If Yogi Berra were a political analyst, he might describe the May 3 passage of HB2815 as the second consecutive year that the Legislature passed a once-in-a-generation competitiveness package.
The work put in on this year’s package is a testament to the commitment of Gov. Jan Brewer, House Speaker Andy Tobin and Senate President Steve Pierce to make Arizona the absolute best place to grow a thriving business.
The centerpiece of the bill was a landmark cut in the capital gains tax. Before passage of HB 2815, Arizona taxed capital gains like regular income. But thanks to the Legislature, we will phase in reductions of 10 percent, then 20 percent and finally 25 percent in the tax on capital gains, resulting in a 3.4 percent effective tax rate on capital gains.
This is big — the kind of stuff that wins plaudits from The Wall Street Journal and tax policy observers from around the country. Arizona is now in select company, as highlighted by the work of Arizona Chamber Foundation research analyst Chris McIsaac, whose cheekily titled policy brief, “Unchain the Gain,” demonstrated the economic power behind lower taxes on capital gains.
According to McIsaac’s paper, Arizona joins only eight other states that extend broad preferential treatment to capital gains. Rep. J.D. Mesnard of Chandler deserves kudos for his commitment to seeing capital gains tax reform through to the end.
The Chamber Foundation’s presence was also felt in another key element of the bill — an extension of the number of years businesses can carry a net operating loss (NOL) forward to future tax years. The bill extended Arizona’s five-year carry forward to 20 years, aligning the state with the federal government.
As the policy brief “Net Operating Loss in Arizona” states, an improved NOL policy is good news for start-ups and companies with big capital investments that might suffer a loss, but then see profitable years in the future.
A longer NOL period means that profitability for tax purposes can be measured over a time period that more closely corresponds to a business’ investment horizon. By aligning Arizona with the feds and regional competitors like Colorado, businesses now know that they will have more time to absorb early losses and offset them against future profits.
HB2815 also encourages capital investment in the near term by offering bonus depreciation for assets placed in service during 2012. This provision, which piggybacks on existing federal tax policy, is designed to spur economic activity by lessening the tax burden on businesses that purchase equipment during the next year.
In addition to encouraging the purchase of new business equipment, the package nearly doubles the amount of personal property that a business can exempt from taxation from around $68,000 to around $125,000 beginning in FY 2014.
This is a nice insurance policy just in case Proposition 116 fails at the ballot this fall. If passed, the proposition will amend the Arizona Constitution to reset the personal property tax exemption for new equipment and machinery purchases to an amount equal to the earnings of 50 Arizona workers, or approximately $2.4 million.
Last year’s competitiveness package included a three-year, $3,000 per year income tax credit for each net, new qualifying job created by employers in the manufacturing field and other export-oriented industries. Among other requirements, the jobs must pay at least the median county wage and cover 65 percent of health benefits. HB2815 removes the cap on the number of jobs for which an employer can claim the credit in a year, which is currently 400.
HB2815 also expands eligibility for an income tax credit previously reserved for companies in the renewable energy sector to all qualifying manufacturers. Building on the success of the current tax credit, this eligibility expansion will encourage job creation and capital investment in other areas of the manufacturing sector.
We were also pleased to see the Legislature pass SB1442. The manufacturing sector of Arizona’s economy has been a continued source of high-wage, permanent job creation and capital-intensive construction projects. For the largest manufacturers, a lack of necessary infrastructure discourages investment and creates a substantial barrier to new growth.
Passage of SB1442 signifies Arizona’s commitment to attracting and retaining world-class manufacturing projects by allowing government to share in the financing of necessary infrastructure. The measure is limited to the large, high-dollar projects that create sudden and significant needs to expand public water, waste and transportation infrastructure. This bill is absolutely critical in advancing Arizona’s standing as an attractive state for manufacturing.
The governor and the 50th Legislature have whipped up a powerful job creation cocktail over these past two years.
This year’s good work combined with last year’s phased-in 30-percent corporate income tax reduction, improved business property tax picture,
$25 million per year deal-closing fund, a 100-percent elective sales factor for manufacturers, along with passage this year of SB1046, which extends that treatment to service providers, is absolutely monumental.
All of these tools in the economic development toolbox are poised to make the still-new Arizona Commerce Authority a lean, mean, job attracting machine.
The formula is already working. We’re gaining jobs. Chief Executive magazine just named Arizona a top-10 state for business climate. The Kauffman Index of Entrepreneurial Activity ranked Arizona the most entrepreneurial state in the country.
Arizona’s rise in these important rankings did not happen by accident. Enacting pro-growth policies like those contained in HB2815, SB1442 and SB1046 send the message to job creators that Arizona is open for business.
— Glenn Hamer is president and CEO of the Arizona Chamber of Commerce and Industry.