PHOENIX — Arizona businesses are likely to get a tax break as part of a deal for a new $10.6 billion state budget.
Both the House and the Senate proposed plans based on the belief there's enough money coming in to provide some tax relief. And both plans target that money for business — with some identical elements.
One element deals with the question of how much businesses pay in property taxes. And that starts with the basic question of setting the value of the property.
Historically, residential property has been assessed at 10 percent of what's called its "full cash value," a figure that is supposed to approximate market value. So a $200,000 home is assessed for tax purposes at $20,000
By contrast, most businesses for years have had a 25 percent assessment ratio. So a $200,000 business is assessed at $50,000.
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Two years ago, lawmakers agreed to cut the business assessment ratio a bit, to 20 percent — but over 10 years. One element of both the House and Senate packages would cut the eight years remaining in that schedule in half.
Part of the impetus for that goes beyond the inequity with residential rates.
The state constitution requires that businesses pay annual property taxes not only on land and buildings but also on equipment, ranging from presses to file cabinets. Lawmakers concede that makes Arizona less attractive for manufacturers — the ones with the most expensive equipment but also, generally speaking, the ones with higher pay scales than service-industry jobs.
That goes to the other part of a tax package that has both House and Senate approval.
The value of business equipment is computed on schedules set by both law and the Department of Revenue. It starts at the actual price and is depreciated each year.
Both the House and Senate plans provide for an accelerated depreciation schedule. But that will be available only for new purchases; existing equipment will continue to be valued according to the old formula.
Bipartisan package of tax cuts
Those two elements make up the entire tax-cut package negotiated between Senate Republicans and Democrats. House Republicans — who did not have talks with Democratic leaders there — want more. And the biggest and most contentious of those differences is designed to provide across-the-board tax relief for corporations.
Lawmakers last year approved a 10 percent cut in individual income taxes over two years.
That helps not only people with their own taxes but also partnerships and S-corporations, so named for a section of the Internal Revenue Code. These companies have no corporate income, with all earnings flowing to the individual owners who report it as personal income, which is taxed at lower rates.
House Republicans contend C-corporations also deserve a break and want a 2.5 percent cut in the corporate tax rate, taking it to 6.8 percent.
Only thing is, that change alone reduces state revenues by $28 million — a figure the Senate negotiating team found unacceptable.
That cut in corporate income taxes is only part of what House Republicans want to provide above and beyond what Senate negotiators find acceptable.
Another provision would provide a new tax credit for some insurance companies doing business in the state. House Majority Leader Tom Boone said this simply provides these firms equal treatment, as they pay taxes based on their premiums rather than corporate income.
But not all firms would qualify. Only companies with at least 150 employees at a single location in the state would be eligible — and only if they have at least 50,000 square feet at a single location and administrative expenses at that location of at least $5 million.
Boost in R&D tax credit
Another House proposal would boost the tax credit for research and development to 22 percent of the first $2.5 million in qualifying expenses, up from 20 percent, with a 13 percent credit for the balance instead of the current 11 percent.
Rep. Russell Pearce, R-Mesa, who chairs the House Appropriations Committee, said there is no reason a $10.6 billion budget can't handle more in tax cuts than $7 million — the cost of the two changes on which both chambers agree.
But Senate President Tim Bee said that ignores some facts.
Key to that, he said, is last year's cut in individual income taxes. The second half of that cut, which takes effect this year, computes to $178 million in new revenue reductions.
On top of that, Bee noted that last year's budget deal included a three-year suspension of a special state property tax earmarked for education. Not collecting that tax this coming year cuts state revenues another $226 million, he said.
Proposed tax breaks
Business tax breaks proposed in the budgets passed by the state House and Senate
1. Property tax relief (House and Senate budgets)
This measure would accelerate the reduction of business property taxes to a 20 percent rate. The rate would go down to 20 percent in four years instead of eight.
2. Equipment tax relief (House and Senate)
The state would speed up the rate at which it says equipment depreciates, meaning businesses will pay less tax on their new equipment year after year.
3. Corporate income tax relief (House)
This measure would give "C" corporations a 2.5 percent tax cut, making their rate 6.8 percent.
4. Insurance company tax credit (House)
Insurance companies with at least 150 employees at a single location in the state would qualify, but only if they have at least 50,000 square feet at a single location and administrative expenses at that location of at least $5 million.
5. Research and development tax credit (House)
This measure would boost the tax credit for research and development to 22 percent of the first $2.5 million in qualifying expenses, up from 20 percent, and offer a 13 percent credit for the balance instead of the current 11 percent.