House Speaker Kirk Adams has been emphatic all year long: Arizona’s long-term fiscal problems need to be fixed by reforming the state’s economy. To do that, he has pushed a bill that he says will attract new companies to the Grand Canyon State through a series of tax cuts and credits.
The goal has been to attract “base industries,” meaning the types of companies that can easily locate anywhere in the country. The bill, H2250, is specifically aimed to attract manufacturing companies, businesses that make most of their money from out-of-state sales and firms that specialize
in research and development.
Much of the debate over the bill at the Capitol has centered on political rhetoric, with Republicans calling it a “jobs bill” and Democrats assailing it as a “corporate bailout.”
Meanwhile, economists, who have less to lose or gain by political maneuvering, say many of the bill’s provisions would create economic growth; lowering business taxes, for instance, will remove “red flags”
that impede business development. Yet other parts of the bill, they say, would do nothing to attract business or create new jobs.
The legislation has several main components: individuals and businesses would get tax cuts on income and property; firms that pay high wages and spend a lot of money on capital improvements would get even more property tax breaks; businesses would get tax credits for creating new jobs; the governor would be able to draw on a deal- closing fund to offer incentives to businesses; and the state would create a new job training program.
The bill, of course, is still wending its way through the legislative process. It is slated to be heard in the Senate Finance Committee on April 12, and is likely to be changed to reflect weeks-long negotiations between Republican leaders in each chamber (for details on the strike-everything amendment to H2250, check out the accompanying story on page 15).
The Arizona Capitol Times asked three economists to weigh in on the components of the bill as it passed the House in January. Here’s what they said about each of the major provisions.
The tax cuts are the most controversial pieces of the bill, largely because the state would lose revenue during a prolonged budget crisis.
One provision would cut the assessment ratio for corporate property taxes from 20 percent to 15 percent over five years, while another phases out the equalization property tax over four years.
Arizona’s business property taxes have been much higher than other Western states for years, said Elliott Pollack, the Scottsdale economist who was commissioned by the House of Representatives last year to write a report outlining how the state can shift its economy away from housing and growth
Low tax rates won’t necessarily attract businesses, Pollack said, but high taxes can certainly keep them away.
University of Arizona economist Marshall Vest said Arizona needs to bring its property tax rates in line with those of other states in the region.
Arizona doesn’t have to set the lowest tax rates, but removing the deterrent of abnormally high rates will improve the state’s ability to attract new businesses.
“What’s really important is not that the taxes are zero, but that they don’t raise a red flag,” Vest said.
The bill also would reduce corporate income taxes to 5 percent from 7 percent over five years, which would reduce state revenues at first while attracting new businesses that would later contribute to the state’s
Arizona State University economist Dennis Hoffman said corporate income taxes in the state aren’t terribly high now, but cutting the rates will only help the economy.
“Any business tax cut would have some kind of positive impact on the economy,” he said. “If we could lighten the burden on our business community, we would boost our economy.”
While the economists were certain most of the tax cuts would, indeed, contribute to economic development, they were pretty sure one of the reductions was almost worthless: an income tax cut for individuals.
Lawmakers who drafted the bill were working under the theory that the individual income tax cut would lead to job growth because it would put more money in the hands of small businesses owners who file their taxes under the individual tax code.
Hoffman said that assumption is wrong.
“That is completely laughable,” he said, calling those cuts a “misguided, populist agenda to eliminate the burden on individuals.”
Those tax cuts are likely to be removed from the bill when it is considered by the Senate, however, and Pollack said that is a good decision by policymakers.
“I think that will be a positive for the bill. There’s not going to be any increased benefit” from those cuts, he said.
For years, Arizona has relied on so-called “enterprise zones” with special tax incentives to attract larger businesses to rural parts of the state. But H2250 would expand the program across the entire state – including urban centers such as Phoenix and Tucson – for new businesses that make large
If the bill passes, lower rates on property taxes and income tax credits would be available to firms that relocate to Arizona or expand existing operations, create at least 25 jobs in a city of 50,000, pay 175 percent of the county’s average wage and invest millions of dollars for capital projects.
Vest said enterprise zones have allowed Arizona to mitigate the state’s taxes on property and equipment, which has attracted businesses to the state that otherwise wouldn’t have operated in Arizona.
“If you can get (businesses) into an enterprise zone, that’s very important,” Vest said.
Corporate income tax credits
Base industry businesses that move to Arizona or expand existing operations would qualify for income tax credits of up to half of the income tax withholding for newly created jobs that pay at least 135 percent of the county’s average wage.
Those credits can be extended for seven years, depending on the salary levels for the new jobs.
Although other states use this technique, the economists have doubts about its effectiveness. Many of the states that use corporate income tax credits do so because they generally have more difficulty attracting jobs than Arizona does, Vest and Hoffman said.
Vest said these kinds of credits could exacerbate Arizona’s budget problems by giving away tax revenues for little return.
Hoffman said, “It’s not going to cost us that much more, but it isn’t going to do much.”
In the midst of extreme budget woes, lawmakers eliminated a tax on Arizona businesses that generated money for a job-training program.
That move made Arizona the only state in the nation without a job-training program. Now, though, lawmakers want to set up a new job- training program by using income tax revenue that normally goes to the state’s general fund. And economists say it’s a good idea.
“It’s something that will add to the skill of workers who take those jobs,” Pollack said. Vest said job training is more important than ever before, considering the state’s education system lacked adequate funding even before the past two years of deep spending cuts.
“The state with the best work force wins the economic development sweepstakes,” he said. “Arizona has a run-of-the-mill work force, so anything we can do to boost the skills of the work force is a good thing.”
A special account, named the Arizona Opportunity Fund, would be created by the bill in order to allow the governor and the director of the Department of Commerce to award grants that could be used to attract businesses by paying for infrastructure projects.
Money for the “deal-closing” fund would come from the state’s general fund and from income tax revenue generated by new jobs that, lawmakers surmise, will be created as a result of H2250.
Pollack said the fund would be a valuable tool that the governor would be able to use when an agreement is close but not assured.
“It allows us to bring money to the table at the last minute to be competitive and beat out other states,” he said. “It would not require a bunch of money for each individual deal.”