Historic tax reform, reductions tops list of accomplishments for small business
The second regular session of Arizona’s 55th Legislature adjourned June 25, 2022, with some historic victories for small business.
From the second regular session (2022)
Won Historic Reduction in Personal Property Taxes
House Bill 2822 sets a new valuation factor of 2.5%, for property tax purposes, for classes considered business personal property that are acquired and initially classified on or after January 1, 2022. This significant reduction in the rate down to effectively the lowest constitutionally allowed amount, in combination with the exemption of the first $207,366 of value, will nearly eliminate this tax as a going concern for most small businesses. And for those businesses that exceed the exemption amount, the rate of 2.5% will drastically reduce the taxes owed and potential liability in the case of any audit.
Secured Commercial Property Tax Assessment Relief
Reduces the assessed valuation percentage on all commercial properties over two years to 15% by 2027. In the 2021 regular session, NFIB advocated for the initial 0.5% annual reductions from 18% to 16% over four years (2022-2025). Senate Bill 1093 continues that reduction for another two years to bring the assessment ratio down to 15% by 2027. This has been a collective goal of the business interests at the Capitol since the 1990s.
Successfully Lobbied to Eliminate the State Equalization Tax Rate
While determined by the state, this tax is collected through each county and is itemized on the property tax statement for property owners. Although its name varies by county, this rate may appear on a property tax statement as School Equalization or an abbreviated name. So any property tax payer can look at their prior years statement to see the savings. (House Bill 2866)
Obtained Asbestos Litigation Relief
Senate Bill 1157 is commonsense legislation that addresses asbestos litigation abuse and the practice of over-naming defendants in asbestos cases. It ensures there is an evidentiary basis for the claims against each defendant named, cutting down unnecessary litigation costs and focusing court resources on claims with an actual evidentiary basis.
Helped Ease Regulatory Burdens on Business
House Bill 2599 was bipartisan legislation that make various changes to the regulatory procedures at the state level. This legislation will ease regulatory burdens on small businesses, allow for a fair and impartial appeal of government agency actions, and provide for the recovery of attorney fees and costs. It streamlines, simplifies and modernizes regulatory policies while preventing government from adopting new rules that curtail business growth.
Won Improvements to Arizona’s Energy Grid
House Bill 2101 reestablishes public policy that prioritizes electricity as an essential public service through long-term planning and investments in the energy grid. This bill repeals a defunct 1998 electric deregulation law that may jeopardize the delivery of these services and threatens to put Arizona on the problematic path that other states have suffered in deregulated markets like California and Texas.
From the first regular session (2021)
$1.75 Billion Income Tax Cut
Prior to Prop 208, Arizona had one of the lowest income tax rates in the country, allowing the state to compete against states with zero income tax, such as Nevada and Texas. Following the passage of Proposition 208 in 2020, small businesses in Arizona were faced with a 77.7% tax increase—moving Arizona from a 4.5% maximum marginal tax rate to a combined 8% rate. Thankfully, the legislature majority appreciated small business and responded with bold action during this legislative session. The recently enacted budget includes historic changes to the individual income tax code that will protect small businesses from this burdensome tax hike by placing a tax max rate of 4.5% –the same top tax rate as there was before Proposition 208. Additionally, instead of the five different brackets in the existing system, all Arizonans will soon pay a personal income tax rate of 2.5 percent, except for the highest earners, who will pay 4.5 percent. This reform was made possible in part by the fact that Arizona was projected to build up a budget surplus of nearly $4 billion over the next three years.
$292 Million Alternative Income Tax for Small Businesses
In addition to the historic reductions and flattening of the income tax rate structure, the Legislature also enacted an optional alternative income tax system for small businesses. This tax would be paid only on business income and would be accounted for separate from the owner’s personal tax return. This option could be useful to many different business owners depending on the circumstances of their business. However, if a business owner chooses this option, there will be no standard deduction included so the first dollar will be taxed at the rate of 3.5% which will also be lowered to 2.5% in subsequent years as the brackets in the personal income tax are flattened and eliminated.
Property Tax Reductions
Businesses who own or lease commercial property currently pay 80% more per dollar of assessed value than a residential property does on property in the same jurisdiction. Through a reduction of what is called the assessment ratio, this year’s tax legislation will reduce property taxes on small businesses by 10% by incrementally lowering the assessment ratio that commercial property is subject to over four years beginning in 2022. This change will provide a meaningful reduction in the tax burden discriminately placed on commercial property and will move commercial property closer to equity with residential.
COVID Liability Protections
Senate Bill 1377 establishes commonsense liability protections for small businesses and others that are taking responsible steps to prevent the spread of the virus. This is welcome news for small-business owners who now will not have to worry about an enterprising trial attorney attempting to draw the business into litigation.
Federal Income Tax Conformity – NOL Carrybacks
The Arizona Legislature annually conforms with changes made to the federal government’s internal revenue code. Due to the federal government’s pandemic response, this year’s conformity legislation included significant tax reductions. For example, the CARES Act included a provision allowing for net operating loss carrybacks which allow a small business to carry back current year losses and deduct them from prior year profits. The net operating loss carryback provisions alone were estimated to be a tax reduction of $203.5 million by the end of FY 2022 (June 30, 2022). All told, Joint Legislative Budget Committee fiscal note estimates that conforming to the federal CARES Act, the Consolidated Appropriations Act 2021 and the American Rescue Plan Act equals a one-time tax cut of $624.8 million over the next several years.