Advocates: Easing business personal property tax will spur investments in Arizona

Dolan Media Newswires
Monday, January 31, 2011
Gary Grado

PHOENIX, AZ -- The annual futility of efforts either to abolish Arizona’s tax on business equipment and machinery or to increase the exemption has not deterred the many critics of the tax.

This year’s version, HCR 2006, takes a novel approach to formulating the tax exemption, which, if passed by voters, would increase from $66,440 annually per company to almost $1 million.

Furthermore, business leaders are trying to convince legislators the revision wouldn’t be an orphaned referendum.

“One of the key missing ingredients in the past is that there needed to be a commitment from the business community to actually support such a referral,” said Farrell Quinlan, Arizona State Director for National Federation of Independent Business.

Quinlan said his organization is prepared to wage the campaign that the exemption is necessary to spur investment and in turn boost the economy, and he has commitments from local chambers of commerce to support the measure at the committee level.

The revenue from the tax does not go into the state’s treasury; instead, local taxing districts receive the tax money. The increase in the exemption will reduce support for those districts, which means taxes on homeowners and the other owners of real property will have to make up the difference, according to studies.

Among the jurisdictions receiving proceeds from the tax are school districts, cities, community colleges, counties and special taxing districts such as flood control and fire.

A hearing on HCR 2006 is scheduled for 2 p.m. Jan. 31 by the House Ways and Means Committee.

Arizona has always taxed business personal property, but in 1996 voters approved a constitutional amendment that exempted the first $50,000 per taxpayer. The amount is adjusted annually to today’s exemption of $66,440.

Kevin McCarthy, president of the Arizona Tax Research Association, said the exemption was designed to reduce the administrative burden rather than offer tax relief.

The exemption eliminated payments by business owners who had minimal amounts of equipment to declare, which meant fewer tax statements for the state to process, McCarthy said.

There have been proposals in past legislatures that would increase the exemption to as much as $10 million.

HCR 2006 would use the average salary of 20 employees, adjusted annually, to come up with the exemption.

Quinlan said that figure is $950,000, which would wipe off the tax rolls about 95 percent of small businesses. Those businesses would be able to use the savings to invest in equipment and hiring.

“A million dollars is a significant amount of investment,” Quinlan said.

Why 20 workers?

“Twenty employees is something people would associate with a small business,” Quinlan said.

Doug Click, who owns Arizona Hi-Lift, a Phoenix company that rents forklifts, scissor lifts and boom lifts, has four employees.

“I think it’s really going to help the manufacturing field,” Click said. “If they can invest in more equipment, maybe they can hire some more people. Most small businesses — that’s where people put their money — invest back into their business.”

Click said the current exemption level has never stopped him from buying equipment because most of what he purchases for his business is already exempt.

But if the exemption were $950,000, Click said, “When I go to buy a semi-truck it’s definitely going to help.”

McCarthy said there isn’t wide support among the business community for increasing the exemption. Business people, he said, usually put their efforts into campaigning to reduce the tax rates for personal and real property.

A bill passed in 2005 incrementally lowered the property tax rates for business from 25 percent to the current 20 percent, and SB1163 proposes to lower the rate to 18 percent by 2012.

McCarthy said there have also been successful efforts to accelerate the depreciation on personal property.

The Joint Legislative Budget Committee has yet to do a financial analysis on HCR 2006, but previous analyses on the effect of eliminating the business personal property tax, conducted by the Joint Legislative Budget Committee last year and the Citizens Finance Review Commission in 2003, have come to similar conclusions.

The tax burden would shift to homeowners and commercial real-property owners to cover the costs of school districts, fire districts, municipal districts, health districts and the like.

The proposal’s sponsor, Rep. Jack Harper, a Surprise Republican, said he has no problem with that.

“It’s not an arbitrary shift,” Harper said. “They (taxpayers) vote on it, it is a referral to the ballot.”

Previous analyses have also concluded that a lesser tax base for school districts would trigger more state aid to schools.

Such reasoning sounds specious to Chuck Essigs, of the Arizona Association of School Business Officials.

“The state can’t even afford the current funding formula,” Essigs said.

Click said he has no sympathy for the school districts because he has seen the tax on the properties he leases and owns increase while the values of them have plummeted.

“I’ve been able to cut back my spending to match my income, and I suggest (schools) take a really hard look at what they do and how they operate so they can do the same steps,” Click said.

The 2003 analysis also comes to the same conclusion that Click and Quinlan have.

“While difficult to quantify, the elimination or reduction in the BPP tax would have a positive economic impact, resulting in an increase in other types of tax revenues,” read the 2003 report by the Citizens Finance Review Commission. “The elimination of the BPP would make Arizona more attractive to capital intensive manufacturers with significant investment in BPP.”