Report: New tax policy to add thousands of Arizona jobs

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(The Center Square) - A new permanent tax deduction will have a big boost on Arizona’s economy, according to a new report.  

The National Federation of Independent Business released a report showing that the 20% small business deduction, made permanent in federal law by the Big Beautiful Bill Act, will create an extra 26,000 jobs annually in Arizona over the next 10 years.

The report also said the tax deduction will increase the state’s gross domestic product by $1.4 billion annually over the same time span.

NFIB’s report shows after 2035, Arizona will see an additional 49,000 jobs created annually, and its GDP will increase by $2.9 billion each year.

Chad Heinrich, NFIB’s Arizona state director, said this permanent tax policy is the “greatest, invisible mega project in Arizona history” because of the jobs it will create.

Small businesses can make these investments when they have “tax certainty,” Heinrich told The Center Square this week.

“Business owners can go out, create jobs, expand their business and grow Arizona’s economy collectively,” he noted.

With the tax policy being made permanent at the federal level, it saves Arizona small businesses “from a significant tax increase,” the state director said.

According to Heinrich, the 20% small business deduction is from the 2017 Tax Cuts and Jobs Act, which was intended “to level the playing field” for small businesses because “big corporations were getting a lower [tax] rate.”

Glenn Farley, the policy and research director for the Common Sense Institute Arizona, told The Center Square this week that the TCJA lowered the corporate tax rate from 40% to 21%.

Farley said this provided an advantage to big companies filing taxes, but left small businesses at a tax disadvantage because they did not benefit from the tax break.

Small businesses file individual income taxes while big businesses file under the corporate income tax system, Farley said, noting the bill included the tax deduction to help small businesses.

For example, Farley said that if a business made $100,000 in a year, it would get a $20,000 deduction, meaning it would pay individual income taxes on $80,000.

Since the TCJA became law, Farley said, there is ample evidence that manufacturing and commercial activity have increased in Arizona.

“State revenues took off after 2017. A lot of this goes back to the provisions in the TCJA and the state’s decision to conform to them,” he said.

Uncertainty around this tax provision and other tax conformity issues remains unresolved in Arizona, as the state has not yet passed its annual conformity bill, which aligns its tax policies with the federal government’s.

If Arizona passes a tax conformity bill that does not include the tax deduction, the potential new job and GDP growth will go away, Farley said.

However, if Arizona fails to pass a tax conformity bill, the state’s conformity to federal tax law will be left up to the Arizona Department of Revenue, Farley said, noting this year’s interpretation includes the tax deduction.

This session, Gov. Katie Hobbs vetoed two tax conformity bills that the Arizona Legislature sent her.

Heinrich said the Republican-controlled Legislature and the Democratic governor need to “follow through and make sure” the state conforms “to the key business provisions in federal law.”

“If I am a business and I have all this uncertainty about how Arizona’s going to treat these investments, that may reduce my likelihood to actually make those purchases in Arizona,” Farley said.