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Key lawmakers scaling back tax cut measure to avoid veto

An ambitious economic development bill meant to be a follow-up to the 2011 Arizona Competitiveness Package will jettison some of its more contentious provisions due to the Ninth Floor’s concerns that it will cost too much money.

But lawmakers and business groups pushing the bill say they’re optimistic that an agreement will be reached with Gov. Jan Brewer to cut state taxes on capital gains — the core component of the bill — even if they’re unable to achieve the outright elimination many GOP legislators sought earlier in the session.

Rep. J.D. Mesnard said he will strike two major provisions from his

HB2815 — one creating a tax credit to reimburse businesses for the costs of complying with regulations and another that would revamp the state’s job training program — to avoid Brewer’s opposition.

And now he’s adjusting a provision that would eliminate taxes on capital gains, which Mesnard called the “heart and soul” of the bill, to ensure Brewer’s support.

Mesnard, R-Chandler, said he has asked the Senate to put the brakes on his bill while he works out an agreement with the Brewer administration over a provision that would gradually phase out taxes on capital gains, which are taxed as regular income. Mesnard said he is working on amendments that will alleviate the governor’s concerns about the bill’s price tag, which was projected to be about $387 million by the fiscal year 2020.

Brewer in January listed a reduction in capital gains taxes as one of her “tax reform” objectives for the 2012 legislative session. But her staff warned lawmakers early on that she was unwilling to eliminate the tax entirely.

Mesnard said he and many of his colleagues would prefer elimination, and noted that the entire House and two Senate committees voted for that provision. But for the sake of reducing the tax as much as possible and avoiding a gubernatorial veto, Mesnard said he’ll scale the phased out elimination to a simple tax deduction, which would mirror laws on the books in about seven other states.

“I’m focusing on investment, so I want it to be as large as possible.

That’s why I pushed … a complete repeal,” Mesnard said. “But obviously there’s another big player, the governor, in these discussions. And she’s made it clear, to me at least, that the complete repeal is beyond where she’s willing to go. So we’re in the midst of somewhere between the status quo and the complete repeal.”

House Speaker Andy Tobin, who spent much of the off-session meeting with business groups on the proposed economic development bill, said the pared down version will provide a boost to Arizona’s recovering economy. But he said he would prefer the complete elimination of the capital gains tax and questioned why the Governor’s Office would oppose it, as long as it didn’t go into effect until after the Proposition 100 sales tax increase expires next year.

“I don’t know why Mr. Hunter would have a problem with a total phase- out. When he was in the Senate, I thought he supported that. So we’ll see,” Tobin said, referencing Brewer lobbyist and former Senate staffer Michael Hunter, who is negotiating with Mesnard on the bill.

“We put it out beyond the sales tax, so those are the parts I remember promising the governor we wouldn’t do anything while the sales tax was in force, because that seemed to always bother her.”

Mesnard said he is looking at changes to HB2815 that would reduce the fiscal impact of the capital gains reduction to $50 million or $100 million per year. He is hoping for a 50 percent deduction on all capital gains taxes, but said the fate of that proposal will depend on negotiations with the Governor’s Office.

“Being pragmatic about it, we’ve got to get a signature,” Mesnard said. “It has never been my intent to just throw something on her desk.”

Brewer spokesman Matthew Benson pointed to the governor’s tax reform outline from January, saying that she wants to reduce sales taxes, business personal property taxes and capital gains taxes. But she wants to do so, he said, without “blowing a hole in the budget.”

“We want to make sure that whatever step we take is measured and reasonable and doesn’t worsen the budget situation going forward,”

Benson said.

Arizona Chamber of Commerce and Industry President Glenn Hamer, whose group is a major proponent of the bill, said replacing the capital gains tax phase-out with a tax deduction would still be a significant achievement that would spur investment in Arizona. The point is to bring Arizona in line with competitor states and the federal government, which, unlike Arizona, tax capital gains at a separate rate than regular income.

And if Arizona reduces its capital gains taxes this year, Hamer said, it sets a precedent that might set the stage for further reductions or even an outright elimination at some point in the future.

“Moving in this direction by itself is a big deal and is welcome,”

Hamer said. “We’ll be happy if we can get a significant capital gains piece through that establishes a very important precedent that capital gains should be treated in a different way than ordinary income.”

Mesnard said a provision of the bill that will probably fall by the wayside would require the state and its political subdivisions, including cities, to provide tax credits to companies to offset the cost of some regulations.

The regulatory tax credit faces fierce opposition from municipal governments across Arizona, and Mesnard said Brewer has serious reservations as well. Mesnard said he’s willing to scrap the tax credit, a creation of the Goldwater Institute, if it’s weighing down the rest of the bill.

Tobin, R-Paulden, agreed with the move, saying people may need some time to get used to the brand new concept.

“I know there’s issues with the tax credit. Maybe that wasn’t ready for prime time,” Tobin said.

Mesnard is also planning on eliminating the job training expansion. He said Brewer is concerned with how the money in the $34 million fund is being used, while some Republican legislators such as Senate Majority Leader Andy Biggs and Sen. Ron Gould — who savaged the proposal in the Senate Appropriations Committee — have larger philosophical issues with the very existence of the fund, which is funded through a wage tax on all employers but isn’t available to all companies.

“I’m at the point where I’m removing what’s weighing it down,” Mesnard said.

Mesnard may also make changes to the other priority in the bill, which would lengthen the “carry-forward” period in which a new company can offset net operating losses by pushing income taxes to future years.

The bill would currently increase the carry-forward period from five years to 20, which would mirror federal tax code. Mesnard said he’d be willing to reduce the period to 10 or 15 years if need be. Tobin also said he’d be willing to make the change prospective only if Brewer has fiscal concerns with the provision.

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