Brewer, lawmakers tangle over business tax cuts

PHOENIX - It didn't take long last year for Gov. Jan Brewer and the Republican-led Legislature to shake hands on a big package of corporate income-tax cuts and subsidies to spur the state's economy.

This year is a different story.

So far, the Republican governor and GOP lawmakers are struggling to agree on proposals for more business tax cuts.

Brewer expresses support for more tax changes to encourage business expansions and relocations.

But she also balks at some legislative proposals and presses for changes when she finds the cost in lost revenue too high at a time when the state's finances are still recovering from the recession.

"We are all proceeding with caution," said Michael Hunter, a senior Brewer adviser.

Last year's big tax cuts included phased-in rate reductions in the corporate income tax and an income-tax formula change that will benefit manufacturers.

This year, one legislative proposal would gradually eliminate income taxes on capital gains, which are profits on investments. A sticking point: As proposed, the elimination would cost the state hundreds of millions of dollars in revenue.

Other proposals have much smaller price tags, and consequently are stirring less controversy. Two would raise businesses' exemption on property taxes on equipment. Another proposal would allow corporations more time to use losses to offset future profits for tax savings.

Rep. Javan "J.D." Mesnard, the chief sponsor of a bill to both eliminate the capital gains tax and change the corporate losses formula, said he suspects the elimination will have to become a partial reduction to satisfy Brewer.

As originally proposed, the bill's gradual elimination of capital-gains income taxes on new investments acquired after 2011 would cost the state $387 million in lost annual revenue by the 2019-2020 fiscal year. That's an amount roughly equal to the combined state funding for Arizona State University and Northern Arizona University.

Mesnard said the anticipated changes likely would substantially cut the amount of tax revenue lost.

"If I had to guess, you're probably looking at a fiscal impact of somewhere between $50 million and $100 million," he said. "I hope we can get some resolution in the near future."

Hunter said an appropriate step this year would be to install a new partial income-tax deduction for certain capital gains. That would have to be set at an "appropriate percentage that is reconcilable with our budget situation," he said.

There also would have to be some additional funding for the state Revenue Department so tax officials could monitor the impact, which would provide information for considering future tax changes, he said.

And like last year, Brewer is insisting that business tax cuts don't take effect until at least mid-2013. That's when the temporary sales tax increase approved by voters in 2010 at Brewer's urging will end.

Brewer promised voters that the sales tax money would be used to help prop up schools and other state services during the recession, not to pay for business tax cuts.

"That desire to push that off is entirely hers," Mesnard said. "I'd just as soon have it in effect now. I am wanting to create an incentive for investment now, but I'm fully cognizant that she has a different view."

Rep. Chad Campbell, a leading Democrat on tax issues, said reducing the business equipment tax makes sense because resulting business activity would create jobs. But the capital gains tax is harder to justify, he said.

"They're just piling on," he said of Republicans. "It's a massive tax cut that cannot be paid for."

House Ways and Means Chairman Jack Harper admits that he'd vote for just about any business tax cut put before him. But the Republican from Surprise said fellow legislators don't seem to take into account that last year's tax cuts haven't taken effect yet.

"It's my opinion that we have already put the state on course to bring back the manufacturing sector and anything else now is probably just not remembering what was done last year," he said.