Two lawmakers told a gathering of business representatives and legislators that the best opportunity for the state to reduce corporate taxes is now, and they plan to introduce legislation that would attract more businesses and high-paying jobs to the state.
“In the next two to three years, you will see some of the largest tax relief packages ever passed out of the Legislature,” Sen. Dean Martin, R-6, told the attendees of the Arizona Tax Research Association’s Outlook Conference on Nov. 19. Mr. Martin is the chairman of the Senate Finance Committee.
Rep. Steve Huffman, R-26, said Arizona’s corporate property tax assessment rates prevent many corporations from opening up shop in the state. Mr. Huffman is the chairman of the House Ways and Means Committee.
“I can’t even imagine how many businesses aren’t considering coming here because of the tax situation we have,” he said. “We can’t afford to wait another three, four or five years just to get started. We have to start right now, today. There isn’t a better time.”
In Arizona, Mr. Huffman said, the business tax base pays the majority of property taxes collected by the state, even though the residential tax base is three times the size.
Mr. Huffman said he plans to introduce legislation that would decrease the business property tax assessment ratio by one percentage point per year for five years, to 20 per cent from 25 per cent. During the same five-year period, the homeowners property tax rebate would be increased three percentage points per year, to 50 per cent from 35 per cent.
In order to reduce the business property tax assessment by the amount he is proposing, Mr. Huffman said the state would lose $40 million for each one-percentage point reduction. He called that “a small investment for reducing the business assessment rate 20 per cent” of the current rate.
Mr. Martin said the biggest problem in the state’s tax system is not the inequity as much as it is that businesses are penalized for investing in capital resources. It is those investments — namely, in property and office buildings — that are taxed regardless of how successful a company is, unlike sales tax, which is only applied when the company engages in business.
The problem with the corporate property tax, Mr. Martin said, is not necessarily that the assessment ratio is too high, but that the amount paid by the taxpayer is too high. He said he will propose legislation that will lower the tax bills for corporations by creating a property tax rebate, similar to the ones enjoyed by residential homeowners.
“Instead of extending the homeowner rebate, let’s apply it to all taxpayers,” he said.
Property tax rebates were created to lower the tax burden on homeowners without affecting the amount of money the state distributed to the recipients of the tax, such as municipalities and schools.
Time Is Right, Lawmaker Says
Lawmakers seeking tax reductions have the perfect opportunity to put reductions in place, Mr. Huffman said, because revenues are climbing and the state is expecting a budget surplus. He said even though Arizona’s economy is on an upswing, it will not last more than a few years.
“We’re fooling ourselves if we think we’re going to have the state we want to live in in 10 years if we don’t do something about this now,” he said. “This has got to be an ongoing, everyday focus.”
Rainy Day Fund
Mr. Martin suggested adding a “fourth leg” to the three-legged stool metaphor of balanced taxation. In addition to property, sales and income taxes, he said the rainy day fund should be used to stabilize the system by acting as a savings account that can be used when the economy dips in the future.
Rep. Russell Pearce, R-18, the House Appropriations Committee chairman for the last two years, was in the audience and expressed reservations about using the rainy day fund. He said legislatures are addicted to spending and fears that it creates a false sense of economic security. Without proper safeguards, he said the Legislature may take money from the fund even if the state is not in an economic emergency.
“My fear is it’s like giving a stash of alcohol to an alcoholic,” Mr. Pearce said. “Everything is an emergency.”
Mr. Martin said lawmakers define tax reform in one of two ways: either completely changing the current system or working within the system’s framework to fix existing problems.
He described the first definition as a “hail Mary pass” that has a low chance of success and is a last resort. Tax reform, Mr. Martin said, is “a game of inches” that needs to be addressed one problem at a time.
Both legislators said that past Legislatures have resisted making relatively minor tax code changes in lieu of a “perfect” plan that would completely overhaul the system. They also both agreed that such a plan is unlikely to be created and waiting for it hinders any serious attempts to alter the tax code.
“We cannot let the perfect be the enemy of the good,” Mr. Martin said. “If we hold on to [finding] the perfect solution, we may not be able to get the good solution.”
Mr. H
uffman said waiting for a comprehensive plan would grind the reform process to a halt.
“If we can’t start something until we get this global package, we won’t start anything,” he said.
Mr. Martin also said an important factor in developing changes to the tax code is to do so in a way that does not harm the political futures of lawmakers who support it. He said he has seen too many people lose elections because of their support in plans that were not well-crafted.
“We need to not only do the right public policy,” he said, “but we need to do it in a way that we can defend it and keep our friends around.”