Saying it will make the state more competitive, the Senate Finance Committee voted unanimously Wednesday 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.
Wednesday's 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.
Hunter said the state is actively trying to lure firms to locate or expand here, and he said much has been done already to make the business climate more attractive, 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 won'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 Department of Revenue has strict standards under which it defines what is manufacturing.
Anyway, he said, eliminating the levy is consistent with existing Arizona tax policy. He said the state does not charge sales tax when companies purchase manufacturing equipment. All this does, Hunter said, is say the state should not charge sales tax for running that equipment.
That argument, however, brings up other questions.
For example, newspapers do not pay sales taxes on the purchase of the printing presses used to produce that product. But those companies – and everyone else with that kind of equipment – would remain subject to the tax.
“There is honestly a debate we should be having in Arizona about whether we should be taxing utilities at all,” Hunter said. 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.
Hunter said targeting manufacturing should help boost that sector of the economy, helping to diversify the state's economy.
Brewer's original tax-break request was solely for manufacturing. But Hunter said it makes sense to provide the same benefit for smelters, which are not technically defined as manufacturers, saying Arizona needs to remain competitive for them, too.
“It's not like the ore in the ground,” he said, where mines need to be where the metals are. “Smelting can kind of pick up and go.”