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.

Congress is biased against small cars

The tax code punishes, encourages, rewards, and generally manipulates decisions we make, both big and small. And the tax code is crafted by politicians who are primarily motivated by ego and arrogance. They know what’s best, so just follow along and maybe a tax break is headed your way.

But what makes the current tax code a joke and the flat tax something to pine for, are the countless examples of policies that inherently conflict with one another.

“Congress is clearly biased against smaller cars,” says Joe Kristan, a CPA with Roth & Co. in Des Moines in today’s Wall Street Journal.

What? I thought Congress wanted everyone to own a Toyota Prius or Chevy Volt.

Guess not. The article points out that “this year Congress is running a large ‘bonus depreciation’ special on cars weighing more than 6,000 pounds, such as the Cadillac Escalade and Nissan Armada.

That ought to go over well at the Sierra Club.

What is a corporate bailout?

In the midst of ripping the state budget passed by the legislature and signed by Gov. Brewer, House Minority Leader Chad Campbell (D-Phoenix) also blasted the Jobs bill, which will, among other things, cut the corporate income tax from nearly 7 percent down to 4.9 percent.

Mr. Campbell:

“The truth is that Adams and Pearce tout a so-called jobs bill. But that’s also completely false. It’s actually a corporate-bailout package that gives away corporate tax breaks to giant, out-of-state retailers that won’t use it to create a single job here in Arizona; rather, rich CEOs likely will keep it to themselves.”

Since Ken Cheuvront left the legislature in 2010, the Democrats have had no sensible voice when it comes to sound tax policy. Mr. Campbell makes occasional attempts to be sensible when he argues for a more neutral (flatter) tax code, but he quite often seems to enjoy the rhetoric rather than the substance. For example, Mr. Campbell claims to despise corporate tax “loopholes” and targeted tax credits, but his solutions usually involve ending certain exclusions that total a few million dollars (think country club memberships), exemptions and credits (primarily tuition tax credits) in exchange for an overall tax increase (he once proposed a $3 billion tax increase with Rep. Bill Konopnicki (R-Safford)).

His broadside against the Jobs bill sounded just a little too much like a Keith Olbermann rant. Yes, there were corporate subsidies in the Jobs bill (which we opposed), but because of the wording in Mr. Campbell’s charge, the tax credits weren’t the primary target of his consternation. The targeted credits were, in fact, geared toward new jobs, which doesn’t make it good policy, but it does make it tough to claim that they go to “out-of-state retailers that won’t use it to create a single job here in Arizona.” In fact, “retailers” (what does he have against retailers?) isn’t even mentioned in the bill; the bill, given it’s reliance on capital investment, is geared toward manufacturers.

It appears Mr. Campbell’s beef is with the corporate income rate cuts. Populists can say what they want about broad-based tax rate cuts, but corporate bailouts they aren’t. Speaking of the rate cuts, it’s unclear – probably even for populists – how a rich CEO would pocket a corporate tax cut. But what if he could? After all, an owner of a small business – like Mr. Campbell – can pocket a tax cut, so why not a rich CEO?

Mr. Campbell’s attack on corporate tax breaks would have been more accurate had it been directed at SB1041 (aka Invest Arizona), which was an actual corporate tax break. Would he have joined all the Democrats who voted for this subsidy (if it’s any indication, Mr. Campbell voted for targeted tax breaks for renewable energy manufacturers) that Gov. Brewer ultimately – and rightly – vetoed? Who knows? Mr. Campbell missed the vote.