Advocates of an ill-fated tax cut proposal meant to spur small- business growth believe they’ve finally found the key to overcoming longstanding opposition and are rounding up early support to head off any problems as they prepare for the 2012 legislative session.
Senate Majority Leader Andy Biggs, R-Gilbert, and small-business advocate Farrell Quinlan are building up support for the Small Business Job Creation Act, a 2012 ballot referral that would dramatically reduce business personal property taxes.
Biggs and Quinlan, the state director of the National Federation of Independent Business, say cutting the tax, which is levied on business equipment, would be a boon to small businesses that are hesitant to make major purchases. Lifting that burden, they say, would pump money into the economy and encourage hiring during the prolonged downturn.
Unlike in past years, when questions over the impact on homeowners’
property taxes and school funding have doomed attempts to lower the taxes, Biggs and Quinlan said they believe they’ve found a way to overcome the steep opposition.
Businesses currently get an exemption on the taxes they pay for up to $67,000 worth of personal property. The 2012 proposal would boost that exemption to about
$2.3 million, a number Biggs said is based on the average cost of hiring 50 employees.
“What I hope this proposal will do,” Quinlan said, “is give immediate incentive for people to invest in equipment and machinery, the very guts of small business. People just don’t work in empty shells of buildings. There’s got to be something to work on.”
The personal property tax rate is set by the Arizona Constitution, so the Legislature can’t raise the exemption rate on its own. Any change would have to be approved by the voters.
Because of the way property taxes are structured in Arizona, any decrease in one kind of property tax can raise others, meaning previous plans to raise the personal property tax exemption would have inadvertently raised homeowners’ property taxes.
And because property taxes are such a large chunk of the funding that school districts receive, education groups have historically been wary of any attempt to raise the exemption rate.
Unlike past proposals, Quinlan said his plan would make the new exemption rate prospective only, so that personal property that is already on the books would not be eligible for the $2.3 million exemption.
Only new purchases would be eligible, which Quinlan said he hopes will lessen or even prevent the dreaded shifting of the tax burden onto homeowners and avoid the steep opposition that always comes with that shift.
Quinlan acknowledged that any proposal that doesn’t eliminate that shift is probably a dead issue. Voters are unlikely to voluntarily raise their own property taxes, and organizations like the Arizona Association of Realtors would be likely to actively oppose such a ballot measure.
But he and Biggs said the restructuring of the measure may finally be the key to getting everyone on board.
“This is the pie-in-the-sky deal,” Biggs said. “We think we can come up with a measure that everybody is going to be comfortable with.”
In past years, similar proposals have rarely even gotten a hearing in committee. But Biggs, the second-ranking Republican in the Senate, is confident he can get a hearing for the NFIB plan.
The pair is still waiting on estimates from the Joint Legislative Budget Committee that will determine whether the higher exemption rate will affect homeowners. In the meantime, they’re meeting with business groups, stakeholders like the Realtors and other lawmakers to drum up support.
Quinlan said getting the Realtors to support the measure — or least not actively oppose it — will be a key to success. He said they won’t move forward with the proposal if the Realtors are going to fund an opposition campaign, and the only way to guarantee that is to ensure that homeowners won’t see their property tax bills go up as a result.
“Well-funded opposition makes any ‘yes’ campaign problematic,” Quinlan said. “Do I expect their full-throated support and active financial support? No. But to the extent that (the group) could be a neutral or a soft ‘yes,’ that would be a home run.”
Tom Farley, CEO of the Arizona Association of Realtors, could not immediately be reached for comment.
The idea has broad support among Republican lawmakers and some Democrats as well, with numerous referrals introduced in the Legislature each year. But the questions over homeowners’ taxes, school funding and others issues have kept it from advancing in previous legislative sessions.
Past supporters are enthusiastic about the proposal. Sen. Rick Murphy, R-Peoria, who sponsored several referrals in past years to alter or repeal the personal property tax, said the idea has never succeeded in the past because lawmakers were paralyzed by the fear of failure. But with the economy still lagging, things are different now.
“From my mind, if there’s ever going to be a time where the message of ‘this is killing jobs and it needs to be repealed to bring economic activity to the state’ is going to resonate, it’s right now,” he said.
Many supporters said they believe that the shift would be worth it.
Murphy said he would gladly pay $20 more in property taxes if it helped spur job creation.
But convincing homeowners would be difficult, said Rep. Jack Harper, R- Surprise, who sponsored a measure in the 2011 session to raise the exemption amount. That proposal had 43 co-sponsors.
“If the citizens are well-informed they’re going to recognize that what they’re actually voting on is higher taxes for themselves,” said Harper, whom Quinlan said wants to sponsor the House version of his
Sen. Michele Reagan, R-Scottsdale, said the combination of the prospective-only nature of the proposal and 9 percent unemployment may be enough to finally tip the scales in 2012.
“Their proposal is really, really interesting. And it could be phenomenal if it pencils out the way we think it will,” she said.
Even some Democrats, who frequently battle with Republicans over the impact that business tax cuts will have on education funding and the state budget, are supportive. House Minority Leader Chad Campbell, D-Phoenix, sponsored a ballot referral in the 2011 session to repeal the business personal property tax. The measure had nine Democratic co- sponsors.
“I think there’s a lot of rhetoric around taxes and taxes being a hindrance to capital investment or job creation, etcetera, etcetera. A lot of times it’s just rhetoric and doesn’t have any meaning whatsoever,” Campbell said.
But the business personal property tax “really is an ill-advised tax that does hinder capital investment in this state.”
Campbell agreed with Biggs and Quinlan that raising the exemption would create more revenue for the state by encouraging businesses to buy more equipment.
But education groups are worried that will also eliminate tax revenue from the purchases that businesses would have made anyway, which would reduce the funding that school districts get. By law, the state must pay the difference.
Chuck Essigs, the director of government relations for the Arizona Association of School Business Officials and the interim executive director for the Arizona School Boards Association, said the state may opt to simply cut K-12 education funding if it has to pick up the tab for lower property taxes.
“There is a cost to this. What is that cost, and how will you make up that cost so you don’t have to cut school funding and you don’t have to raise homeowners’ taxes?” he said.
Some lawmakers will be deterred as well if there are lingering questions about the future of school funding. Rep. Rob Robson, R- Chandler, said he’d have serious concerns about any proposal that might lead to cuts in education.
“I would have tremendous heartburn to affect education right now.
We’ve taken a lot. I think we have to be very guarded, especially in that,” Robson said.