Saying higher taxes would make the economy worse, Republicans on the House Ways and Means Committee voted Monday to permanently repeal the state property tax.
The 5-3 party-line vote came after a parade of business lobbyists said higher taxes could drive some already struggling firms under. Glenn Hamer, president of the Arizona Chamber of Commerce and Industry, said the levy also would make it harder to convince firms to locate in the state.
But Monday’s action may be just the first steps of the Republican-controlled Legislature to revamp Arizona’s tax code to make it more friendly to business.
Committee members began debating — but did not vote on — a separate measure to cut corporate incomes taxes from slightly less than 7 percent. Rep. Rick Murphy, R-Glendale, who crafted the measure, said his goal is to get that figure down to 4.5 percent, the top rate now paid by individuals.
Murphy pointed out that certain types of businesses can be organized so that the profits flow to the owners, who in turn pay taxes on that individual rate. He said a company should not be financially penalized because it chooses a corporate structure rather than being set up as a limited liability company.
But that’s not all.
Current law requires businesses to pay property taxes on the value of all equipment they own in excess of $65,013. Murphy’s bill, HB2368, would boost that exemption to $10 million, essentially eliminating that tax for many companies.
And his bill would exempt 57 percent of any capital gains from corporate or individual state income taxes.
The fight over the future of the state property tax has its roots in 2006 when the state had a surplus. A deal between then-Gov. Janet Napolitano and the Republican-controlled Legislature suspended the tax for three years; if lawmakers do not act this session, the levy returns later this year.
The tax is considered particularly onerous for business and a detriment to economic development.
That’s because in Arizona, unlike many other states, business property is assessed for tax purposes at a rate more than twice as high as residential property. So a $200,000 business might pay $190 a year, compared to $86 owed by the owner of a $200,000 home.
Businesses are taxed each year not only on land and buildings, like homeowners, but also on their equipment, ranging from expensive computer chip fabrication machines to office equipment. That makes Arizona particularly unattractive for manufacturing operations which, in general, pay higher wages than operations like credit card processing centers.
The move for repeal comes as Arizona faces a $2.4 billion deficit next year. And lawmakers just trimmed about $580 million in spending, including cuts to education, health and welfare programs, to balance this year’s budget.
Hamer acknowledged that if the tax returns, there would be another $250 million to keep programs operating.
“But what I can say with 100 percent certainty, if that tax comes back, more Arizonans will lose their jobs, more Arizonans that are struggling to stay in their homes will find it more difficult to do so.”
Elizabeth Slaine, who teaches English at Tucson Magnet High School, said she sees the issue in a different light.
Slaine said when the state doesn’t have enough tax revenues, that means less money for education. And she said Arizona’s economy won’t improve unless there are people qualified to be in business.
“We have to have educated students who are ready to start these businesses,” she said.
That contention drew derision from Rep. Andy Biggs, R-Gilbert.
“Education does not create jobs,” he said. “Entrepreneurs and businesses create jobs.”
And Biggs said it won’t matter whether Arizona has the best educated workforce in the country if higher taxes drive companies out of business.
The argument by Slaine and others that eliminating the tax will hurt education drew an angry reaction from Murphy who said he is “tired of hearing that lawmakers hate children.”
He said virtually every state has had to cut education funding to balance its budget. Murphy called the 2 percent cuts to K-12 financing in Arizona “pretty mild.”
HB2073, which goes to the House Appropriations Committee, is at the top of the Republican legislative agenda.
Gov. Jan Brewer has yet to take a position on whether the levy should be repealed.
Brewer, in office for slightly more than a month following Napolitano’s resignation, has repeatedly said that “everything has to be on the table” to deal with the deficit. But Brewer also has stressed she is not a fan of higher taxes.