Tax Changes Coming for Arizona

Arizona is up there on the list of states in real budget trouble, along with the usual crowd like New York and California. Recently Governor Jan Brewer gave hints that she would propose tax increases and budget cuts to solve Arizona’s budget shortfall—projected to be nearly $5 billion across two years—in her State of State address on Monday. Last year Arizona struggled to pass a budget and Jan Brewer pushed for a 1 percent temporary sales tax increase that was not supported by Republicans or Democrats. The state ended up cutting some spending and doing some accounting gimmicks and selling the capitol, postponing their budget reckoning to this year. Brewer said she would provide details of her new tax plans on Friday and asked for proposals by others.

Republican legislators have already given some proposals for tax changes in a bill unveiled last week. The Arizona Republic has details:

Tax Cuts:

The plan envisions more than $600 million in tax relief by June 2016:

• $200 million in individual income-tax relief by reducing rates 10 percent.
• $200 million in corporate income-tax relief by reducing the rate to 4.5 percent from 6.97 percent.
• $250 million in property-tax reductions by eliminating the state equalization rate.

Tax Incentives/Other:

• Cash rebate to employers that add $2 million to their payrolls and keep those jobs for five years.
• A “deal-closing fund” that would allow the state to offer out-of-state employers last-minute incentives, including tax breaks and infrastructure construction.
• The bill’s third job-creation provision involves tweaking Arizona’s existing job-training program. All state employers pay a job-training tax, which collected $15 million in 2009. The fund helps companies pay for new employee training when a skilled workforce is not immediately available…However, not every company that pays the tax uses the program, House Republicans say. The new bill proposes eliminating the job-training tax and instead funding the program via participating companies’ withholding taxes.

Tax breaks to encourage hiring is a bad idea. The system can be gamed and it likely only provides a short-term employment jump. The “deal-closing fund” seems like a very bad idea. Apparently nine other states have such funds. I am not sure what would stop a business from threatening not to move to Arizona until they were awarded something in the fund. And in any case, you would have politicians deciding which businesses deserve a little extra to close the deal.

Of course cutting taxes alone in Arizona will not fix their budget. Maybe Brewer will have a decent plan tomorrow. Or maybe it can be put off just one more year.