Gov. Jan Brewer unveiled her plan to revive the state’s flagging economy with a series of tax cuts and incentives aimed at spurring job creation and sending a signal to out-of-state companies that Arizona is an ideal place to do business.
Brewer and her chief of staff, Eileen Klein, outlined the proposal at a Nov. 30 meeting of the Arizona Commerce Authority. During her presentation, Klein proposed lowering the state’s corporate income tax rate from nearly 7 percent to about 5 percent; eliminating the taxes paid by in-state companies on out-of-state transactions; and making major reductions in capital gains taxes on small business investments.
The governor’s staff referred to those three facets of her plan as a “consensus proposal” that they say will have broad support in the Legislature.
In addition, Klein said Brewer aims to ease the property tax burden on Arizona businesses and create new tax credits for things like research and development and “angel investors” who provide capital for small businesses.
Many of the changes, such as the corporate income tax reduction, wouldn’t go into effect until 2013, once the one-cent sales tax increase that voters approved in May expires.
“It is my wish, if you will, after Proposition 100 goes away, that then we start implementing the tax reform,” Brewer said. “That’s not very far away.”
Some of the changes, however, could go into effect next year, Klein said. One of those proposals, she said, is a change in the state’s sales factor – the percentage of an Arizona-based business’ out-of-state sales that are tax exempt. Brewer proposed increasing the sales factor from 80 to 100 percent, meaning businesses would pay no taxes on goods they produce in Arizona but sell in other states.
Brewer said she also wants to reduce property taxes, but in a way that would not shift the burden to homeowners. Because of the way Arizona property taxes are structured, any reduction in the business property tax rate would likely increase property taxes on private homes.
“It won’t happen with my blessing, that’s for sure,” Brewer said, when asked if homeowners would face higher property taxes to compensate for lower business taxes. “Certainly I have a Legislature that I have to work with. But I believe they’re probably on the same path that I am.”
To avoid shifting the tax burden to homeowners, Klein said Brewer may seek an expansion of the state’s enterprise zone program, which gives tax breaks to businesses that are located in certain areas, generally with high poverty and/or unemployment rates. Klein said the governor is unlikely to push for an across-the-board reduction in business property tax rates.
“What I talked about is … moving the enterprise zone program more statewide and looking at a more favorable treatment for qualified businesses on real property and business personal property. But I didn’t give a specific rate. I think that’s one of the things we need to determine in negotiation,” Klein said.
The governor also said one of her top priorities for 2011 is getting legislative approval for the Arizona Commerce Authority, a proposed public-private entity that would replace the Arizona Department of Commerce. Brewer, who created the authority through an executive order, named Commerce Director Don Cardon as the agency’s first president and CEO. The title will only be ceremonial unless the Legislature approves the governor’s plan.
Cardon had planned to return to the private sector after the Commerce Authority was established, he said. But the state’s grim economic condition led him to accept Brewer’s request that he lead the new agency.
“This is not about me,” Cardon said. “It’s about the urgency and the situation we all find ourselves in.”
Klein said the Governor’s Office had some preliminary estimates for how much money the short-term and long-term tax proposals would cost, but would not release them. But the governor’s comments on funding for the university system provided a stark example of how hamstrung Arizona is when it comes to any economic recovery proposal that would add to the state’s massive deficit.
Despite the Commerce Authority’s advocacy of a highly-trained workforce that would attract high-tech businesses, Brewer said her 2011 budget proposal will include cuts to the university system.
“We will strive to do as little harm that is possible,” Brewer said.
Funding for the Arizona Commerce Authority is also murky. Brewer said Arizona Public Service, the state’s largest utility, has agreed to pay part of the start-up costs for the agency, and other funding would be shifted over from the Department of Commerce. But the Commerce Authority will likely need more.
Klein said the Commerce Authority will need about $10 million for its first-year operating budget and $25 million for a deal-closing fund that it can use to attract new businesses to the state. She said the governor is looking for non-general fund money that can be transferred to the Commerce Authority.
“Where can we forgo dollars in the future to help fund this effort instead – that’s the idea,” Klein said.
Before Brewer seeks legislative approval for the Commerce Authority, she also must determine which agencies will take over dozens of the Department of Commerce’s dozens of responsibilities and statutory duties.
Klein said the governor’s plans have broad support in the Legislature, including from House Speaker Kirk Adams, an ex-officio member of the Commerce Authority’s board.
“The legislative leaders have indicated strong support. We know jobs and competitiveness will be at the top of their agenda, like it is for the governor. And so we’re looking to partner with them,” Klein said. “I’ll work with their staff and then we’ll wait to see who the actual sponsors will be.”
But some Republican lawmakers may want to go further than the governor is willing to go. Several lawmakers have suggested cuts to the business property tax rates.
Brewer’s preliminary legislative agenda for 2011 is three-pronged – get legislative approval to create and fund the Commerce Authority; give the agency tools such as a job-training fund and a deal-closing fund; and implement her long-term tax reform plan.
The governor will unveil her full proposal before she submits her budget to the Legislature on Jan. 15, Klein said. The plans will be finished by the time Brewer gives her State of the State address.