The next frontier in Arizona’s efforts to woo manufacturers may be an exemption on the sales taxes they pay on electricity usage.
Gov. Jan Brewer is working on a proposal to eliminate the sales taxes that manufacturers pay on their electricity, according to gubernatorial aide Michael Hunter. Arizona is one of only 13 states that charges its full sales tax rate on energy usage, he said.
The 37 other states, including many that Arizona competes with in trying to lure new businesses, either don’t tax energy usage at all or have exemptions or lower rates for manufacturers, Hunter said.
“There are certain tax problems in our tax code that just jump off of a spreadsheet,” Hunter said. “It’s just one of those not very interesting, not very exciting areas of the tax code where we’re not competitive. And our system is providing a level of sticker shock that we could probably manage better by providing an exemption.”
The plan provides an early glimpse at what may be in Brewer’s 2014 agenda. Hunter said Brewer has pursued some kind of tax agenda every year, and this is a potential feature of that agenda for the upcoming session, expected to be her last as governor.
Hunter, Brewer’s director of policy and the administration’s resident tax policy expert, said the governor isn’t considering a wholesale elimination of the state’s transaction privilege tax on utilities. The state can have a larger conversation in the future about whether Arizona should tax energy usage at all, he said.
For now, the governor wants to focus on manufacturers, who generally use large amounts of electricity, Hunter said The state collects nearly $500 million on utility sales taxes annually, Hunter said. A spokesman for the Arizona Department of Revenue said the agency doesn’t yet have any details on how much of that money comes from manufacturers.
“A principle for the governor has always been that tax reductions have to be affordable,” he said.
Hunter said there are still a lot of details to be worked out, including which of several statutory definitions of “manufacturer” the potential plan will use. One possibility is that the governor could use the definition in the North American Industry Classification System, a classification system used by businesses and governments in Canada, Mexico and the United States.
Hunter said the Governor’s Office is meeting with tax experts and manufacturers to determine exactly what shape the plan may take.
Rep. Debbie Lesko, R-Glendale, announced Brewer’s plans at a Nov. 15 conference of the Arizona Tax Research Association. Lesko said she supports the overall concept and is waiting to see more details in January.
“I think it’s always a good idea when we try to attract more businesses into the state of Arizona,” Lesko. “And manufacturing business — typically, they’re pretty good paying jobs. And then there’s secondary local business from when manufacturers move here.”
Arizona has ramped up its efforts in the past few years to attract manufacturers to the state, and manufacturing is a top priority for the Arizona Commerce Authority. According to ACA data, there are 4,500 manufacturers in Arizona.
Arizona has created a plethora of new tax credits and incentives over the past few years, most of which require companies to meet certain benchmarks to qualify, such as the number of jobs created, the amount of capital invested and the median wage of the jobs created. But Hunter said Brewer wants the electricity exemption to be as across-the-board as possible.
Arizona Tax Research Association President Kevin McCarthy said he hopes Brewer takes an across-the-board approach as well.
“It’s no secret that this is something that has surfaced in the last couple of years with companies that have been looking to relocate to Arizona,” McCarthy said. “My hope would be that, if they find it’s an impediment to job growth, that whatever would be proposed would be broad-based.”
Many Republican lawmakers are resistant to passing tax credits and incentives that can be viewed as government “picking winners and losers.” But some conservative lawmakers say they like what Brewer is planning, in part because of that broad-based approach.
Rep. David Stevens, R-Sierra Vista, said he thinks Brewer’s plan is a “conservative approach.” He said he wants to know why the governor isn’t looking to exempt homeowners from sales taxes on energy usage, but is intrigued by the possibility of a plan that would exempt all manufacturers, regardless of size.
“Whenever you reduce the cost of manufacturing, everything drives off of that — wholesale, retail, consumer purchasing,” Stevens said. “I think that’s a legitimate way of stirring some economic activity.”
Stevens said he’d like to know how the state will define “manufacturer” when deciding who is eligible for the exemption.
“I’ve got a sister-in-law who makes wax candles in her basement. I wonder if she would be considered a manufacturer,” he said.
Rep. J.D. Mesnard, R-Chandler, said he doesn’t like that Arizona taxes electricity usage at all. But he said it would unrealistic to eliminate a tax that generates more than $400 million a year in revenue.
If the exemption is broad-based, Mesnard said he could support the plan.
“At least conceptually, I think that sounds good,” Mesnard said. “I’d want to see the details.”