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Arizona Senate votes to exempt new businesses from having to pay any state income taxes in first year


By Howard Fischer
Capitol Media Services

PHOENIX -- Starting a new business?

Arizona lawmakers apparently want to help you succeed.

On a party-line vote, the Senate on Tuesday voted to exempt new businesses from having to pay any state income taxes at all in their first year of operation. That tax break would taper off to 50 percent in the second year and 25 percent in the third, by which point it should be clear whether a company will make it or not.

SB 1559 is the brainchild of Sen. Steve Kaiser, R-Phoenix, who told colleagues of his own experience trying to start a business -- he has since sold it -- and the problems in arranging financing.

What this is designed to do, he said, is provide a bit of fiscal breathing room.

But Democrats were opposed, even after he added requested language to ensure that companies don't simply dissolve and reform on an annual basis to take advantage of the tax break.

"Of course we support small businesses,'' said Senate Minority Leader Mitzi Epstein, D-Tempe. "Arizona businesses are so important to every part of our economy.''

But Epstein said that carving out a special tax break for those who start a new business is not good policy. And she noted that it's not like lawmakers are providing similar relief for people who start a new job.

"Why is it only a person who owns a business that gets a tax break?'' she asked.

Anyway, Epstein said she believes that special carve-outs are not the best way to encourage economic development. Instead, she said, the state is better with low rates that apply to all.

"Everybody pays a fair share,'' Epstein said.

Kaiser, however, said his legislation simply recognizes the hardships of starting a business from scratch.

About five years ago, Kaiser said he bought into a franchise that does junk removal.

"We had some pretty heavy capital investment when it came to the dump trucks,'' he explained.

"I leased my warehouses, but we had three of them,'' Kaiser continued. "We had all the franchise fees.''

Kaiser said he grew it during the time he had, to the point he had 15 employees.

"But I still had capital problems every year,'' he said.

The problem, Kaiser said, is not unique to him. He said that's why most businesses fail in their first few years because of cash flow -- or, more to the point, the lack of it.

"You can't get financing from traditional places,'' he said.
"You have to go to these short-term, basically payday loans,'' Kaiser said. "And those are really dangerous,'' what with high interest rates that can leave a borrower even further in debt.''

What SB 1159 would do, he said, is allow new businesses to hang on to as much capital as possible "when they're the most vulnerable, which is those first few years.''

Kaiser is no longer in the junk removal business. He said he concluded that the costs -- particularly those franchise fees -- plus having to spend time at the Capitol make it just too much of a burden.

He also said that giving a tax break to new businesses won't increase everyone else's taxes, as their income tax brackets and bills would remain unchanged.

But the flip side of that is the price tag. Legislative budget staffers predict SB 1559 would reduce state revenues by close to $39 million by 2027.

The measure now goes to the House.