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: March 2, 2001

SUBJECT: Strike Everything Amendment to S.B. 1262

(corporate income tax rate reduction)

Purpose

Gradually decreases the corporate income tax rate to 6.81 percent by tax year 2006 and eliminates all corporate income tax credits, as well as some business 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 6.810 percent over a period of five years. Additionally, the strike everything amendment to S.B. 1262 eliminates all corporate income tax credits, some business tax credits and their corresponding carryforward provisions. Any credits that a taxpayer is entitled to before December 31, 2001, are not affected and may be carried forward.

According to the Department of Revenue, the amendment is considered revenue neutral and is not expected to impact the state general fund.

Provisions

1. Decreases the corporate income tax rate from 6.968 percent to 6.810 percent over a period of five years. See table below:

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

· Employment by qualified defense contractor;

· Property taxes paid by qualified defense contractor;

· Increased employment in military reuse zones;

· Increased research activities and technology training;

· Construction costs of qualified environmental technology facility;

· Pollution control equipment, and alternative fuel vehicles, alternative fuel delivery systems and vehicle refueling equipment and infrastructure;

· Employment of temporary assistance for needy family recipients;

· Corrective action costs for underground storage tanks;

· Coal consumed in generating electricity;

· Participating in an agriculture preservation district;

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

· Donation of a school site or donation of a vehicle to Wheels to Work.

3. Eliminates various individual tax credits available to business owners and corresponding carryforward provisions on January 1, 2002. Specifically, credits will be eliminated for:

· Increased research activities;

· Property taxes paid by a qualified defense contractor;

· Pollution control equipment; and,

· Construction materials incorporated into qualifying facilities.

4. Makes technical and conforming changes.

5. Contains a general effective date for the tax rate reduction. All other provisions are effective from and after December 31, 2001.

DG/jas