Lawmakers Hope Electricity Tax Break Will Boost Manufacturing In Arizona

February 17, 2014

(Photo by Nick Blumberg-KJZZ)
Michael Hunter is the governor's Director of Policy and her adviser on tax issues.

During her time as the state's chief executive, Gov. Jan Brewer has pushed for policies she thinks will make Arizona more business-friendly. One of her proposals currently moving through the legislature would get rid of a tax that brings in millions of dollars to the state, but officials think it will lead to new business that will more than make up for the loss.

Standing in his office at Nichols Precision in the East Valley, Dante Fierros showed off the intricate parts his company manufactures.

"This is a small, titanium, very complex part that goes somewhere on a standard missile. They won't tell us where that is, but it's very important. And this little gold-plated, intricate piece is on the Mars Land Rover," said Fierros.

His company makes parts for things including defense equipment, race cars, and medical devices. It is a 12,000 square foot business where a couple dozen people work at about as many machines.

"This [machine], for example, is a five-axis Swiss-style machine, which means nothing to the layperson," Fierros said. "So I equate this to say, this one's a Ferrari, and that one over there's a Ford pickup, and that one over there's a Yugo, or whatever."

Most days, Nichols Precision runs a double shift. Workers are at it from 6 a.m. until after midnight, and they are burning not just the midnight oil but lots and lots of electricity too.

"I can visualize the bill," Fierros said. "It's large!"

But if Gov. Brewer gets her way, that utility bill will shrink. She has asked the legislature to do away with the sales tax on electricity that manufacturers pay, somewhere between 8 and 10 percent.

"We're talking about the smallest manufacturer all the way up to the biggest," said Michael Hunter, the governor's policy director.

He said this idea was influenced by conversations with manufacturers.

"We know that they're concerned about their costs, and electricity cost is a major thing that they're going to be looking at," Hunter said. "When they see that we're also taxing that high energy cost, that's not a good story."

Hunter said Arizona is one of just nine states that offers no tax break whatsoever on manufacturers' electricity use. If we did, he thinks Arizona would draw new manufacturers and high-paying jobs. In the meantime, Hunter said the state has the money to weather this revenue loss, up to $20 million.

"Now, that sounds like a big number, unless you look at it being part of the $500 million slice," Hunter said. That's how much sales tax the state collects from everyone on things like electricity, water and natural gas. "There's a couple things that tells you. Probably the most significant thing in my mind that is says is that we do not have a robust manufacturing sector in Arizona."

"To say that this is petty cash that's, you know, unattractive, I don't agree with that," said Rep. Andrew Sherwood, a Democrat who sits on the House Appropriations Committee.

He said after huge cuts during the recession, the state is only funding critical services right now, sometimes, not even those, and Sherwood thinks even small amounts can make a difference.

"We see bills for just a small appropriation, like $250,000, that can go a long way to something like the seriously mentally ill, or some kind of health diagnosis," Sherwood said. "I've got another bill right now that could help create a pilot program for smaller school classroom sizes."

So losing revenue does not exactly sit well with Sherwood, especially since there is no guarantee that more manufacturers will move here and make up the difference, and some skeptics say Arizona's energy rates for manufacturers are already pretty low. According to the United States Energy Information Administration, we are about in the middle of the pack among states, and electricity is much cheaper here than in California or New England.

Still, Hunter said they want to attract both new manufacturers and "other business people who recognize the value that the manufacturing sector adds to Arizona, because there's all the auxiliary companies and all these effects that happen."

The League of Cities and Towns has also objected to the plan because it would prevent municipalities from levying a tax. Last week, the Senate Finance Committee voted unanimously in support of the bill.