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Experts Detail How Tax Plan Would Help Arizona's Economy

by Betty Beard, Russ Wiles and Jahna Berry
The Arizona Republic      

Surprising new tax breaks and the extension of current tax rates and jobless benefits could infuse needed dollars into the state and national economies and potentially create more jobs, some Arizona economists say.  Employed or not, many Arizonans would have more money to spend. Business-tax breaks could make companies more likely to hire. The resulting momentum could provide a much-needed boost for a fragile economy.

The sweeping economic package proposed by President Barack Obama and Republican congressional leaders would deepen the already daunting national debt and reduce funding for Social Security - issues that raise red flags for many.

But the economy has proved incapable of restoring jobs quickly, as the state's 9.5 percent unemployment rate and the national rate of 9.8 percent attest.

Additional stimulus could have an impact, said economist Dennis Hoffman of Arizona State University. He said the package could provide the one thing the economy has been lacking this year: confidence.

"We have got to get people to stop doubting the economy and make some investments and buy some consumer durables and build their way out of these doldrums," he said.

Marshall Vest, a University of Arizona economist, said a proposed reduction in Social Security payroll taxes alone would add an estimated $2.3 billion a year to Arizona workers' paychecks. That's an average of $1,000 per worker.

Michael Pollack, whose Mesa-based company Pollack Real Estate Investments is one of Arizona's largest privately held shopping-center owners and operators, is enthusiastic about a proposal to let companies deduct the full cost of investments in equipment in 2011 instead of having to follow a typical depreciation schedule.

"It would stimulate the Arizona economy incredibly," he said. "Businesses will reinvest because they can buy new equipment and upgrade facilities."

The deal also would extend the tax cuts signed into law by then-President George W. Bush and restore federal long-term unemployment benefits. The extensions would keep existing dollars in the economy and likely prevent a pullback in spending that could result from their elimination.

Vest said failure to pass the tax package, especially the Bush tax cuts, would leave the national economy vulnerable to a renewed recession.

He estimates the tax package would add 1.5 percent to 2 percent to the national economy's growth rate in 2011.

Here are the key provisions and how their enactment could affect Arizona:

- Reduction of payroll taxes

A reduction in payroll taxes in 2011 would put more money into circulation immediately.

The cut would increase workers' take-home pay by lowering to 4.2 percent from 6.2 percent the Social Security tax that workers pay.

"That's a really good way of putting extra money into paychecks," Vest said.

- Higher write-off for capital expenses

The larger write-off would be a big benefit for businesses and could indirectly result in new jobs. This proposal would let companies deduct the full cost of investments in equipment in 2011 instead of having to follow a typical depreciation schedule.

Presumably, that would stimulate more factory jobs needed to make that equipment or construction jobs needed to install the equipment or prepare buildings for them.

As an example, Pollack said, someone who wanted to open a pizza restaurant would be able to buy all the equipment, such as ovens and other kitchen apparatuses, and deduct the amount in one year instead of over 15 years.

He believes Arizona could especially benefit because it already offers incentives that could sweeten the pot for companies looking to expand or relocate. Those include a large supply of vacant industrial, office and retail properties and affordable homes.

However, Hoffman said, one downside is that, sometimes, equipment purchases automate processes, which could cost jobs.

"That's just the nature of the beast," he said. "When businesses invest in plants and equipment, that sometimes paves the way for them to eliminate positions."

- Extension of income-tax cuts

The tax-cut extensions would largely retain existing tax rules for individuals, keeping money in their hands and out of the government's.

Under the compromise, current individual tax rates would be extended for another two years, keeping the top marginal rate at 35 percent.

The deal also reportedly would retain current low rates on capital gains and dividends. Stocks and most other assets held for more than one year would be taxed at a top 15 percent rate, as is currently the case, and the top rate on most dividends would persist for two more years at 15 percent.

The White House said the compromise would include a provision to "reform" the alternative minimum tax to prevent an additional 21 million taxpayers from getting hit by it. The agreement also would extend the low-income child tax credit, the earned-income-tax credit and a higher-education-tax credit for two more years.

The added national debt remains a major worry, however.

"It could increase the deficit by another $1 trillion," said Armando Roman, a certified public accountant at Axiom Financial Advisory in Scottsdale. "That's not good because we have so much debt as it is."

Until any legislation passes, taxpayers and their advisers will face uncertainty.

"This whole up-in-the-air situation has made tax planning much more difficult," said Stephen Harnden, a CPA and certified financial planner at Ameriprise in Sun City.

Among the tricky questions is whether to sell stocks or other securities before the end of the year. Normally, investors sell to lock in losses that can be used for the current year's tax computations while delaying trades that would recognize gains.

- Extension of jobless benefits

If the tax package was approved by Congress, it would extend federal long-term unemployment benefits for 86,474 Arizonans whose payments were to be phased out because the last jobless-aid program expired Nov. 30.

The state estimates that 51,700 of those people would lose unemployment benefits by Jan. 1 if nothing changed.

During the recession, a combination of temporary federal aid and state-administered benefits allowed eligible workers in Arizona to receive up to 99 weeks of unemployment benefits.

A total of 139,120 people now receive unemployment benefits in Arizona, said Steve Meissner, spokesman for the Arizona Department of Economic Security.

The agency has already begun sending out letters to recipients to let them know that the federal unemployment payment will be phased out within weeks, he said.

Although the individual payments are relatively small - $240 per week is the maximum a single person can receive - those payments have major economic impact.

That's because jobless aid is almost always immediately spent by recipients on necessities, helping sustain local businesses. The U.S. Labor Department has estimated that every dollar of unemployment benefits has a $2 impact on the economy. In 2010, $1.6 billion in state and federal unemployment benefits were disbursed in Arizona, meaning the funds had up to a $3.1 billion impact on the state, Meissner said.

"We are going to continue to monitor what is going on in Washington and not change anything else pending further developments," he said. "We want to make sure we know what is going on in Congress, and it's a little uncertain at this point."

- Restoration of estate taxes

This tax, which hits a relatively small number of wealthy households, would be reinstated at a top rate of 35 percent in 2011 and 2012, after excluding the first $5 million of a deceased person's property. The estate tax was repealed for 2010 after being set at a 45 percent rate and $3.5 million property-exclusion amount in 2009.

The tax was set to come back in 2011 at a top 55 percent rate for people with more than $1 million in assets.

John C. Vryhof, an estate-planning attorney at law firm Snell & Wilmer in Phoenix, said the proposed rate offers a significant savings for wealthy households. "