Speaking of Superlatives

The Arizona legislature passed a bill this year that would continue to reduce commercial property taxes, begin a gradual phase down of corporate income taxes (from nearly 7 percent down to 4.9 percent), and subsidize new hires for some companies.

The corporate income tax cut doesn’t take effect until 2013 and it won’t be fully phased in until 2016 and the property tax reductions take four years to be phased in.

We supported parts of the package (property tax reduction and corporate income tax cut) and opposed other parts (the subsidies). On balance, the package was okay–not great, but better than kick to the head.

The bill was certainly not “once-in-a-generation” (AZ Chamber), nor was it “the best bill that’s ever been passed in Arizona for the economy” (Greater Phoenix Economic Council).

It wasn’t even the best tax package in the last five years. In 2006, Republicans passed (and Democrat Gov. Napolitano signed) the largest tax cut in Arizona history. The 2006 package included an across-the-board reduction in personal income taxes (how the vast majority of businesses are taxed) and an across-the-board reduction in state property taxes (commercial and residential alike).

In Arizona, less than 1 percent of C corp taxpayers (those who pay the corporate income tax) account for about 65 percent of the total corporate income taxes collected. In other words, very few companies pay the corporate income tax and the tax collects little revenue relative to total tax collections (it’s high water mark was about 10 percent of total revenue collected by sales and personal income taxes).

Now, part of the reason there aren’t many companies organized as C corporations in Arizona is very well due to the fact that Arizona has a high marginal corporate tax rate (3rd-highest in the western U.S.). Another reason is that the corporate tax rate in Arizona is 35 percent higher than the individual rate. Since businesses aren’t required to organize as C corporations, the vast majority of them do not (NFIB estimates that between 75% and 80% of businesses organize under the personal income tax system). The tax code should be neutral as to what kind of business you’re in and, accordingly, the rates should be the same. This is why we’ve long supported a corporate tax cut.

Is the package good? Yes. Is it the best ever? Not even close.