The state Legislature on Tuesday passed a personal property tax reform with bipartisan support that supporters say will dramatically simplify a complicated section of Arizona tax law.
H.B. 2822, sponsored by Rep. Jeff Weninger, R-Chandler, sets the valuation factor at 2.5% for business personal property acquired after tax year 2022 in taxation classes 1, 2, and 6. These classes include commercial & industrial uses, agriculture, and non-profits.
Compliance with business personal property tax is notoriously cumbersome. The Arizona Department of Revenue’s Business Personal Property Tax manual includes 76 pages of instructions and 49 pages of tables that explain how to value equipment ranging from cranes to TVs and chairs.
Chad Heinrich, the Arizona state director of the National Federation of Independent Business, said in a state Senate Commerce Committee hearing earlier this month that it’s an issue of major importance for small businesses.
“Our members rank it second only to federal income taxes, when they look at tax issues that are important to them,” he said.
The personal property tax requires businesses to pay taxes on assets like machinery and equipment of all types, ranging from something as large as a farmer’s tractor all the way down to a simple laptop. The personal property tax is on top of the sales tax the buyer pays at the time of purchase.
The Tax Foundation, a Washington, D.C.-based tax research association, says that unlike real property like a building or land that cannot be easily moved to a jurisdiction with more favorable tax policy, the mobility of personal property makes it more sensitive to taxation. The foundation argues that “personal property taxes distort investment decisions, complicate business tax compliance, and reduce economic growth.”
Tim Lawless, president and CEO of CREED, a commercial property owner advocacy group, said passage of the bill into law will help make Arizona’s tax code more competitive when it comes to landing investment over other states in the region.
State Sen. J.D. Mesnard, chairman of the Commerce Committee and a longtime advocate for business property tax reform, supported the bill.
“Business personal property tax is double taxation. You pay the sales tax when you buy the thing, and then you pay it for holding it,” he said. “So, if you want folks to invest in new capital and all the jobs that creates, you want businesses to locate or expand here, this is not what you want to have.”
State Rep. Morgan Abraham, D-Tucson, said the state’s personal property tax law is overly complex, especially for small businesses.
“I own many businesses that involve personal property and the depreciation associated with personal property is terrible – the state laws that we have,” he said in a party caucus meeting where the bill was discussed. “And it’s very confusing and very hard for small business owners to adequately account for the depreciation of personal property.”
Abraham was one of five House Democrats who supported the bill.
Bill sponsor Weninger said the legislation would improve the state’s overall business environment.
“It brings new jobs here, which brings new income tax, which brings new people going out and shopping and getting more sales tax,” he said during debate on the bill in the House in response to criticism from state Rep. Mitzi Epstein, D-Tempe, an opponent of tax cuts. “I think this will be a magnet and attract more large businesses, but, also, in the possibility that some businesses replace older assets sooner, as was contemplated, guess what – we get sales tax on a new item. And guess where that sales tax goes. It goes to pay for police officers, firefighters, it goes to pay for teachers, and all those kinds of things. So, to me, that’s a good thing.”
The Arizona Chamber of Commerce & Industry, which made passage of the bill one of its top priorities for the legislative session, hailed Tuesday’s vote.
“We are grateful for thoughtful leaders of both parties coming together to enact a simple and fair policy solution that allows small businesses to spend more time on their operations and creating jobs, and less time with their accountants trying to cut through government red tape,” Chamber Vice President of Government Affairs Courtney Coolidge said.
Also supporting the bill was a large cross section of the business community, including the Arizona Tax Research Association, the Arizona Chamber of Commerce & Industry, and the Arizona Farm and Ranch Group.
The bill now heads to Gov. Doug Ducey for his signature.