PHOENIX - Arizona's self-employed could be in line to get a tax break designed to partly offset a $900 average increase in what they're paying to the federal government.
The state House approved legislation Wednesday to let those who work for themselves deduct up to 2 percent of what they earn before computing what they have to pay in state income taxes. That deduction, which eventually could cost the state $58 million a year, would apply on the first $113,700 of a self-employed Arizonan's income.
But the actual savings to individuals won't make up for what the feds are taking. The most someone might see in actual cash is in the neighborhood of $103 a year.
The measure, HB 2264, now goes to the Senate.
The original legislation proposed by Rep. Tom Forese, R-Chandler, dealt only with a property tax break. Arizona's property tax system is considered an impediment to economic development, especially when trying to land new manufacturing operations.
Part of the reason is the property is assessed for tax purposes at a higher rate than homes, condos and apartments. But the real kicker is that businesses in Arizona also must pay an annual levy on every piece of equipment they have, from major presses down to individual desks and file cabinets.
HB 2264 would cut the property tax assessment by 75 percent on any new construction or equipment purchased beginning next year, resulting in a similar reduction in property taxes owed.
To qualify, however, a company would have to invest at least $25 million within three years and create at least 125 new jobs in urban areas. The standard elsewhere would be a $2 million investment and 15 jobs. There would also be requirements on wages paid.
It was only when the measure was making its way through the House that Forese tacked on the tax break for the self-employed. He said it provides some balance to the rest of the legislation, which would benefit only large corporations.
But there's another dynamic at work.
When the president and Congress came up with a last-minute deal to avert the "fiscal cliff" at the end of 2012, they did not agree to keep in place lower payroll tax rates. Those lower rates, in effect for two years, had reduced the federal self-employment tax by two percentage points, to 13.3 percent of net earnings. The result is that the rate bounced back to 15.3 percent on Jan. 1.
Forese said the proposed 2 percent deduction in income computed for state taxes for the self-employed would help make up for that.
"The issue that we're having right here is a negligent federal government that does not understand how fragile our economy is and how bad of an idea that is to raise taxes when business is about to have its comeback," he said, calling the expiration of the lower tax rate a "tax increase."
He got bipartisan support.
Rep. Ruben Gallego, D-Phoenix, said the Republican-controlled Legislature has pushed through plenty of tax breaks "for large corporations that did not need it."
"This tax cut will directly affect a lot of our small-business owners," he said. Gallego said the $900 hike by the feds is going to hurt them. "It's a mortgage for a lot of people, it's a rent payment," he said.
That's also the assessment of House Speaker Andy Tobin, R-Paulden, who said middle-class "folks got hurt the most."
Forese acknowledged that the "fiscal cliff" deal also resulted in tax rates going up for others, including the worker side of the payroll tax. But he said his legislation cannot fix everything the federal government has done.
Wednesday's 32-27 House vote reflected objections from lawmakers on both sides of the aisle.
Rep. John Kavanagh, R-Fountain Hills, said the real solution to encouraging economic growth is "broad-based tax relief" where everyone gets a break, not just certain business or individuals.
"Let's start lowering the Arizona personal income tax to zero," Kavanagh said. "Then the CEOs will want to live here because it's better for them. And they'll locate their companies here because they don't like long commutes."
Rep. Debbie McCune Davis, D-Phoenix, said the state cannot afford the loss of $58 million a year. And she pointed out the Legislature has yet to adopt a budget for the coming year.
"I haven't seen that we're addressing issues related to Child Protective Services, I haven't seen that we're doing what we need to do with education," she said. "Giving a tax break without knowing where the money is coming from isn't sensible."
Rep. Eddie Farnsworth, R-Gilbert, said he could not support generous property tax breaks. He said the net effect of lower taxes for some would be that cities, counties and school districts, which rely on these taxes, will have to get their revenues from others.