PHOENIX — Saying it will make the state more competitive, the Senate Finance Committee voted unanimously this week to exempt manufacturers and smelters from having to pay tax on the electricity they buy and use.
Everyone else, however, would continue to pay the levy, at least in part because the state can’t afford the revenue loss.
The vote is a victory for Gov. Jan Brewer, who sought the special tax break in her State of the State speech. Michael Hunter, her financial adviser, said Arizona is one of fewer than a dozen states that makes manufacturers pay the levy.
The measure still needs approval of the full Senate before going to the House.
Hunter said the state is actively trying to lure firms to locate or expand here. Much has been done already to make the business climate more attractive, he said, like lowering the corporate income tax rate and allowing businesses to reduce their taxes by writing off the cost of equipment more rapidly.
But he said Arizona has to compete with other states that also are making the same pitch. And he said many of those firms — he wouldn’t disclose names because of promises of confidentiality — have said the tax is an issue.
“When the tax people and the financial planners for corporations are looking at their spreadsheets, all the different costs associated with doing what they want to do, electricity costs matter a lot,” Hunter said.
“It’s a liability,” he said. “We’re adding an 8 to 10 percent cost to something that’s already a cost-incentive center for equipment-intensive industries.”
The only opposition to this point has come from the League of Arizona Cities and Towns. Ken Strobeck, the league’s executive director, objected to a requirement for cities where these companies operate to also give up their local taxes on utilities.
Strobeck said, however, there’s a bigger problem.
“This definition of ‘manufacturing’ and ‘smelting’ is so broad, it could apply to just about everything,” he said. And that, Strobeck said, could pave the way for all sorts of other companies to claim they’re in the business of manufacturing something and therefore should also get their electricity tax-free.
Hunter insisted that’s not a problem, saying the Revenue Department has strict standards for defining manufacturing.
“There is honestly a debate we should be having in Arizona about whether we should be taxing utilities at all,” Hunter said. But he said that can’t happen because eliminating the levy entirely has a price tag of more than $500 million, a major chunk out of a $9.6 billion state budget.