Members in the state House of Representatives did something unusual last week: They killed a major corporate tax break.
It was a surprising development in a GOP-controlled Legislature that has embraced tax breaks and incentives to attract business; every year, there is some sort of tax cut done in the name of making Arizona competitive.
Sponsored by Rep. Jeff Weninger, R-Chandler, and backed by the Arizona Manufacturers Council, Honeywell, Raytheon and other large employers, the bill proposed a number of tax incentives. They included sales-tax breaks that would grow over time, a faster write-down of the property tax charged on manufacturing equipment and tax credits for creating jobs.
The biggest portion of the $20 million package — estimated at $10 million — was allowing companies to get a refund on tax credits that they otherwise could not claim because they had no tax liability.
When House Bill 2492 was put on the examination table, aka a meeting of the 60-member House, lawmakers found some fatal symptoms, compounded by a less-than-robust fiscal environment. The bill found ways to offend various factions of lawmakers, enough to lead to a 36-23 defeat with Democrats and Republicans on both sides of the issue.
Here’s an autopsy of what led to the demise of a bill that, in other circumstances, might have received a warm reception.
Both Republicans and Democrats said they have problems with the state picking winners and losers, that is, which businesses or industries get relief from taxpayers and which do not. It’s a perennial debate at the Legislature when it comes to doling out tax breaks, and splits Democrats and Republicans alike.
“I would love, in my business, to say I won’t pay taxes so I can put the money back into my business,” said Rep. Darin Mitchell, R-Litchfield Park, who voted against the proposal. He runs a small home-inspection business.
Rep. Pamela Powers Hannley, D-Tucson, noted the bill was written to benefit companies with 2,000 or more employees.
“This does nothing to help small business, unless, of course, trickle-down reaches them,” she said. That was a reference to the theory that tax breaks will lead to a more robust economy that will “trickle down” to smaller companies as well as individuals.
She also objected to a sales-tax break, estimated to cost $4 million, that would let large manufacturers forgo much of their tax liability. Weninger said there was an agreement to cut out that provision.
For another group of lawmakers, the basic question of how to pay for the package was a deal killer.
Rep. Vince Leach, R-Tucson, questioned how the state could afford the $10 million price tag for the refundable credit when the state-budget outlook is tight.
“I don’t have $10 million in my pocket to fund this program,” said Leach, who is a member of the House Appropriations Committee.
The committee already is grappling with the “many wants, needs and desires on the revenue we have,” he said. Legislative budget analysts have estimated the state has a surplus of about $46 million as it approaches a new budget year.
Acknowledging the public’s demand to boost school funding, Gov. Doug Ducey has proposed $114 million in new spending on K-12. In addition, lawmakers have said they intend to increase payments to contractors who provide services to people with developmental disabilities and people in state nursing homes. Those contractors have complained the increase in the state minimum wage to $10 an hour is straining the funding they have received from the state, and they may have to cut services without more. Those costs could top $74 million.
Besides, Leach said, he objects to the concept of a refundable tax credit. That’s when a company could cash in a tax credit that they can’t use to reduce their taxes.
“To say we’re going to write a check is troublesome to me,” he said.
Many Democrats said the state needs to boost education funding, rather than continue to hand out tax breaks.
If lawmakers really want to invest in Arizona, they should put that money into education, said Rep. Isela Blanc, D-Tempe.
Ducey’s budget calls for $114 million in new money for the state’s K-12 system, and there is widespread agreement the state needs to pump more money into schools.
Rep. Ken Clark, D-Phoenix, said the bill does nothing to help the state’s small businesses. These locally based operations suffer, he argued, while the state gives away money to large companies, which may leave the state.
Rep. Kirsten Engel, D-Tucson, said the state has not fulfilled its obligation to properly fund the state’s schools. She can’t support a tax giveaway at a time that schools need more money, she said.
The bill was written to allow companies to tap $1 billion in income-tax credits they currently can’t use. That’s because the firms essentially don’t owe taxes to the state, due to other breaks they have received. With no tax liability, the research-and-development credits have piled up.
HB 2492 would have made the tax credits refundable: up to $2.5 million per company per year. They could use this money to pay for construction costs or other expenditures.
For Rep. Eddie Farnsworth, R-Gilbert, this part of the bill pushed him firmly into the “no” column.
Lawmakers have been generous enough with tax credits, he said. They removed the cap on the R&D credit years ago, then gave companies up to 15 years to use the credit. Allowing a company to transfer it to uses other than research and development “astounds me,” Farnsworth said.
“I don’t think we need to, in the name of competition, give away the store,” he said.
Mitchell said he decided long ago that this bill wasn’t salvageable. He’s not a fan of the secrecy that surrounds most tax credits: By state law, the Department of Revenue can’t disclose how much of a credit any individual firm gets, so it’s impossible to gauge whether the boost from the state actually spurred economic activity, he said.
Besides, giving away tax credits without an ability to know what they are doing robs lawmakers of the ability to control how state revenues are spent, he said.
A number of lawmakers said a refundable tax credit amounts to the state giving a gift to a business — something barred in the state’s Constitution.
House Speaker J.D. Mesnard, R-Chandler, didn’t go that far, preferring to call the idea of letting a business cash in up to $2.5 million in an unused credit a ”subsidy.” That made him uncomfortable enough to vote “no,” even as he acknowledged the economic benefit major businesses such as Intel and Raytheon bring the state.
The bill’s defeat might be a temporary setback, as supporters vowed to regroup and opponents noted the swarm of lobbyists already at work to revive the measure.
The bill got the support of 23 of the 59 lawmakers who voted last Thursday. One member recused himself from the vote, citing a potential conflict of interest. If supporters can switch eight votes from “no” to “yes,” the bill can continue.
Supporters argued the tax break is a way to keep Arizona competitive in the manufacturing sector, which sets in motion a string of other economic activity from suppliers to retail growth to local businesses that cater to a growing workforce.
Weninger said he saw firsthand the benefit from attracting a large business to the state or inducing it to expand, as he described his bill two weeks ago. When he served on the Chandler City Council, Intel’s expansion triggered so much economic activity and sales-tax growth that the city was paying for road projects with cash instead of bonds, he said.
And Rep. Randy Friese, D-Tucson, said bills such as this might be the only way to get more money flowing into state coffers, given the Legislature’s aversion to tax increases. He voted “yes.”
Ducey has vowed to not raise taxes and is intent on working to reduce the income-tax rate to as close to zero as possible.
His tax-cut proposal — indexing the personal exemption on income taxes to inflation — won unanimous approval from the House last month and is now before the state Senate. Its price tag is more modest: an estimated $3.6 million.
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