Assigned to FIN                                                                                                          AS PASSED BY THE SENATE

ARIZONA STATE SENATE

Forty-eighth Legislature, First Regular Session

AMENDED

FACT SHEET FOR H.B. 2515

hearing aid dispensers; continuing education

(NOW:  municipal sales tax incentives; prohibition)

Purpose

            Penalizes certain municipalities that offer tax incentives to retail business facilities to locate or to relocate into their city or town.

Background

            Arizona cities and towns currently provide tax incentives to retail businesses as a means to entice those businesses to locate within their borders.  The competition between municipalities to entice businesses can result in the granting of tax incentives as cities vie with one another. 

            There are three categories involving the use of tax incentives for businesses that are employed by local governments: economic development, infrastructure development and economic revitalization.  In most cases, municipalities offer businesses a rebate on city sales tax as an incentive to serve as an economic development tool.  Municipalities may also provide a tax incentive in exchange for the developer paying the initial costs of public infrastructure construction. Tax incentives are also provided in blighted or declining areas to allow the local businesses to reinvest the tax savings into their business. 

            Laws 2005, Chapter 200, requires a municipality to make a finding, by a two-thirds vote of the governing body in a municipality located in or within 25 miles of a metropolitan statistical area with more than two million persons or by a simple majority in all other municipalities, without the use of consent calendar, before entering into a retail development tax incentive agreement that includes both of the following: 1) that the proposed tax incentive is anticipated to raise more revenue than the amount of the incentive within the duration of the agreement and 2) that the retail business or a similar retail business would not locate in the municipality in the same time, place or manner without the tax incentive. The same vote requirement is required for the adoption of a retail development tax incentive agreement. The use of an emergency measure for a decision by the governing body regarding an expenditure for economic development is prohibited.  H.B. 2515 penalizes municipalities that offer tax incentives to retail businesses by reducing state shared revenue by a commensurate amount.

            The Department of Revenue (DOR) is responsible for monitoring municipal activity to determine the value of the tax incentive, which may involve an administrative cost to DOR.  Additionally, H.B. 2515 could increase state General Fund revenues due to the withholding of state shared revenues.

Provisions

1. Prohibits a municipality located entirely within the exterior boundary of a metropolitan statistical area having a population of more than two million persons from offering or providing a tax incentive to a business as an inducement or in exchange for locating or relocating a retail business in the municipality.

2. Penalizes a municipality for offering or providing a tax incentive in an amount equal to the incentive realized by the business over five years.

3. Exempts the following from the penalties established in this legislation:

a) incentives generally afforded to all new businesses in the municipality having no direct effect on tax levies.

b) incentives available to all retail businesses located within the municipality.

c) incentives for locating retail businesses in redevelopment areas where the average household income is less than the average city household income.

d) incentives for reimbursing public infrastructure dedicated to and accepted and controlled by a city, town, county, the state or private utility.

e) incentives offered for the purpose of preserving historical buildings.

f) incentives offered for cleanup or remediation activities at brownfield sites.

g) incentives approved by a city or town council prior to July 1, 2007.

h) incentives referred to the ballot by July 1, 2007, and approved by the voters.

4. Limits public infrastructure to the fair market value of real property necessary for the public infrastructure, transportation, water, sewer, electrical, drainage and other necessary public infrastructure projects.  Public infrastructure excludes parking lots or similar structures or amenities owned or controlled by a public entity.

5. Limits eligibility for the exemption to those incentives that are offered in exchange for the business’s expenses, which may not exceed or be disproportional to the actual cost incurred by the business.

6. Requires DOR to notify the State Treasurer to withhold the amount of state shared revenue from the municipality.

7. Requires that the withheld monies be credited to the state General Fund.

8. Requires municipalities to report the value of any retail business facility tax incentives to DOR.

9. Prohibits the State Treasurer from withholding any amount the municipality certifies is necessary to make any required deposits or payments on bonds or long-term obligations that were issued or incurred prior to the incentive being provided.

10. Defines terms.

11. Makes technical changes.

12. Becomes effective on January 1, 2008.

Amendments Adopted by Committee

· Adopted the strike everything amendment.

Amendments Adopted by Committee of the Whole

1. Decreases the area in which municipalities are prohibited from providing retail tax incentives.

2. Clarifies that a municipality may provide retail tax incentives without penalty for reimbursement for public infrastructure.  The infrastructure must be dedicated to and accepted and controlled by the city, town, county, state or certain private utilities.

3. Limits public infrastructure eligible to receive retail tax incentives.

4. Limits the redevelopment areas eligible for retail tax incentives.

5. Allows a municipality to provide retail tax incentives without penalty if a city or town council approves the incentives prior to July 1, 2007, or if the incentives were referred to the ballot before July 1, 2007, and approved by the voters.

Senate Action House Action

HEALTH        3/14/07     W/D                                   HEALTH        2/7/07     DPA     7-0-0-3

FIN                 3/21/07     DPA/SE     7-1-0-0            3^rd Read           3/6/07                  53-4-3-0

3^rd Read           6/19/07                        18-8-4-0

Prepared by Senate Research

June 20, 2007

SL/jas