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Updated Mar 6, 2013 - 5:54 pm

House approves new biz, self-employed tax cuts

PHOENIX -- A sharply divided Arizona House gave final approval Wednesday to a pair of business tax cuts that supporters say will help the economy by encouraging employers to add jobs and making up for increased federal withholding taxes.

The bill, which passed 32-27 with an unusual split that saw support and opposition from both Democrats and Republicans, provides property tax breaks for businesses that expand and creates a 2 percent tax deduction for the first $114,000 self-employed people earn in a year.

``One thing I like about this tax cut is it will directly affect small businesses,'' said Rep. Ruben Gallego, a Phoenix Democrat who supported the measure.

The bill, which now heads to the state Senate, generated some of the hottest debate of the session.

Some stood in opposition, even Republicans, some of whom said the bill lowered the wrong taxes.

``The best way to grow Arizona is to give broad-based tax relief to everyone,'' said Rep. John Kavanagh, the Republican chair of the House Appropriations Committee.

``Let's start lowering the Arizona income tax rate to zero, then the CEOs will want to live here because it's better for them,'' he said after the floor debate.

Other critics warned that the costs of the reductions were just too high and predicted that the state will face tough budget years in the future.

Supporters ultimately countered these arguments by touting the boost to small businesses and saying that the measures put Arizona in a better competitive position with nearby states.

The value of the business tax break, which provides reductions for businesses that purchase or construct new buildings and new equipment, isn't known. The self-employed reduction is valued at $58 million a year.

The self-employment tax cut is intended to offset a 2 percent increase in Social Security withholding tax that went into effect Jan. 1.

Rep. Tom Forese and House speaker Andy Tobin, both Republicans and proponents of the plan, said it would help create jobs by encouraging companies to expand.

The proposal builds on previous Republican efforts to make Arizona's tax climate more business friendly.

Another tax credit that passed the House this week is designed to funnel savings that insurance companies receive from lowered premium taxes into a new high-tech fund overseen by the Arizona Commerce Authority.

That bill gives insurers a credit against their premium taxes of up to $10 million in the budget year beginning July 1 and $20 million in the next two years for the investments. They can carry unused credits forward for 15 years if they can't use it in the year it's earned.

The tax cuts come before the bulk of a Republican-championed 2011 economic development package comes on line. Business tax cuts, valued at $538 million when fully in place in 2018, and a capital gains tax cut, benefiting wealthy Arizona residents valued at $108 million, are key parts of that package.

The new cuts also come during a tight budget year when a temporary sales tax that brought in about $1 billion a year and helped the state avoid more budgets cuts is set to expire.

Minority Democrats generally oppose additional tax cuts, arguing the state needs to restore funding to schools and services cut during the Great Recession. But they have been somewhat supportive of some cuts designed to spur economic development.

Rep. Debbie McCune Davis, D-Phoenix, said she supported the original part of the bill that addressed business property tax rates because she believes it is good economic development policy. The $58 million tax break for the self-employed put her in the ``no'' column, however.

``At this point,'' McCune Davis said, ``I haven't seen a budget. I haven't seen that we're addressing issues related to Child Protective Services. I haven't seen that we're doing what we need to do with education, and giving a tax break without knowing where the money is coming from isn't sensible.''

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