Even the most ardent tax cutters in the Legislature say it would be impossible to balance the budget next session while cutting corporate taxes.
But Republican lawmakers still say businesses need reassurances that cuts are coming, and they say they have a way to reconcile the conflict between the desire for lower taxes and the requirement for a balanced budget: Immediately pass tax cuts, but don’t let them take effect for several years.
It’s a departure from last session, when House Speaker Kirk Adams and others pushed for tax cuts that would draw revenue away from a temporary sales tax being proposed to help close massive deficits.
Even Adams, the architect of a tax cuts bill that died in the Senate last session, said future tax cuts would likely have to be timed so they didn’t contribute to the deficit, and didn’t overlap with a three-year sales tax increase voters approved in May.
“I think we have to be very sensitive to when tax reductions are implemented, vis-à-vis the temporary sales tax, as well as … the budget deficit,” Adams said.
The state faces an $825 million deficit in this fiscal year, and that number is expected to grow to about
$1.4 billion in fiscal 2012, which begins July 1, 2011.
Many legislators say businesses will be more likely to invest in Arizona if they know cuts to the corporate income and business property tax rates are set in stone, even if the rates won’t change for several years. Some lawmakers want a specific deadline, while others advocate for cuts that would be triggered by benchmarks that show the economy has improved.
Some still advocate for cuts that would go into effect immediately. Rep. Andy Biggs, who will move to the Senate in January, said he wants to find a way to pass tax cuts that wouldn’t have to wait for several years, a proposal that he said would rely solely on deep budget cuts.
Biggs, who was recently appointed chairman of the Senate Appropriations Committee, said the purpose of tax cuts is to spur economic growth that will increase the state’s tax revenue. The Gilbert Republican said it would be self-defeating to wait until state revenues bounce back to pass the cuts.
“Why would we wait? Why would we say we can’t afford it this year?” Biggs said.
But even Biggs acknowledged that he may be one of a few lawmakers who would vote for immediate cuts.
Gov. Jan Brewer, most lawmakers and various business groups say an economic recovery bill — or a “jobs bill,” as many supporters refer to it — should be the Legislature’s top priority in the 2011 session.
Some support enacting tax cuts that wouldn’t go into effect until 2013, when a temporary 1-cent sales tax increase that voters approved in May will expire. Voters might be angry if their temporarily higher sales taxes were being used to cover the budgetary costs of corporate tax cuts, and Brewer opposed the tax cuts bill last session over concerns that the cuts would overlap with the sales tax increase.
Others want a package that is similar to Adams’ tax cuts bill from 2010. Rep. John Kavanagh, who chairs the House Appropriations Committee, said the cuts shouldn’t fully take effect for several years, but should start phasing in before the sales tax hike expires.
“Perhaps a three-year phase-in of these cuts would be better,” said Kavanagh, a Fountain Hills Republican.
Some don’t think the state should use a timetable at all. Rep. Michele Reagan said she believes tax cuts should be triggered by economic indicators such as business revenue, state revenue or unemployment figures.
Cutting taxes based on economic benchmarks avoids the risk that the cuts would go into effect while the state is still grappling with deficits.
“We’ve got to make sure that the economic conditions can handle it,” said Reagan, a Scottsdale Republican. “Isn’t it just more logical and more fair to say when we reach certain benchmarks, things would kick in?”
Reagan said the benchmarks could delay the tax cuts for longer than some lawmakers would like. But if the economy improves faster than expected, they could go into effect sooner than they would under a timetable.
The uncertainty of the benchmark proposal isn’t sitting well with most Republican lawmakers and others who list tax cuts as their top priority for 2011. Glenn Hamer, president and CEO of the Arizona Chamber of Commerce and Industry, said business won’t be as willing to invest in Arizona if they have no idea when their taxes will go down.
He acknowledged that the state can’t afford immediate cuts, but said businesses need the stability that comes with knowing exactly when the cuts will happen.
“Businesses can’t plan for that,” Hamer said.
Tax cut advocates such as Hamer say Arizona isn’t competitive with other Western states. For example, Arizona has a 6.9 percent corporate income tax rate, compared to 4.6 percent in Colorado and 5 percent in Utah, while Nevada, Washington and Wyoming don’t levy any corporate income taxes. Hamer said he wants Arizona’s rate brought down to about 4.5 percent.
Some Republican lawmakers, however, are hesitant to commit to across-the-board tax cuts like the ones the Chamber of Commerce wants. Sen. Steve Pierce, the Senate majority whip, said he supports tax reform in 2011, but hasn’t decided yet whether that would include outright cuts to the corporate income or business property tax rates.
When Brewer opposed Adams’ bill last session, she offered a counterproposal that featured incentives, enterprise zones and targeted tax breaks for businesses that created new jobs, but not the rate cuts Adams sought.
Pierce said any economic recovery package the Legislature passes in 2011 should include some of those elements, but not necessarily the across-the-board cuts.
“I doubt that it comes back like it was,” the Prescott Republican said of the Adams bill. “I’m not saying tax cuts. I’m saying tax reforms.”
Economist Elliott Pollack, who often provides economic data and advice to state officials, said across-the-board cuts shouldn’t be considered until the state budget is more stable, even if they won’t go into effect for several years.
“The argument that we should be cutting all taxes across the board is an argument for another day,” he said.
He said the Legislature should be looking only at targeted cuts for “export-related” businesses that could move out of state, such as aerospace companies, technology manufacturers and regional offices of large nationwide companies.
“I don’t care about personal property taxes for Dillard’s. I only care about personal property taxes for companies that could go elsewhere,” Pollack said. “We don’t need another retailer because they’re going to come anyway.”
Paul Senseman, a spokesman for the Governor’s Office, said Brewer might be willing to support delayed cuts.
“I think we’re all talking about that. I know the governor has been talking about that for a couple years now. She hasn’t stopped advocating for that,” he said.
Senseman said the state would be hamstrung by the federal health care bill, which includes a maintenance-of-effort provision that bars the state from cutting Medicaid. If Congress doesn’t lift that requirement, Arizona will be limited in what kind of tax relief it can pass in 2011, he said.
Most tax-cut supporters believe Brewer’s opposition to Adams’ bill was based more on the political pressures of the impending special election on her sales tax proposal, not an ideological problem with tax cuts in general.
“She is on record supporting a reduction in the capital gains rate,” Hamer said. “She’s on record supporting a reduction in the corporate tax rate. She’s on record supporing a reduction in business property taxes.”