Wednesday. But he said that should provide plenty of opportunity for the lawmakers and public to understand the provisions and ask questions.

As expansive as the plan is, it falls far short of what Adams had proposed last year. He wanted not only sharper cuts in corporate income taxes but also reductions in individual income tax rates.

That category is significant because many small businesses in Arizona are set up under federal tax laws as sole proprietorships, partnerships of S-chapter corporations. In each case, the corporations book no profits, with all the earnings passing through to the individual owners who report it on their personal income tax forms.