ARIZONA STATE SENATE

RESEARCH STAFF

DENISSE GEE

LEGISLATIVE RESEARCH ANALYST

FINANCE COMMITTEE

Telephone: (602) 542-3171

Facsimile: (602) 542-7833

TO: MEMBERS OF THE SENATE

FINANCE COMMITTEE

DATE: February 8, 2001

SUBJECT: Strike Everything Amendment to S.B.1262 (corporate income tax rate reduction)

Purpose

Gradually decreases the corporate income tax rate to five percent by tax year 2009 and eliminates a number of corporate income tax credits on January 1, 2002.

Background

Arizona corporate taxable income is calculated beginning with federal taxable income. Therefore, by conforming Arizona law to the Internal Revenue Code, any subtractions allowed under federal law in the calculation of federal taxable income are allowed under Arizona law. From federal taxable income, certain additions and subtractions are allowed to reach Arizona taxable income. After calculating tax liability, corporate taxpayers may take advantage of a number of credits to reduce tax liability. The tax credits that currently exist in Arizona corporate tax law are nonrefundable credits; therefore, any credit amount greater than a firm’s tax liability will not be refunded. A number of the credits, however, allow the corporation to carry unused credit forward for use in future tax years.

Currently, the corporate income tax rate is 6.968 percent of net income or $50, whichever is greater. The strike everything amendment to S.B. 1262 gradually decreases the corporate income tax rate to five percent over a period of nine years. Additionally, the strike everything amendment to S.B. 1262 eliminates various corporate tax credits and the corresponding carryforward provisions.

According to the Department of Revenue the net cumulative fiscal impact of this bill will be a $90.2 million reduction in tax revenues by FY 2005-2006. A formal fiscal note has been requested from Joint Legislative Budget Committee staff.

Provisions

1. Decreases the corporate income tax rate from 6.968 percent to 5.0 percent over a period of nine years. See table below:

2. Eliminates various corporate tax credits and corresponding carryforward provisions on January 1, 2002. Specifically, the following corporate credits will be eliminated for:

· Employment by qualified defense contractor;

· Property taxes paid by qualified defense contractor;

· Research & development expenses;

· Increased research activities;

· Construction costs of qualified environmental technology facility;

· Pollution control equipment;

· Corrective action costs for underground storage tanks;

· Solar hot water heater plumbing stub outs and electric vehicle recharge outlets installed in houses constructed by taxpayer; and

· Donation of school site.

3. Makes technical changes for conforming purposes.

4. Provides for a general effective date.

DG/jas