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The Senate voted this week 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% in the second year and 25% in the third, by which point it should be clear whether a company will make it or not.
Senate Bill 1559 is sponsored by 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. His proposal is, he said, to provide a bit of fiscal breathing room.
But Democrats were opposed, even after he added requested language to ensure 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 carving out a special tax break for those who start a new business is not good policy. And she noted 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.
Epstein said she believes 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.
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.”
He also said 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.
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