Arizona's business-personal tax balance is out of whack

The Daily Star
Friday, March 11, 2005
Jim Kiser

Two truths about taxes: They are necessary. They discourage behaviors that are taxed, while they implicitly encourage behaviors that are not taxed.

In Arizona, there is a third truth about taxes: The balance between business and personal taxes is heavily lopsided. Consequently, Arizona's tax code is helping create an economy exactly opposite of what Arizonans most often say they want.

Which would you rather have move to Arizona: (a) a sufficient number of retirees to create 1,000 new jobs in grocery and retail stores or (b) a company that creates 1,000 new high-tech jobs?

If you answered (b), that you prefer the company with its high-tech jobs, then you might want to ask why Arizona discourages new businesses by imposing property taxes that are 2.5 times as high as the taxes on residents' homes.

You might want to ask why companies that manufacture products in Arizona but sell them elsewhere are required to pay income taxes to Arizona on those sales.

You might want to ask why the state's legislators consistently lower taxes that people pay - the personal income tax and the vehicle license tax, for example - but don't comparably lower business taxes.

And you might want to ask why Arizona is among the nation's 15 highest states in its tax burden on business, but about 40th in its tax burden on individuals. (Those rankings come from a year 2000 ASU report titled "A Current Assessment of Arizona's Tax Competitiveness.)

In short, what is happening in Arizona is that through its tax code, the state has created the perfect formula for attracting people, not job-creating businesses.

"We've created a whole system that is against what we say we want," says Duff Hearon, a businessman and former chairman of the Greater Tucson Economic Council.

"We say we want a better quality of life for people and not just more people. But we've got a structure that does just the opposite."

Hearon contends that structure is based on the economy 100 years ago, when the Three Cs ruled - copper, cotton and climate. Companies in those industries couldn't move away from the state, so they were easy to tax.

"Now that we have companies that can move, we're behind the eight ball," Hearon adds.

Academic studies consistently show Arizona's asymmetric balance between business and personal taxes.

Another ASU study, this one from 2003, noted that "while personal tax burdens are below average in Arizona, business tax burdens are somewhat higher than average."

Several bills in the Legislature would address that imbalance. Rep. Steve Huffman, R-Tucson, introduced the two best.

House Bill 2508 would gradually reduce business property taxes from 2.5 times as great as those on residences to two times as great. That is a significant step.

And House Bill 2139 would lower income taxes on companies that manufacture products in Arizona but sell them elsewhere. Both bills have passed the House and are in the Senate.

A third bill, Senate Bill 1043, is similar to Huffman's proposal for reducing corporate income taxes. It was introduced by Sen. Dean Martin, R-Phoenix.

But a fourth, Senate Bill 1508, introduced by Martin to reduce business property taxes, is complex and convoluted.

Critics of the tax reforms argue there is no guarantee that lowering the tax burden on business will create new jobs.

That is true.

But there is no guarantee, either, that spending more money on the public schools will increase student achievement.

I strongly favor both actions, though, because they help create the environment in which success is possible - success in raising student achievement and success in creating new, higher-paying jobs.