Republican lawmakers are moving to cut income tax rates for Arizona corporations by nearly half – a move legislative budget analysts say eventually could cut state revenues by nearly $670 million a year and take about $5.6 million in annual revenue away from Gilbert.
The party-line vote last week by the House Ways and Means Committee came over objections from all the Democrats on the panel who questioned both the wisdom and the need to take the tax rate from its current 4.9% to 2.5% by 2026. And that follows a series of cuts a decade ago that dropped the rate from nearly 7%.
“There are better places we can invest more than half a billion dollars than on corporate welfare,’’ said House Minority Leader Andres Cano.
“We could give our teachers a $10,000 raise, taking them from 44th in the nation to 19th,’’ the Tucson Democrat said. “We could send relief to Arizona renters and homeowners by quadrupling the state’s current investment in the Housing Trust Fund.’’
But Rep. David Livingston, R-Peoria, the author of HB 2003, pointed out that even legislative budget staffers concede the estimates of lost revenues are “highly speculative.’’
Some of that is because corporations have great flexibility in how and when they compute and pay their taxes. That had led to a volatility over the years.
In 2013, when the corporate rate was close to 7%, collections were $662 million. They hit $368 million when the rate reached 4.9% but rose to $847 million by 2021, even at the lower rate.
What the measure also is, Livingston said, is a matter of equity.
The 4.9% rate applies to what are known as “C-corps,’’ called that because that’s how they’re organized under that chapter of the Internal Revenue Code. The profits of these corporations are directly taxed, as are the distributions to shareholders.
By contrast, “S-corps’’ pay no corporate taxes, with the profits or losses passed on to individual shareholders who report them on their personal returns. And the individual tax rate in Arizona is 2.5%
But not every company can organize that way, with federal law limiting them to companies with 100 or fewer shareholders, all of whom have to be U.S. citizens or residents.
David Lujan, CEO of the Children’s Action Alliance, questioned the need for further corporate tax relief.
He cited figures from the state Department of Revenue that 79% of corporations pay only the $50 a year minimum state tax. That’s because many are able to reduce their reported profits because of various tax credits the state makes available, credits these companies can bank for up to 12 years if they had no tax liability.
In fact, Lujan said, those corporations currently have more than $1 billion in “banked’’ credits that they will be able to use in future years if they ever do have taxable income.
“We think a better economic strategy would be to focus on investing in our workforce,’’ he told lawmakers.
Lujan said many factors go into why companies move choose to locate or expand. And he said one of the biggest factors is not the tax rate but the ability to find qualified workers.
“This bill we believe will make it even more difficult to invest in strengthening our workforce,’’ Lujan said. “It’ll make it more difficult to invest in higher education and job training and K-12 education.’’
Livingston questioned that claim.
“We invested record amount of dollars into K-12 last year and in the previous year,’’ he said. And Livingston said strong state revenues also allowed the state to pay down much of its debt, meaning more dollars are available for not just education but other needs like transportation.
“If we cut taxes, there’s an ability – not a guarantee, but an ability – to pay people more or cut (the cost of) products,’’ Livingston said.
Rep. Neal Carter, R-Queen Creek, had a similar argument.
“The payor, the person remitting the receipt, is a corporation,’’ he said. “But the incidence of the tax, the person actually bearing the burden of it, are consumers and employees.’’
But Rep. Seth Blattman, D-Mesa, said this is about more than just lost revenue for the state.
He pointed out that cities and towns receive 18% of individual and corporate income tax collections, computed from what was paid two years prior. And legislative budget staffers figure that by 2029 the combined loss to local communities will exceed $120 million.
Rep. Justin Heap, R-Mesa, however, said he was “skeptical’’ that cities actually will end up losing revenues.
“The cities that I have talked to in Arizona are competing to try to get these tech jobs,’’ he said, the kind of jobs he believes a lower corporate tax rate would attract. “They want these high-paying jobs in because that increases revenue of the city, it brings in more money for their economies, and it helps them.’’