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Arizona needs to cut capital gains, corporate income taxes

Economic development can mean many things to many people. The Arizona Free Enterprise Club believes economic development means establishing a state tax structure that is pro-growth, maintaining a regulatory system that is delicate and light and ensuring that the role of government in the economy is limited at most. Then let the market sort out the rest.

Economic growth is determined by how investors, entrepreneurs, and other wealth creators measure these basic characteristics and where, in their opinion, Arizona stacks up.

A recent series in the Arizona Capitol Times focused on taxes and incentives and their effect on luring businesses to Arizona. As an advocate for free markets, the Free Enterprise Club has found itself at odds with economic development experts and groups that promote tax incentives as opposed to actual tax-rate cuts. It is often repeated that Arizona doesn’t have the plethora of economic development tools that states like Oregon, North Carolina and California do. But what about these states?

For all the tax incentives Oregon is known for, the state is in a certain mess. At a staggering 12.1 percent, Oregon’s unemployment is 4.3 percent higher than Arizona’s. Oregon’s 10-year state GDP growth is lower, personal income growth is lower and the economic output is just over half of Arizona’s. Oregonians have higher income taxes and face a barrage of tax increase measures at the Legislature.

North Carolina also was cited as having one of the more aggressive and talked-about economic development programs in the country. At what cost?  North Carolina’s unemployment is 10.8 percent. And during the last 10 years, Arizona has outperformed North Carolina in personal income growth, per capita personal income growth, GDP growth and domestic in-migration.

No matter what business you’re in, it’s tough to overcome a punitive tax system even with a toolbox full of incentives, and California is Exhibit A.

For four consecutive years, more people have moved out of California than have moved in, even with California’s generous use of enterprise zones and business tax subsidies. You can be sure to add a fifth consecutive year of mass exodus as sales, income, and vehicle taxes just went up again this May. Sure, California has a great climate, but why run a business there when you can run one in a neighboring state and fare far better financially?

The Free Enterprise Club promotes a strong and vibrant economy by advancing sound fiscal policies — in other words, doing the opposite of California. In 2006, the club was the lead organization behind the 10 percent across-the-board personal income tax cut. This tax cut applied to everyone who pays personal income taxes, including the thousands of businesses that file their taxes under the personal income tax system. Had this legislation failed, state spending would have grown an additional $330 million.  Instead, that $330 million was left in the economy where it could do some good (at a minimum it kept the deficit lower than it is today).

The club is promoting a substantial cut in the state capital gains tax and the state corporate income tax, both of which are impediments to after-tax profits. The club is also working to prevent substantial property- and sales-tax increases to balance the budget. Long term, we have our sights set on reforming the tax code by eliminating selective and inefficient tax credits and replacing the current system with a broad-based flat tax.

Steve Voeller is president of the Arizona Free Enterprise Club, which promotes a strong and vibrant economy by advancing sound fiscal policies.

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