PHOENIX - Gov. Jan Brewer and Republican lawmakers are touting tax cuts and incentives as the key to boosting Arizona’s dismal economy, but they’re likely in for a long 2011 legislative session as they try to hash out the details of whose plan to use.
Brewer on Nov. 29 unveiled the framework of her plan, which would cut corporate income tax rates from nearly 7 percent to about 5 percent in 2013 and slash capital gains taxes for small businesses, among other things.
But negotiations could get contentious when they try to figure out what do about property taxes.
Senate Republicans are talking about lower business property tax rates and capping increases in property taxes. But because of the way property taxes in Arizona are structured, lowering the rates is difficult to do without raising taxes on homeowners, which Brewer said she won’t agree to.
Some lawmakers, like incoming Senate President Russell Pearce and Senate Majority Whip Steve Pierce, say there are ways to lower business taxes without raising taxes on private homes, though the details are murky and no one has presented a full plan yet.
The governor, on the other hand, said she wants to expand the state’s enterprise zone program, which gives property tax breaks to qualified businesses that locate in designated areas. Brewer’s chief of staff, Eileen Klein, said the administration is still filling in many of the details on issues like property and capital gains taxes.
Brewer also said she wants to create more tax breaks for research and development, especially for companies that work in partnership with Arizona’s universities, and create addition incentives for “angel investors” that provide capital to small businesses.
Those plans, however, are likely to meet some resistance. Pearce opposes the enterprise zone program, which he says amounted to government picking winners and losers in the marketplace. He also opposed a $25 million deal-closing fund that the state would use to lure new businesses here.
Other parts of Brewer’s plan, which the governor referred to as “consensus proposals,” appear to have broad support in the Legislature. The reduction in corporate income taxes, for example, is widely supported by legislative Republicans. Brewer also listed the cuts in capital gains taxes for small businesses as a consensus item.
Another consensus proposal is increasing the state’s sales factor – the percentage of in-state companies’ out-of-state transactions that are exempted from corporate income taxes – from 80 to 100 percent, meaning Arizona-based companies wouldn’t pay income taxes on goods they sell in other states.
The corporate income tax reduction wouldn’t happen until Proposition 100, the temporary 1-cent sales tax increase that voters approved in May, expires in 2012. Even many of the Legislature’s most ardent tax-cutters say it would be unwise to lower taxes at a time when the state is expecting a $1.4 billion budget deficit for the next fiscal year.
The consensus, however, may be limited only to Republicans.
Democrats are casting doubts on the corporate income tax plans, saying the reductions would be disastrous for the budget because it would cost the state hundreds of millions of dollars at the exact same time when the state would lose the extra revenue from Proposition 100.
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