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 Senate plans claim there’s enough money coming in to provide some tax relief. And both plans target that money for businesses — with some identical elements.
One 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.
It is that assessment figure against which the tax rate is computed. Everything else being equal, that means businesses have paid 2 1/2 times as much as identically valued homes.
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.
The state constitution requires that businesses pay annual property taxes not only on land and buildings but also on equipment — from presses to file cabinets. Lawmakers concede that makes Arizona less attractive for manufacturers — the ones with the most expensive equipment and 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 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.
Those two elements make up the entire tax cut package negotiated between Senate Republicans and Democrats. House Republicans 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 would reduce state revenue by $28 million, a figure the Senate negotiating team finds 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, R-Peoria, 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 firms with at least 150 employees at a single location would be eligible — and only if they have at least 50,000 square feet at a single location and administrative expenses at that site of at least $5 million.