Economic Growth: Legislative Wrap-up: Business & Economic Growth

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Arizona Horizon takes a look at what State lawmakers did during the legislative session to help or hinder business and economic growth in Arizona. Guests include Greater Phoenix Economic Council President and CEO Barry Broome, ASU Economist Dennis Hoffman, and Glenn Hamer, president and CEO of the Arizona Chamber of Commerce and Industry.

Ted Simons: The just concluded state legislative session included a series of tax cuts for businesses and individuals. Lawmakers also killed a tax credit measure designed to help Arizona grow its film industry. Here to tell us if the legislature did the right things to grow the state's economy is Glenn Hammer, president and CEO of the Arizona chamber of commerce and industry, Barry Broome, president and CEO of the greater Phoenix economic council, and ASU economist Dennis Hoffman, who directs the research institute for the W.P. Carey School of Business. Good to have you all here.

Guests: Great to be here.

Ted Simons: Let's start Glenn with an overall view of the session from a business standpoint. What did you see?

Glenn Hammer: It was a fantastic session. We passed the second annual once in a generation competitiveness package, and of course I'm kidding a little bit there, but we built very smartly on the tax reform package that passed last year, we add add very sizable capital gains tax reform, net operating loss, we made some of the tax credits that passed in the last several years more usable. There's a very important infrastructure bill that also passed, and additionally we made additional progress on civil justice reform, regulatory reform, it was a spectacular session. The last 48 hours broke the right way.

Ted Simons: All right. And I want to get to some of these ideas in a second, but overall, have a -- from a bird's eye view, what did you see?

Barry Broome: I thought it was very good. Glenn summarized it in a really important way. I think a lot of the policies that the legislature passed this time were much more strategic and impactful on things like export industries, we also had the elective sales factor for service industries, which people referred to as the Apollo bill, but service industries are becoming much more complex, they're exporting resource and services abroad, they're getting treated like an Intel or honeywell or Boeing. The expanding -- the investment tax credit from the renewable industry to all export industries was a smart move and the 9,000 job tax credit is on cap, so a company like apple that would create 4,000 jobs would get the benefit of all the tax credits, and then some of the environmental issues that Glenn brought up were also very impactful.

Ted Simon: OK, Dennis, what did you see in session?

Dennis Hoffman: I defer to my colleagues here in terms of the detail in deliverables for businesses. I think it's a great thing. I think business, we need to be very kind to business in the state, that businesses create our jobs, and I've always been a supporter of having a very kind tax and regulatory environment when it comes to businesses. I would say in terms of the session I saw some pluses, and some of it is addition by subtraction. We're not making massive cuts and being on the front line with a lot of those cuts in the past, it's a good thing. I think that it was very refreshing to see the legislature even though they dabbled with these crazy Tabor rules and growth government spending restriction rules, they backed away at the end and we didn't get those types of regulations, and I think that's very good. It's a signal that the legislature wants to take on that budget in commitment and I think that's a very important thing for them to do. And we had some wins, I think in terms of education, some small wins in terms of education, and got some equity funding for the Universities. So all in all, coupled with the detail you can get from these gentlemen about the benefits that a specific benefits that accrue to business, it was a good session.

Ted Simons: Let's get to some of the details. The individual corporate tax capital gains cut, how much impact?

Glenn Hamer: It will phase into -- it will scale up to 25%, it will start at 10%, go to 20, and then I believe 25%. The impact here is, we expect will be pretty sizable. And Dennis Hoffman has also put together papers on the capital gains tax reform. We have to remember this, is one of the most volatile taxes. One of the neat things is probably for the first time we're going to be able to accurately measure what this tax collects. But this is a great tax reform for those that want to invest capital. And the history on the federal side has been that when capital gains taxes have been cut, more revenue has come in because of the additional activity.

Ted Simons: But critics will say capital gains tax cuts, usually means folks, they're not creating jobs, they're not investing in the community or in getting manufacturing, etc., they're buying more stocks. They're looking at real estate. These sorts of things. Is that a veiled criticism?

Barry Broome: The key things, when we work on things like the elective sales factor, connected back to export industries, or a monetized tax credit for emerging technology, they're much easier to measure. I think it's easier to raise questions about the capital gains tax because it's tougher to track back to activity. But in a state that has a lot of need for liquidity, for small businesses, creating an improved transactional environment around technology, there are also some benefits to that you can trace back.

Ted Simons: What do you think, how easy is it to trace the success of capital gains tax?

Dennis Hoffman: Again, this is -- these are gains on investments made after December 31st, 2011. So we're not talking about investments that are already made, that realizations that folks could just bring forward. So we're going to have to watch this I think very carefully. Glenn is right, my paper pointed to the volatility of this as a source. And actually the point I made was, it didn't make sense to me to try to fund predictable things like kids in schools, prisoners in prisons, access roles, University students, very predictable expenses on this roller coaster of capital gains revenues. But of course my intent, we need to replace this revenue source with something else. And I don't hear any dialogue about replacing it with anything.

Ted Simons: Well, let's talk about that as far as concerns with revenue. Obviously the last session, big jobs bill. Big jobs creation bill, 500 and some-odd, now you've got these particular incentives and the tax credits and such. Much of this is hitting as a temporary sale, as the cliff is approaching. Is there a concern regarding revenue?

Glenn Hamer: We need to make sure, Ted, that we really get the Arizona jobs machine going again. Let's take a look at what's happened since last year's bill passed. Now CEO magazine ranks Arizona as one of the top 10 states. That's a big deal. Calfman ranks us as the number one state in the country when it comes to entrepreneurial activity. As more jobs come back, you could take it to the bank. We're going to see more tax revenue come into this state. That's the religion I'm going to give you. And I'm not -- I think we have to be as aggressive as we possibly can so that we replace, and we have begun replacing the 300,000-plus jobs we lost during the great recession. I get a little excited and giddy when I'm sitting across from my colleague Barry Broome and he has new tools in the toolbox to play with. We're going to get new jobs because of these reforms.

Ted Simons: Does that religion and the revenue that accompanies it, does that equal out to the revenue that could be lost with all of these tax credits with all these tax cuts?

Barry Broome: I think it's two separate discussions. First off, the economy doesn't make a good bedfellow for politics. When you're competing with people for jobs, you have to sit down and start with a blank slate. We're building a strategy around export industries, it's a global competition, our competitor footprint has to be determined based upon evidence and what's going on in the marketplace. After you build your competitive footprint, then you have to think about your public responsibility and your public investments. And I think Glenn is correct. Improving our public position is going to do a lot to help us improve our public income strain. And the best thing you, do for anybody is to get them a job. And when you get somebody a great-paying job, they're in control of making their own decisions about education and health care. But I do want to close by saying I don't want to dismiss the revenue discussion. And I think the revenue discussion really should be centered around what happens when proposition 100 goes away. And I don't it this answer to proposition 100 is you repeal the gains made in your business climate. You might need to sit down and talk about how that income gets replaced independent of the growth in the economy, but you don't want to use a tactic to replace that income by shortening your ability to compete for the jobs that Arizona needs.

Ted Simons: What do you make of this, Dennis?

Dennis Hoffman: These guys are right on the mark. We need to be kind to businesses. We are. And I'm not suggesting we backtrack on that at all. But the model works as follows. You're kind to businesses, they pay good salaries, you bring in high-salaried people, and then you ask those people to pay for public services. Politically that's very challenging. And ARITHMATICALLY, I like what you're saying, we've got to grow jobs. But think about the arithmetic, $75,000 a year family of three. One child, two adults. They pay less than $5,000 in combined state and local taxes. If their kid's in school, it just barely covers that expense. They don't pay for anything else. I'm talking $75,000 salary. What I'm suggesting here is the current tax structure on individuals is insufficient to make this model work. It just doesn't --

Ted Simons: what do you think about that, Glenn?

Glenn Hamer: Well, it is -- I believe that it is working. If you look at -- not that there aren't tradeoffs, but if you look at what the legislature has done during the last couple years, and a lot of these choices, they were tough choices. But they've basically brought the budget back into structural balance. And I don't believe that Governor Brewer or speaker Tobin or senate president pierce or any of the people that have been working very hard to reform our tax system to create these new opportunities to bring jobs to this state should owe anyone an apology. Because our revenues are coming back, our jobs are coming back. And I think as the job machine continues to pick up steam, we will see additional revenue.

Dennis Hoffman: I've got to interject. This is not an indictment of our legislature. It's not an indictment of our governor. I think that the politics of really very clear. People, the average citizen doesn't want tax increases. OK? I think that the governor shows leadership on this point, the legislatures responded, businesses are pleased, we got more businesses moving here. It's just my worry that we as a people are just not confronting the arithmetic of this challenge.

Barry Broome: I think they're both right. If you take a look at Virginia, which is the number one business state in the country, individuals are paying higher taxes in Virginia. If you look in our metro competition environment, in Salt Lake and the Denver region, those states' business environments are still better than ours, not as much, just barely, but those individuals are paying more taxes. So the equation is, how do you bring your business environment -- because Intel is the best teacher. You want to know what Intel talks about, Intel says, I need a benefit against my R&D activity, I need benefit against this capital investment. I need to benefit against this corporate liability and you've got to do something about your schools while you're at it. Some people say your businesses are talking out of both sides of their mouth. They're not. You have to do both. This state has to bring the best business environment in the country online and improve schools and universities. But I think they've made strides on that, and I think the one point I wanted to make is, in the 1990s Arizona's legislators cut idividual income taxes like 11 times.

Dennis Hoffman: 40%.

Barry Broome: Now what you see the legislators doing is working very precisely on the business tax environment. And I think that's an achievment in the right direction.

Glenn Hamer: And I want to first say certainly it was not an indictment on Dennis. He's a very, very bright economist and I always --

Dennis Hoffman: my point was, I think our policymakers have got a real political challenge on this. This is not easy.

Glenn Hamer: But it is competitive out there. And even on the individual income tax, yes, it's true, add has a lower individual income tax than most states. But Texas, zero. Nevada, zero. The conversation across America from several states, Kansas, Oklahoma, the number of other states, is how to reduce to zero their individual income taxes. It's not easy. This is a tough business. But if you take a look at where the state is going, huge strides. If you're in an export oriented industry, whether it's capital or it's stuff in the -- on the internet, welcome to Arizona, because we beat any state in the country.

Ted Simons: We've got about 30 seconds left. With this kind of legislation, does this produce tangible results? I mean significant tangible, not just here, there -- significant results.

Barry Broome: yeah. Absolutely it will. And it already has. I'll give you a good example. What the legislature and the governor is doing now is not only are they building a better business environment, but they're start to be understand the uniqueness of export industries. So these policies are more qualified, more intuitive, and I think this was -- I think this was almost in some ways a big I set of legislative achievements than even last year because it really shows the legislature and the governor is gaining in their understanding of the economy.

Barry Broome:President and CEO, Greater Phoenix Economic Council; Dennis Hoffman:ASU Economist; Glenn Hamer:President and CEO, Arizona Chamber of Commerce and Industry;

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