A R I Z O N A D E PA R T M E N T O F R E V E N U E T H E R E V E N U E I M PA C T O F A R I Z O N A’ S TA X EXPENDITURES FY 2001/02 P R E PA R E D FOR: T H E G OV E R N O R B Y: T H E O F F I C E OF AND THE LE G I S L AT U R E E C O N O M I C R E S E A RCH & A N A LY S I S Janet Napolitano Governor November 15, 2002, Preliminary March 2004, Final J. Elliott Hibbs Director The following report on Arizona's Tax Expenditures was prepared for the Governor and the Legislature in compliance with A.R.S. §42-1005. The 2002 report provides a broad range of information. The report contains sections for all taxes imposed by the state. The preliminary report, released November 15, 2002, did not include information on tax expenditures from the Individual Income Tax. The individual income tax information included in this final report was made available through the 2000 Individual Income Tax Simulation Model. If you have any questions or comments regarding this report, please contact the Arizona Department of Revenue, Office of Economic Research & Analysis at (602) 716-6090. 1 TABLE OF CONTENTS INTRODUCTION ........................................................................Page 1 AIRCRAFT LICENSE TAX EXPENDITURES .........................Page 3 AVIATION FUEL TAX EXPENDITURES ................................Page 9 BINGO TAX EXPENDITURES..................................................Page 13 BOXING TAX EXPENDITURES ...............................................Page 19 CORPORATE INCOME TAX EXPENDITURES......................Page 23 ESTATE TAX EXPENDITURES................................................Page 35 FIDUCIARY INCOME TAX EXPENDITURES........................Page 39 FLIGHT PROPERTY TAX EXPENDITURES...........................Page 49 IN LIEU PROPERTY TAX EXPENDITURES...........................Page 53 INDIVIDUAL INCOME TAX EXPENDITURES......................Page 57 INSURANCE PREMIUM TAX EXPENDITURES....................Page 75 JET FUEL EXCISE AND USE TAX EXPENDITURES............Page 83 LUXURY TAX EXPENDITURES..............................................Page 87 MOTOR CARRIER FEE EXPENDITURES...............................Page 93 MOTOR VEHICLE FUEL TAX EXPENDITURES...................Page 99 PARI-MUTUEL TAX EXPENDITURES ...................................Page 103 PRIVATE CAR PROPERTY TAX EXPENDITURES...............Page 107 PROPERTY TAX EXPENDITURES ..........................................Page 111 SEVERANCE TAX EXPENDITURES .......................................Page 119 TRANSACTION PRIVILEGE AND USE TAX EXPENDITURES......................................................................Page 123 UNDERGROUND STORAGE TANK TAX EXPENDITURES......................................................................Page 151 UNEMPLOYMENT INSURANCE TAX EXPENDITURES .....Page 155 USE FUEL TAX EXPENDITURES ............................................Page 163 VEHICLE LICENSE TAX EXPENDITURES ............................Page 167 WATERCRAFT LICENSE TAX EXPENDITURES..................Page 173 WORKERS’ COMPENSATION PREMIUM LIEU TAX EXPENDITURES......................................................................Page 179 THE 2002 ARIZONA TAX EXPENDITURE REPORT INTRODUCTION The Arizona Tax Expenditure Report is a study prepared for the Governor and the Legislature by the Arizona Department of Revenue's Office of Economic Research and Analysis. The report is prepared in compliance with A.R.S. §42-1005. by the Arizona Department of Revenue were reviewed by the agency administering the tax. Any figures presented in these sections were provided by that agency. ASSUMPTIONS Tax expenditures are provisions within the law (exemptions, exclusions, deductions and credits) that are designed to encourage certain kinds of activity or to aid taxpayers in certain categories. Such provisions, when enacted into law, result in a loss of tax revenues, thereby reducing the amount of revenues available for state (as well as local) programs. In effect, the fiscal impact of implementing a tax expenditure would be similar to a direct expenditure of state funds. This report provides a list of tax expenditures, plus, whenever possible, details the approximate costs of exempting certain types of income, goods, services or property from their respective tax statutes. The purpose of this report is to provide a better understanding of the costs associated with the existing set of tax exemptions, exclusions, deductions and credits. There are sections on every tax imposed in Arizona. In each section, provisions dealing with that specific tax type are analyzed. The analysis includes a detailed explanation of the provision as well as the approximate cost of that provision, if possible. Sections pertaining to tax types not administered This report is not intended in any way to determine the desirability of the tax expenditures currently established in law. The Legislature and the Governor determine the taxation environment that they wish to create in Arizona and formulate law to create this taxation policy. All tax expenditures were conscious public policy decisions at the time of enactment. For example, since 1990, public policy decisions were made to relieve the individual income tax burden on persons age 65 and over in Arizona. To that end, the amount of the age 65 and over exemption was increased in 1992 to $1,750 from $1,500 and increased again for tax year 1993 to $2,100. From tax years 1993 through 2002, the age 65 and over exemption has remained at $2,100. The costs associated with the specific provisions shown in this report are the estimated impact of that provision based upon the information available for the stated fiscal or calendar year. There is no consideration of decreased demand as a result of higher taxes. For example, if taxes on a certain type of liquor were increased to $3 per gallon, the 1 calculations presented assume that the same demand exists under the $3 per gallon tax as exists when the tax is 84¢ per gallon. This constant demand would not exist in the "real" world, but the tools are not available to the Department of Revenue to estimate the elasticity of demand. Therefore, the estimated costs should be used only as a guide and not as an exact representation of what would occur in later years. Finally, the summary page(s) at the end of each section provides a total value of the tax expenditure. This total value is only a general guide and should not be used in isolation from the rest of the expenditure amounts. In fact, the expenditures for any particular tax cannot generally be added to reach a total. The presence or absence of one expenditure for a tax type can directly affect the value of another expenditure for that same tax type. Return to Table of Contents 2 AIRCRAFT LICENSE TAX EXPENDITURES 3 4 AIRCRAFT LICENSE TAX EXPENDITURES A license tax is imposed on aircraft operating in this state at the rate of 0.5% of the average fair market value of the particular make, model and year of the aircraft, but not less than $20. The proceeds from this tax are deposited into the state aviation fund. AIRCRAFT LICENSE TAX EXEMPTIONS Certain aircraft are exempt from this license tax, as set out in A.R.S. §28-8322. Aircraft operated by an airline company and regularly scheduled for the primary purpose of carrying persons or property for hire in interstate, intrastate, or international transportation are exempt from this tax. Calculating the tax value of this tax expenditure would require knowing the average fair market value of every aircraft carrying persons or property for hire that stops at an airport in this state. Therefore, the tax value of this tax expenditure is not quantifiable. Aircraft owned and operated exclusively in the public service by the federal government, by the state or by any political subdivision thereof, or by the civil air patrol is exempt from the vehicle license tax (A.R.S. §28-8323). The average fair market value of aircraft owned by the federal government and operated in Arizona is unknown. It is known that there were 103 aircraft owned by the Arizona Department of Transportation, the Arizona Department of Public Safety, various Arizona counties and cities, and the civil air patrol 1 in fiscal year 2001/02. The average fair market value of each aircraft is approximately $131,100, which equates to a tax value of $67,500 for this tax expenditure. A.R.S. §28-8383B also exempts aircraft owned and held by a bona fide aircraft dealer solely for the purposes of sale, as long as these aircraft are registered within ten days of the dealer's purchase date. There were 155 aircraft of this type registered by bona fide aircraft dealers in Arizona in fiscal year 2001/02. The tax value of these aircraft was approximately $866,700. PREFERENTIAL TAX RATES There are preferential aircraft license tax rates granted to certain types of aircraft in A.R.S. §28-8336. The license tax rate for a nonresident who bases his aircraft in Arizona for more than 90 days but less than 210 days in a given calendar year, provided that the aircraft is not engaged in any intrastate commercial activity, is equal to 0.1% of the average fair market value of the particular make, model, and year of aircraft (A.R.S. §28-8336). This tax rate is 20% of the tax rate imposed on resident-owned aircraft. In fiscal year 2001/02, there were 80 nonresident aircraft based in Arizona. The total aircraft license tax paid by nonresidents falling into this category in fiscal year 2001/02 was $33,800. The value of this expenditure can be calculated by multiplying this figure by four, which yields the foregone tax collections 1Any figures presented for Aircraft License Tax Expenditures were provided by the Arizona Department of Transportation. 5 allowed by this preferential rate, or $135,200. Aircraft in storage or being repaired is charged a license tax of $20 (A.R.S. §288337). There are 380 aircraft, which have been granted this license tax rate with a fair market value of approximately $502.0 million. The tax value of this preferential license tax is $2.5 million which is the total fair market value multiplied by 0.5% less $20 per aircraft. The annual license tax for a salvage aircraft that is in storage or that is being restored is $5 (A.R.S. §28-8338). There are 79 aircraft registered under this provision. Assuming no market value for salvage aircraft, the tax value of this tax expenditure is the difference between the $20 minimum license tax imposed on all other aircraft and the $5 minimum license tax imposed on these tax, or $1,200. aircraft. There are 1,417 aircraft registered in Arizona under this provision, with a total market value of $5.6 million. The tax value of this tax expenditure is the total market value multiplied by 0.5% less the $20 license tax paid per aircraft, or $0. Maintenance aircraft owned by a nonresident (A.R.S. §28-8341) and manufacturer's aircraft (A.R.S. §288340) are required to pay an aircraft license tax of $20. There are 21 nonresident-owned maintenance aircraft and 112 manufacturer's aircraft registered in Arizona, for a total market value of $752.5 million. The tax value of this tax expenditure can be calculated by multiplying the total market value by 0.5% and subtracting the $20 per aircraft tax paid, or $3.8 million. A.R.S. §28-8339 allows a $20 license tax for an antique, classic, warbird, glider, experimental, homebuilt, or balloon 6 SUMMARY OF AIRCRAFT LICENSE TAX EXPENDITURES Revenue Gain AIRCRAFT LICENSE TAX EXEMPTIONS: Aircraft operated for the primary purpose of carrying persons or property for hire ....................................................................................................NIA* Nonresident-owned aircraft in the state for less than 90 days ................................. NIA Aircraft owned by a government or by the civil air patrol................................. $67,500 Aircraft owned by an aircraft dealer for sale ..................................................... 866,700 PREFERENTIAL TAX RATES Preferential rate for nonresidents with aircraft in the state from 90 to 210 days ..................................................................................................... $135,200 Preferential rate for aircraft in storage or being repaired................................ 2,507,900 Preferential rate for salvage aircraft in storage or being repaired.......................... 1,200 Preferential rate for antique, classic, warbird, etc., aircraft .......................................... 0 Preferential rate for maintenance aircraft........................................................... 305,500 Preferential rate for manufacturer's aircraft .................................................... 3,454,300 TOTAL QUANTIFIABLE AIRCRAFT LICENSE TAX EXPENDITURES2 ....................................................................................................................... $7,338,300 Return to Table of Contents *No Information Available. tax expenditures represent foregone revenues to the state aviation fund. 2These 7 8 AVIATION FUEL TAX EXPENDITURES 9 10 AVIATION FUEL TAX EXPENDITURES An aviation fuel tax is imposed on every distributor for each gallon of aviation fuel possessed, refined, manufactured, produced, blended or compounded in this state by the distributor or imported by the distributor, whether in the original package or container in which it was imported or otherwise. Beginning January 1, 1998, all suppliers are required to pay tax on all aviation fuel. In order to qualify for exemptions on certain types of aviation fuel, the taxpayer must file for a refund. The fuel tax rate is 5¢ per gallon. Exemptions from the aviation fuel tax are set out in A.R.S. §28-5610. Aviation fuel moving in interstate or foreign commerce, not destined or diverted to a point within this state is exempt from aviation fuel tax. There is no requirement for reporting this information, therefore, the tax value of this expenditure is unknown. Also exempt from aviation fuel tax is aviation fuel sold to the United States armed forces for use in ships or aircraft, or for use without this state (A.R.S. §285610). The amount of aviation fuel purchased by the United States armed 3 forces is not reported and the tax value is unknown. Although not listed as an exemption, a taxpayer may request a refund for aviation fuel for use in applying seeds, fertilizer or pesticides (A.R.S. §285611A). If such fuel were subject to taxation in fiscal year 2001/02, an additional $2,500 in aviation fuel tax would have been received. Aviation fuel, which is exported from the state, is exempt from aviation fuel tax (A.R.S. §28-5611A). The taxpayer must apply for a refund. If such fuel were subject to taxation in fiscal year 2001/02, an additional $28,400 in aviation fuel tax would have been received. The increase in this amount is due to a sharp decline in the amount of fuel exported from the state during fiscal year 2000/01 and a surge in fiscal year 2001/02. Also not listed as an exemption, a taxpayer may request a refund for losses of fuel due to fire, theft or other accident (A.R.S. §28-5611A). No requests for refunds were made in fiscal year 2001/02. 3Any figures presented for Aviation Fuel Tax Expenditures were provided by the Arizona Department of Transportation. 11 SUMMARY OF AVIATION FUEL TAX EXPENDITURES Revenue Gain Aviation fuel moving in interstate or foreign commerce ........................................NIA* Aviation fuel sold to the United States armed forces............................................... NIA Aviation fuel for use in applying seeds, fertilizer or pesticides........................... $2,500 Exported aviation fuel.......................................................................................... 28,400 Aviation fuel lost due to fire, theft or other accident .................................................... 0 TOTAL QUANTIFIABLE AVIATION FUEL TAX EXPENDITURES4 ......................................................................................................... $30,900 * No Information Available. tax expenditures represent foregone revenues to the state aviation fund. 4The 12 BINGO TAX EXPENDITURES 13 14 BINGO TAX EXPENDITURES The tax on state licensed bingo operations is based on a multi-tiered licensing structure. There are three classes of bingo licenses, each of which has a different tax rate. Each class' tax rate is based on bingo receipts. All bingo tax collections are deposited into the general fund. Class A licensees, whose gross receipts do not exceed $15,600 per year, are taxed at 2.5% of their adjusted gross receipts (A.R.S. §5-414). Adjusted gross receipts equals gross receipts less the amount paid for prizes. Therefore, prize money is exempt from taxation for this class of bingo licensees. In fiscal year 2001/02, this group of taxpayers subtracted $2.4 million from gross receipts. Determination of the tax value of this subtraction, however, is not a simple matter. If prize money were not allowed as a subtraction from gross receipts, it is unlikely that this group would have a 2.5% tax rate. However, if a 2.5% tax rate is not used, a more appropriate tax rate must be selected. The tax value of the prize money subtraction for Class A taxpayers is calculated in two ways. Option 1 is to multiply the subtraction amount by 2.5%, the Class A tax rate. This results in potential collections of $59,900. Option 2 is to multiply the subtraction amount by the average effective tax rate of the Class A licensees, calculated by dividing Class A tax collections by Class A total gross receipts. This rate for the Class A licensees is 0.29%. (This method is based on the premise that the Class A tax rate would not be 2.5% if the subtraction were not allowed.) Multiplying the prize money subtraction amount by 0.29% results in potential collections of $6,900. Class B and Class C licensees are taxed on their gross receipts. Class B licensees, whose gross receipts do not exceed $300,000, are taxed at 1.5% of their gross receipts. Class C licensees, whose gross receipts exceed $300,000 annually, are taxed at 2.0% of their gross receipts. This is a preferential rate structure because different tax rates are imposed on similar taxpayers (all involved in the business of bingo) based on criteria set in Arizona statutes. This preferential rate structure allows taxpayers with lower gross receipts to be taxed at a lower tax rate. Measuring the tax value of allowing a preferred tax rate for bingo is difficult because the lowest-income taxpayers (recipients of less than $15,600 annually) have a tax rate higher than the highestincome taxpayers. Normally, this type of calculation would simply involve applying the highest tax rate to all taxpayers to find the revenues that might have been received. Therefore, the tax value of allowing preferential tax rates is also calculated in two ways. Option 1 determines the additional tax that would be received if all classes of licensee were taxed at the highest rate. However, the tax rate of 0.29% mentioned previously, is considered to be the most effective tax rate for Class A. This would make the highest tax rate among the three classes 2.0%. If Class A and Class B were taxed at 2.0%, additional general fund revenues would total $106,400. (The calculation for Class A involves substituting 2.0% as the effective tax rate.) The problem with 15 this method of determining the tax value of preferential tax rates is that it assumes (1) there is a possibility of a legislative change which would raise the bingo tax to a uniform rate that is the highest tax rate currently being imposed and (2) small bingo operations would not be affected by an increase in the tax rate (the same level of bingo activities would occur irrespective of the tax rate). Option 2 looks at preferential rates slightly differently. This option assumes that if a uniform tax rate were to be imposed to tax all licensees identically, the new rate would be revenue neutral, resulting instead in a burden shift. The effective tax rate on all bingo activities, determined by dividing total tax collections into gross receipts, is 1.72%. If this rate is applied to all classes of bingo licensees, total tax collections remain the same, but, as can be seen below, the amount of tax paid by class of licensee shifts. Class A B C Total Original Tax Collections* $8,100 $268,800 $330,600 $607,500 New Tax Collections $47,600 $281,500 $278,500 $607,600 Difference $39,500 $12,600 ($52,100) $0 *This amount reflects collections for tax only, and does not include penalty and interest. 16 SUMMARY OF BINGO TAX EXPENDITURES Revenue Gain Subtraction from Gross Receipts for Class A Licensees Option 1.............................................................................................................. $59,900 Option 2.................................................................................................................. 6,900 Preferential Tax Rates for Class A and Class B Licensees Option 1............................................................................................................ $106,400 Option 2......................................................................................................................... 0 TOTAL QUANTIFIABLE BINGO TAX EXPENDITURES5 RANGES FROM ...........................................................$6,900 -$166,300 Return to Table of Contents 5These tax expenditures represent foregone revenues to the state general fund. 17 18 BOXING TAX EXPENDITURES 19 20 BOXING TAX EXPENDITURES Any person who promotes a boxing contest in Arizona must pay to the Department of Racing (collecting for the state Boxing Commission) a 4% tax on the gross receipts of such match or exhibition, after deduction of city, state and federal taxes (A.R.S. §5-104.02A). Gross receipts are defined as receipts from the face value of tickets sold. Tickets issued as complimentary by the promoter of a boxing match are exempt 6Any 6 from taxation, as long as the number of complimentary tickets does not exceed 2% of total number of tickets issued or 75 tickets, whichever is greater. During fiscal year 2001/02, 29 boxing contests were held. At each event, 75 complimentary tickets were issued with an average price of $25 each. Had the value of these tickets been taxable, an additional $2,200 in boxing taxes would have been received. figures presented for Boxing Tax Expenditures were provided by the Arizona Boxing Commission. 21 SUMMARY OF BOXING TAX EXPENDITURES Revenue Gain Complimentary tickets issued .............................................................................$2,200 TOTAL QUANTIFIABLE BOXING TAX EXPENDITURES7 ...................................................................................................... $2,200 Return to Table of Contents 7These tax expenditures represent foregone revenues to the state general fund. 22 CORPORATE INCOME TAX EXPENDITURES 23 24 CORPORATE INCOME TAX EXPENDITURES The Department of Revenue collected over $346 million in net corporate income taxes during fiscal year 2001/02. Net corporate income tax collected is deposited into the general fund. However, 14.8% of the tax will be distributed to cities and towns two years after the year in which it was collected. For example, 14.8% of tax collected in fiscal year 2001/02 will be distributed to incorporated cities and towns in fiscal year 2003/04. Therefore, only 85.2% of the tax collected is actually available for the state’s use. This fact should be kept in mind when reviewing the reported tax value of subtractions and credits. The assumption can be made that 85.2% of the tax value is general fund revenue, with the remaining 14.8% being distributed to cities and towns two years after collection. Arizona corporate taxable income is calculated beginning with federal taxable income. Therefore, by conforming Arizona law to the Internal Revenue Code, any subtractions allowed under federal law in the calculation of federal taxable income are allowed under Arizona law. From federal taxable income, certain additions and subtractions are allowed to reach Arizona taxable income. After calculating tax liability, corporate taxpayers may take advantage of a number of credits to reduce tax liability. Most of the corporate tax expenditures are not quantifiable. The tax value of the federal subtractions in the calculation of federal taxable income cannot be determined because these are for corporate income from all states, not just Arizona income. The tax value of Arizona's subtractions from federal taxable income cannot be calculated because subtractions are deducted from federal taxable income prior to apportionment of income to Arizona. Therefore, it cannot be determined what percent of the subtractions is used in the calculation of Arizona tax. The remaining subtractions and tax credits are only quantifiable to the extent that data exists. SUBTRACTIONS ALLOWED IN THE CALCULATION OF FEDERAL TAXABLE INCOME The starting point for the calculation of Arizona corporate tax liability is federal taxable income, as calculated on the federal corporate income tax return. The Arizona legislature must approve legislation to conform to the definition of federal taxable income as of January of each year. In conforming to the definition of federal taxable income, Arizona accepts the subtractions from gross income allowed by the federal government. These subtractions include: • • • Compensation of officers. Salaries and wages. Incidental repairs that do not add to the value of the property or appreciably prolong its life. • Debts that became worthless in whole or in part during the tax year. • Expenses of renting or leasing a vehicle. 25 • Contributions or gifts actually paid within the tax year to charitable and governmental organizations and any unused contributions carried over from prior years, except the total amount claimed may not be more than 10% of taxable income. • Depreciation, plus the part of the cost that the corporation elected to expense for certain tangible property placed in service during the tax year. • Certain percentage depletion rates applicable to natural deposits. • Contributions to pensions, profit sharing or other funded deferred compensation plans. • Contributions to employee benefit programs not elsewhere claimed. • Certain taxes paid or accrued during the tax year. • Interest paid on certain debts. • Other deductions including amortization of organizational expenses, losses from partnership trade or business activities, travel and meal expenses, membership dues, etc. It is not possible to estimate the tax value of these subtractions. While the Department of Revenue receives information from the Internal Revenue Service from federal tax returns for corporations with an Arizona address, information on corporations headquartered outside of Arizona but operating within the state is not available. Even if it were available, multi-state corporations would include income and deductions from all states in which they operate in the calculation of federal taxable income, making it useless for Arizona tax expenditure calculation purposes. EXEMPT ORGANIZATIONS Certain organizations are exempt from corporate income tax according to Arizona law. The organizations specifically set out in statute as exempt are: • The United States, the state, counties, municipalities, school districts or other political subdivisions or units of this state or the federal government [A.R.S. §43-104(23)]. • Labor, agricultural or horticultural organizations, other than cooperative organizations [A.R.S. §43-1201(1)]. • Qualifying fraternal beneficiary societies, orders or organizations [A.R.S. §43-1201(2)]. • Cemetery companies owned and operated exclusively for the benefit of their members or which are not operated for profit [A.R.S. §431201(3)]. • Qualifying corporations organized and operated exclusively for religious, charitable, scientific, literary or educational purposes or for the prevention of cruelty to children or animals [A.R.S. §43-1201(4)]. • Nonprofit business leagues, chambers of commerce, real estate boards or boards of trade [A.R.S. §43-1201(5)]. • Nonprofit qualifying civic leagues or organizations operated exclusively for the promotion of social welfare, or local organizations of employees [A.R.S. §43-1201(6)]. • Clubs organized and operated exclusively for pleasure, recreation and other non-profit making purposes [A.R.S. §43-1201(7)]. • Corporations organized for the exclusive purpose of holding title to property, collecting income therefrom 26 and turning over the entire amount of such income, less expenses, to an organization which itself is exempt from the tax imposed by this title [A.R.S. §43-1201(8)]. • Voluntary employee's beneficiary organizations providing for the payment of life, sick, accident or other benefits to the members of such organizations or their dependents, providing certain requirements are met [A.R.S. §43-1201(9)]. • Teachers' or public employees' retirement fund organizations of a purely local character, provided certain requirements are met [A.R.S. §43-1201(10)]. • Religious or apostolic organizations or corporations, if such organizations or corporations have a common treasury or community treasury, even if such corporations or organizations engage in business for the common benefit of the members, but only if the members thereof include, at the time of filing their returns, in their Arizona gross income their pro rata shares, whether distributed or not, of the net income of the organizations or corporations for such year [A.R.S. §43-1201(11)]. • Voluntary employees' beneficiary organizations providing for the payment of life, sick, accident or other benefits to the members of such organization, their dependents or their designated beneficiaries, provided membership is limited to officers or employees of the U.S. government [A.R.S. §43-1201(12)]. • Corporations classified as diversified management companies under §5 of the Federal Investment Company Act of 1940 and registered as provided in that act [A.R.S. §431201(13)]. • Insurance companies paying to the state tax upon premium income derived from sources within this state [A.R.S. §43-1201(14)]. • Mutual ditch, irrigation or water companies or similar nonprofit organizations if 85% or more of the income consists of amounts collected from members for the sole purpose of meeting losses and expenses [A.R.S. §43-1201(15)]. • Workers’ compensation pools established pursuant to §23-961.01 [A.R.S. §43-1201(16)]. • A small business corporation which makes an election for a taxable year pursuant to subtitle A, chapter 1, subchapter S of the Internal Revenue Code is not subject to corporate taxes for such year but only to the extent such corporation is not subject to federal income taxes [A.R.S. §431126). Three of these organizations - religious or apostolic organizations, insurance companies and Subchapter S corporations - are exempt from corporate tax but their income does not escape taxation. In the case of the religious or apostolic corporations and the Subchapter S corporations, the income is taxed at the individual income tax level. Insurance companies are required to pay insurance premium tax rather than corporate income tax. It is not possible to calculate the corporate tax that would be collected if all exempt organizations were subject to corporate taxation. That calculation would require completion of federal and state tax forms by the exempt organizations. ARIZONA SUBTRACTIONS FROM FEDERAL TAXABLE INCOME 27 Arizona statutes set out certain items that can be subtracted from federal taxable income to reach adjusted income attributable to Arizona. The tax value of these subtractions cannot be determined because these are subtracted from federal taxable income prior to apportionment of income to Arizona. It is impossible to isolate those subtractions attributable to Arizona only. • Annuity income included pursuant to §72 of the Internal Revenue Code if the first payment with respect to such annuity was received prior to 12/31/78 [A.R.S. §43-1022(8)]. • The excess of a partner's share of income required to be included under §702(a)(8) of the Internal Revenue Code over the income required to be included under chapter 14, article 2 of Title 43 [A.R.S. §43-1022(9)]. • The excess of a partner's share of partnership losses determined pursuant to chapter 14, article 2 of Title 43 over the losses allowable under §702(a)(8) of the Internal Revenue Code [§43-1022(10)]. • The amount by which the adjusted basis of all property which is held for the production of income and which is sold or otherwise disposed of during the taxable year other than depreciable property used in a trade or business, computed pursuant to Title 43 and the income tax act of 1954, as amended, exceeds the adjusted basis of such property computed pursuant to the Internal Revenue Code [A.R.S. §43-1022(11)]. • The amount allowed by A.R.S. §431024 for amortization by a qualified defense contractor certified by the Department of Commerce under §411508, of a capital investment for private commercial activities [A.R.S. §43-1022(12)]. • Gain included on the sale or other disposition of a capital investment that a qualified defense contractor has elected to amortize pursuant to A.R.S. §43-1024 [A.R.S. §43-1022(13)]. • The amount allowed by §43-1025 for contributions during the taxable year of agricultural crops to charitable organizations [A.R.S. §431022(14)]. • The portion of any wages or salaries paid or incurred by the taxpayer for the taxable year that is equal to the amount of the federal work opportunity credit, the empowerment zone employment credit, the credit for employer paid social security taxes on employee cash tips, and the Indian employment credit that the taxpayer received under §§45A, 45B, 51(a) and 1396 of the IRC [A.R.S. §43-1022(15)]. • Dividend income received from Arizona corporations [A.R.S. §431122(2)]. • Arizona capital loss carryover in an amount not to exceed $1,000 for tax years beginning prior to 1/1/88 [A.R.S. §43-1122(3)]. • Expenses and interest relating to tax-exempt income disallowed pursuant to §265 of the Internal Revenue Code [A.R.S. §43-1122(4)]. • Dividends received from another corporation owned or controlled directly or indirectly by a recipient corporation [A.R.S. §43-1122(5)]. • Interest income received on obligations of the U.S. [A.R.S. §431122(6)]. • Dividend income from foreign corporations [A.R.S. §43-1122(7)]. • The amount of net operating loss allowed by A.R.S. §43-1123 [A.R.S. §43-1122(8)]. • State income tax refunds received which were included as income in 28 computing federal taxable income [A.R.S. §43-1122(9)]. • Expense recapture included in income pursuant to §617 of the Internal Revenue Code for mine exploration expenses [A.R.S. §431122(10)]. • Deferred exploration expenses allowed by A.R.S. §43-1127 [A.R.S. §43-1122(11)]. • Exploration expenses related to the exploration of oil, gas or geothermal resources [A.R.S. §431122(12)]. • Amortization of pollution control devices [A.R.S. §43-1122(13)]. • Amortization of the cost of child care facilities [A.R.S. §43-1122(14)]. • Income from a domestic international sales corporation required to be included in the income of its shareholders pursuant to §995 of the Internal Revenue Code [A.R.S. §43-1122(15)]. • The income of an insurance company that is exempt under A.R.S. §43-1201 to the extent that it is included in computing Arizona gross income on a consolidated return [A.R.S. §43-1122(16)]. • The amount of contributions by the taxpayer during the taxable year to individual medical savings accounts pursuant to A.R.S. §43-1028 [A.R.S. §43-1122(17)]. • The amount by which capital loss carryover allowable per A.R.S. §431130.01 F exceeds the capital loss carryover allowable per section 13410(b)(5) of the internal revenue code [A.R.S. §43-1122(18)]. ARIZONA NET OPERATING LOSSES All corporate taxpayers are allowed to subtract from their Arizona adjusted gross income the amount of unused net operating losses attributable to Arizona for the last five years (A.R.S. §431122.08). Corporations claimed Arizonabased net operating losses totaling $4.7 billion in tax year 2000. In many cases a corporation’s reported net operating loss exceeded its Arizona adjusted gross income. Subtracting the net operating loss in these cases resulted in negative taxable income. To calculate the tax value of the net operating losses, the loss was multiplied by 7.968% for those businesses with positive taxable income. For those businesses with negative taxable income, that portion of net operating loss that was used to reduce taxable income to zero was multiplied by 7.968%.8 These calculations result in a maximum tax value of $64.3 million. Approximately 22.9% of the 41,209 corporations that filed Arizona corporate income tax returns for tax year 2000 reported net operating losses. The table below shows the number of corporations by size of net operating loss and by whether or not there was enough taxable income to generate a tax liability other than the minimum $50 tax. 8For example, if the net operating loss was $10,000 and the negative taxable income was $9,000, adding back the loss results in $1,000 of net operating loss being used to reduce taxable income to zero. The tax rate was applied against the $1,000 to arrive at the tax value of the operating loss. 29 2000 - Size of NOL $1 to $99 $100 to $999 $1,000 to $9,999 $10,000 to $49,999 $50,000 to $99,999 $100,000 to $499,999 $500,000 to $999,999 $1,000,000 to $10,999,999 Over $10,999,999 Total NOL $ Value # with Tax Liability greater than $50 52 260 700 571 148 187 26 27 6 1,977 $362,724,192 COMMERCIAL TAX CREDITS A tax credit directly reduces a corporation's tax liability, as opposed to a subtraction, which reduces taxable income. Most tax credits that currently exist in Arizona corporate tax law are nonrefundable credits; any credit amount greater than a firm's tax liability will not be refunded. The unused credit is then generally carried forward for use in future tax years. A corporation receives a credit for expenditures in the following areas: • • • • • • • # with Tax Liability less than or equal to $50 396 841 2,262 2,004 571 801 205 303 83 7,466 $4,287,874,610 • • • • • for increased employment in enterprise zones (A.R.S. §43-1161). for the purchase of recycling equipment (A.R.S. §43-1164). for employment by a qualified defense contractor (A.R.S. §431165). for property taxes paid by a qualified defense contractor (A.R.S. §43-1166). for increased employment in military reuse zones (A.R.S. §431167). for research and development expenses (A.R.S. §43-1168). for costs incurred in constructing a qualified environmental technology manufacturing, producing or • • • • • Total 448 1,101 2,962 2,575 719 988 231 330 91 9,443 $4,650,568,802 processing facility (A.R.S. §431169). for expenses incurred to purchase property used to control or prevent pollution (A.R.S. §43-1170). for expenses incurred for tangible personal property used to control or prevent pollution, relating to agriculture (A.R.S. §43-1170.01). for construction materials incorporated into a qualifying facility (A.R.S. §43-1171). for an agricultural water conservation system (A.R.S. §431172). for corrective action costs for underground storage tanks (A.R.S. §43-1173). for alternative fuel vehicles and equipment (A.R.S. §43-1174). for the purchase of a vehicle refueling apparatus for natural gas or electric vehicles and for the cost of installing the apparatus (A.R.S. §43-1174.01). for alternative fuel delivery systems (A.R.S. §43-1174.02). for employment of TANF recipients (A.R.S. §43-1175). for solar hot water heater plumbing stub outs and electric vehicle recharge outlets installed (A.R.S. §43-1176). 30 • • for the fair market value of a vehicle, up to $1500, donated to the wheels to work program (A.R.S. §43-1177). for coal consumed in generating electric power (A.R.S. §43-1178). Prior to discussing the cost of the corporate income tax credits, it is important to mention two points. First, corporate tax information for a given tax year changes over time. Late returns are filed, corporations are audited, amended returns are filed, retroactive legislation is enacted, etc. Therefore, any figures stated here will change next year and figures cited in previous years will not match what is presented here. Second, information cannot be revealed about certain credits claimed without TYPE OF CREDIT Enterprise zone Recycling equipment Defense contracting Military reuse zone Research & development Environmental technology facility Pollution control device Agricultural pollution control equipment Construction materials Agricultural water conservation system Underground storage tanks Alternative fuel vehicles (Nonrefundable) Alternative fuel vehicles (Refundable) Neighborhood electric vehicles Vehicle refueling apparatus & infrastructure (Nonrefundable) Vehicle refueling apparatus & infrastructure (Refundable) Alternative fuel delivery systems (Nonrefundable) Alternative fuel delivery systems (Refundable) Employment of TANF recipients Solar hot water plumbing stub outs & electric vehicle recharge outlets Donation of motor vehicle to wheels to work program Taxes paid for coal consumed in generating electrical power Total breaching confidentiality. If fewer than three firms claim a credit or if one firm claims more than 90% of the total credit amount claimed or if providing statistics on one credit would result in confidential information being divulged about other credits, then that information cannot legally be released. In tax year 2000, corporations claimed 399 commercial tax credits and used a total of $18.1 million in credits to offset their taxes and received $14 million in refunds from refundable alternative fuel vehicle credits. Twenty-two different credits were available, as summarized in the table below. Asterisks indicate instances in which release of information would breach confidentiality laws. # 87 4 4 ** 124 4 23 1998 $ USED $7,249,708 12,660 116,500 ** 8,298,441 365,267 4,211,037 5 ** 0 12 1,039,178 ** 0 36,231 3 3 0 1,083,345 35,325 0 # 82 4 4 3 132 ** 32 ** 7 ** 0 23 1999 $ USED $10,284,361 16,028 751,956 170,634 9,044,648 ** 6,761,571 ** $419,071 ** 0 324,234 43 7 1,311,887 13,630 8 1,377,215 # 71 5 3 3 105 ** 32 0 4 ** 0 9 181 37 4 2000 $ USED $4,883,910 15,626 2,659,007 120,440 6,624,306 ** 3,806,949 0 204,184 ** 0 284,971 15,617,314 1,142,629 2,180 12 138,940 4 50 5 677,992 5 0 47,189 0 6 ** 27,598 ** 0 0 0 0 4 671,375 4 803,476 ** ** 281 $23,260,940 365 $31,659,806 492 $36,508,237 31 SUMMARY OF CORPORATE INCOME TAX EXPENDITURES Revenue Gain Subtractions Allowed in Calculation of Federal Taxable Income: Compensation of Officers .......................................................................................NIA* Salaries and wages ................................................................................................... NIA Incidental repairs adding no value to property ........................................................ NIA Debts becoming worthless during the tax year ........................................................ NIA Expenses of renting or leasing a vehicle.................................................................. NIA Charitable or governmental organization contributions .......................................... NIA Depreciation ............................................................................................................. NIA Certain percentage depletion rates applicable to natural deposits ........................... NIA Pension, profit-sharing, etc. contributions ............................................................... NIA Contributions to employee benefit programs........................................................... NIA Certain taxes paid or accrued during the tax year.................................................... NIA Interest paid on certain debts ................................................................................... NIA Other miscellaneous deductions............................................................................... NIA Exempt Organizations: Political subdivisions or units of the state or federal government ........................... NIA Labor, agricultural or horticultural organizations.................................................... NIA Qualifying fraternal beneficiary societies ................................................................ NIA Cemetery companies not for profit .......................................................................... NIA Qualifying religious, charitable, scientific, etc., corporations ................................. NIA Nonprofit business leagues ...................................................................................... NIA Nonprofit qualifying civic leagues........................................................................... NIA Clubs organized for pleasure, recreation or other nonprofit purposes..................... NIA Corporations organized to hold title to property for exempt organization .............. NIA Voluntary employee's beneficiary organizations ..................................................... NIA Teachers' or public employees' retirement fund organization.................................. NIA Religious or apostolic organizations which pass through income ........................... NIA Voluntary employee's beneficiary organizations with a twist ................................. NIA Diversified management companies ........................................................................ NIA Insurance companies subject to the insurance premium tax .................................... NIA Mutual ditch, irrigation or water companies............................................................ NIA Subchapter S corporations ....................................................................................... NIA Arizona Subtractions from Federal Taxable Income: Annuity income included pursuant to §72 of the IRC ............................................. NIA Excess of a partner's share of income under §702(a)(8) of IRC .............................. NIA Excess of a partner's share of partnership losses .................................................... NIA Excess of adjusted basis of property held for income production ........................... NIA Amortization by a qualified defense contractor....................................................... NIA Gain on amortized capital investment by a qualified defense contractor ................ NIA Dividend income received from Arizona corporations............................................ NIA Arizona capital loss carryover not to exceed $1,000 prior to 1/1/88 ....................... NIA Expenses/interest relating to tax-exempt income disallowed per IRC .................. NIA* * No Information Available. 32 Dividends received from controlled corporation ..................................................... NIA Interest income received on obligations of the U.S. ................................................ NIA Dividend income from foreign corporations............................................................ NIA State income tax refunds .......................................................................................... NIA Expense recapture for mine exploration expenses................................................... NIA Deferred exploration expenses allowed by §43-1127.............................................. NIA Exploration expenses related to oil, gas or geothermal exploration ........................ NIA Amortization of pollution control devices ............................................................... NIA Amortization of the cost of child care facilities....................................................... NIA Income from domestic international sales corporation ............................................ NIA Contributions to individual medical savings accounts............................................. NIA Excess capital loss carryover ................................................................................... NIA Net Operating Losses ................................................................................ $64,300,000 Commercial Tax Credits: Enterprise zone employment......................................................................... $4,884,000 Recycling equipment............................................................................................ 16,000 Defense contracting......................................................................................... 2,659,000 Military reuse zone............................................................................................. 120,000 Research & Development ............................................................................... 6,624,000 Environmental technology facility........................................................................... NR9 Pollution control devices................................................................................. 3,807,000 Agricultural pollution control equipment ..................................................................... 0 Construction materials ....................................................................................... 204,000 Agriculture water conservation system......................................................................NR Underground storage tanks ........................................................................................... 0 Alternative fuel vehicles ............................................................................... 15,902,000 Neighborhood electric vehicles....................................................................... 1,143,000 Vehicle refueling apparatus and infrastructure .................................................. 141,000 Alternative fuel delivery systems....................................................................... 678,000 Employment of TANF recipients......................................................................... 28,000 Solar hot water plumbing stub outs and electric vehicle recharge outlets.................NR Donation of motor vehicles to wheels to work program............................................... 0 Taxes paid for coal consumed in generating electrical power ...................................NR Total Commercial Tax Credits………………………………………….$36,508,000 TOTAL QUANTIFIABLE CORPORATE INCOME TAX EXPENDITURES10 ................................................................................................ $100,808,000 Return to Table of Contents * No Information Available. NR indicates that the information is not releasable due to Arizona confidentiality laws. Fewer than ten license holders took advantage of this refund. 9 10These expenditures represent foregone revenues to the state general fund and to the urban revenue sharing fund, which is distributed to incorporated cities and towns. 33 ESTATE TAX EXPENDITURES 34 35 ESTATE TAX EXPENDITURES The Arizona estate tax is a tax on the transfer of property or interest in property that takes effect upon the owner's death. The estate tax is an amount equal to the federal credit for state death taxes. Estate taxes are deposited into the general fund. Estate tax collections totaled $80.6 million in fiscal year 2001/02. If the decedent owned realty or tangible personal property located in another state, the Arizona tax is reduced by the smaller of the amount of death tax paid to the other state or the federal credit times the percentage of total real or tangible personal property located in another state. The total deductions allowed from the federal credit in fiscal year 2001/02 was $1.2 million. This deduction is a dollarfor-dollar reduction in the estate tax liability. 36 SUMMARY OF ESTATE TAX EXPENDITURES Revenue Gain Deduction from federal credit for state death taxes ...................................... $1,176,000 TOTAL QUANTIFIABLE ESTATE TAX EXPENDITURES11 .................................................................................................... $1,176,000 Return to Table of Contents 11These expenditures represent foregone revenues to the state general fund. 38 FIDUCIARY INCOME TAX EXPENDITURES 39 40 FIDUCIARY INCOME TAX EXPENDITURES Arizona imposes fiduciary income tax on trusts and estates. The taxability of the income is determined by the residence of the fiduciary, beneficiary or deceased taxpayer. For estates, the tax applies to the entire taxable income if the deceased taxpayer was an Arizona resident. The fiduciary or beneficiary residence is immaterial. In contrast, for trusts, the tax applies to the entire taxable income when the fiduciary or beneficiary is an Arizona resident. Arizona taxable income is calculated beginning with federal taxable income. By conforming Arizona law to the Internal Revenue Code, any subtractions allowed under federal law in the calculation of federal taxable income are allowed under Arizona law. From federal taxable income, certain additions, subtractions and exemptions are allowed to reach Arizona taxable income. After calculating tax liability, fiduciary taxpayers may reduce their tax liability by using a credit for taxes paid to other states or countries. All fiduciary income tax collected is deposited into the general fund. However, 14.8% of the tax will be distributed to cities and towns two years after the year in which it was collected. For example, 14.8% of tax collected in fiscal year 2001/02 will be distributed to incorporated cities and towns in fiscal year 2003/04. Therefore, only 85.2% of the tax collected, or of the tax value of any expenditures, is actually available for the state’s use. This fact should be kept in mind when reviewing the reported tax value of the various subtractions, exemptions and credits. SUBTRACTIONS ALLOWED IN THE CALCULATION OF FEDERAL TAXABLE INCOME The starting point for the calculation of Arizona fiduciary income tax liability is federal taxable income, as calculated on the federal form 1041 (U.S. Fiduciary Income Tax Return). The Arizona legislature must approve legislation to conform to the definition of federal taxable income by January of each year. In conforming to the definition of federal taxable income, Arizona accepts the subtractions from gross income allowed by the federal government. These subtractions include: • Deduction for interest paid by the estate or trust on amounts borrowed by the estate or trust or on debt acquired by the estate or trust. This includes any investment interest (subject to limitations), qualified residence interest and any interest payable on any unpaid portion of the estate tax attributable to the value of a reversionary or remainder interest in property. • Deductible taxes, including state and local income or real property tax and generation-skipping transfer tax imposed on income distributions. • Deductible fees paid to the fiduciary for administering the estate or trust during the tax year. • Other deductions, such as amortizable bond premiums, casualty and theft losses, net operating loss deduction and fiduciary's share of amortization, depreciation and depletion not claimed elsewhere. 41 • Miscellaneous itemized deductions in excess of 2% AGI. • Income Distribution Deduction. • Estate tax paid. • $600 exemption for estates. $300 exemption for trusts in which all income must be distributed currently. $100 exemption for all other trusts unless the trust is filing for the final year (in which case no exemption is allowed). federal taxable income may be subtracted from federal taxable income [A.R.S. §43-1332(5)]. • Arizona distribution to beneficiaries. The income of the estate or trust which is to be distributed or credited during the year to any legatee, heir or beneficiary is allowed as a subtraction from federal taxable income [A.R.S. §§43-1341 & 43-1342]. It is not possible to calculate the tax value of these subtractions. Information from the Internal Revenue Service would be required to determine the value and this information is not readily available. Other Subtractions The remaining subtractions on the Arizona fiduciary tax form are entered in aggregate on the line "Other Subtractions from federal taxable income." The following is a list of "Other Subtractions": ARIZONA SUBTRACTIONS FROM FEDERAL TAXABLE INCOME • The Arizona fiduciary income tax return lists the following specific items that can be subtracted from federal taxable income to reach adjusted gross income attributable to Arizona: • Interest received on U.S. obligations. Interest income received on obligations of the United States (less any interest on indebtedness, or other related expenses, and deducted in arriving at Arizona gross income) which were incurred or continued to purchase or carry such obligation can be subtracted [A.R.S. §43-1022(6)]. • Federal income from other fiduciaries. When the estate or trust is the beneficiary of another estate or trust, the beneficiary's share of the trust or estate income recognized under the Internal Revenue Code may be subtracted [A.R.S. §43-1022(3)]. • Arizona estate tax deduction. The apportionate share of the Arizona estate tax that related to the income of the estate and which was included in Benefits, annuities and pensions. Benefits, annuities and pensions totaling not more than $2,500 received from any of the following: U.S. government service retirement and disability fund; retired or retainer pay of the U.S. uniformed services; the U.S. foreign service retirement and disability system; any other retirement system or plan established by federal law; the state retirement system or plan; the corrections officer retirement plan; the public safety personnel retirement system; the elected officials' retirement plan; an optional retirement program established by the AZ board of regents; an optional retirement program established by a community college district board; or a retirement plan established for employees of a county, city or town in Arizona. [A.R.S. §43-1022(2)] • Distributions from individual retirement accounts. The amount of any distributions from an individual retirement account as provided for in §408 of the IRC or from a qualified 42 retirement plan of a self-employed individual as provided for in §401 of the IRC to the extent that total adjustments made pursuant to this paragraph in all tax years do not exceed the total of all contributions made by the taxpayer to such plans prior to 12/31/75, which were included in computing Arizona taxable income. [A.R.S. §43-1022(4)] • Installment income. The amount of income on an installment receivable which is recognized pursuant to the IRC and which has already been recognized on the death of the taxpayer for purposes of this title for tax years ending before 1/1/90. [A.R.S. §43-1022(5)] • Interest income on U.S. obligations. Interest income received on U.S. obligations, less any interest on indebtedness, or other related expenses, and deducted in arriving at Arizona gross income, which were incurred or continued to purchase or carry such obligations. [A.R.S. §431022(6)] • Medical savings accounts. In the case of a trust that is established as a medical savings account pursuant to A.R.S. §43-1028, income earned by the trust, to the extent that the income is included in the trust's Arizona gross income. [A.R.S. §43-1332(6)] • Refunds from other states. The amount of any income tax refunds received from states other than Arizona and included as income. [A.R.S. §43-1022(7)] • Annuity income. Annuity income included pursuant to §72 of the IRC if the first payment with respect to such annuity was received prior to 12/31/78. [A.R.S. §43-1022(8)] • Partner’s share of income. The excess of a partner's share of income required to be included under §702(a)(8) of the IRC over the income required to be included under chapter 14, article 2 of title 43. [A.R.S. §431022(9)] • Partner’s share of losses. The excess of a partner's share of partnership losses determined pursuant to chapter 14, article 2 of title 43 over the losses allowable under §702(a)(8) of the IRC. [A.R.S. §43-1022(10)] • Sale of income producing property. The amount by which the adjusted basis of all property which is held for the production of income and which is sold or otherwise disposed of during the taxable year other than depreciable property used in a trade or business, computed pursuant to title 43 and the income tax act of 1954, as amended, exceeds the adjusted basis of such property computed pursuant to the IRC. [A.R.S. §43-1022(11)] • Amortization of capital investment. The amount allowed by §43-1024 for amortization, by a qualified defense contractor certified by the department of commerce under §41-1508, of a capital investment for private commercial activities. [A.R.S. §431022(12)] • Gain on capital investment. The amount of gain included on the sale or other disposition of a capital investment that a qualified defense contractor has elected to amortize pursuant to §43-1024. [§43-1022(13)] • Contribution of agricultural crops. The amount allowed by A.R.S. §431025 for contributions of agricultural crops to charitable organizations [A.R.S. §43-1022(14)]. • Federal credits. The portion of any wages or salaries paid or incurred by the taxpayer equal to the amount of the federal work opportunity credit, the empowerment zone employment credit, the credit for employer paid 43 social security taxes on employee cash tips and the Indian employment credit that the taxpayer received under §§45A, 45B, 51(a) and 1396 of the IRC. [A.R.S. §43-1022(15)] • State lottery winnings. The amount of winnings less than $5000 in a taxable year from any of the state lotteries, except that all such winnings before 3/22/83, including periodic distributions from such winnings made after 3/2/83, may be subtracted. [A.R.S. §43-1022(16)] • Mining exploration expenses. The amount of mining exploration expenses determined pursuant to §617 of the IRC which have been deferred in a taxable year ending before 1/1/90 and for which a subtraction has not been previously made. [A.R.S. §431022(17)] • Social security benefits. The amount included pursuant to §86 of the IRC, relating to taxation of social security and railroad retirement benefits. [A.R.S. §43-1022(18)] • Compensation for armed forces active service. To the extent not already excluded, compensation received for active service as a member of the armed forces of the U.S. for any month during any part of which the member served in a combat zone. [A.R.S. §43-1022(19) • Adoption costs. The amount of unreimbursed medical and hospital costs, adoption counseling, legal and agency fees and other nonrecurring costs of adoption not to exceed three thousand dollars. [A.R.S. §431022(20)] • Wood stoves and fireplaces. The amount authorized by A.R.S. §431027 for the purchases of qualified wood stoves, wood fireplaces or gas fired fireplaces. [A.R.S. §431022(21)] • Individual medical savings accounts. With respect to individual medical savings accounts established pursuant to A.R.S. §43-1028, the account holder may subtract the amount of contributions made by the employer, to the extent that these contributions are included in the taxpayer's federal adjusted gross income, and the amount deposited by the taxpayer in the account during the year. [A.R.S. §43-1022(22)] • Operating loss carryover. The amount by which an operating loss carryover or capital loss carryover, allowable pursuant to A.R.S. §43-1029 F, exceeds the net operating loss carryover or capital loss carryover allowable pursuant to section 1341(b)(5) of the internal revenue code. [A.R.S. §43-1022(23)] • Qualified educational expenses. Any amount of qualified educational expenses distributed from a qualified state tuition program determined pursuant to §529 of the Internal Revenue Code and that is included in income. [A.R.S. §43-1022(24)] • Installment sale subject to tax in another state. Any item of income resulting from an installment sale that has been properly subject to tax in another state in a previous year and is included in Arizona gross income in the current taxable year. [A.R.S. §431022(25, 26)]. • Holocaust survivors. The amount authorized by A.R.S. §43-1030 relating to holocaust survivors. [A.R.S. §43-1022(27)] • Energy efficient residence. The amount authorized by A.R.S. §431031 for constructing an energy efficient residence. [A.R.S. §431022(28)] 44 In tax year 2000, fiduciary tax returns reported total subtractions of $1,494.0 million, with estates reporting $108.9 million in subtractions, and trusts reporting $1,385.1 million. The tax value of the subtractions is calculated by applying the average effective tax rate on gross income (federal taxable income plus additions to federal taxable income) to the total subtractions claimed. The effective tax rate on gross income in tax year 2000 equals 1.68%. The tax value of the total subtractions, using the effective tax rate of 1.68%, calculates to $25.1 million. The calculated tax value is the amount of additional income tax that would have been collected if estates and trusts took no subtractions. EXEMPTIONS FROM ARIZONA ADJUSTED GROSS INCOME A.R.S. §43-1332(2) allows estates to claim a $1000 exemption and trusts to claim a $100 exemption from Arizona adjusted gross income. The total amount of exemptions claimed by estates and trusts in 2000 was $7.2 million. The tax value of these exemptions can be calculated using an average effective tax rate of 4.44% (total tax liability divided by total taxable income) of Arizona taxable income. Using an effective tax rate of 4.44%, these exemptions had a tax value of $320,000. PREFERENTIAL TAX RATES Fiduciary income tax for tax year 2000 was calculated according to a graduated tax rate schedule as presented below: at least $0 10,000 25,000 50,000 150,000 but less than $10,000 25,000 50,000 150,000 and over 2.87% of taxable income 3.20% of taxable income, minus $33 3.74% of taxable income, minus $168 4.72% of taxable income, minus $658 5.04% of taxable income, minus $1,138 As can be seen from the table, lower taxable incomes are taxed at a lower rate. If all taxpayers were treated identically, the same tax rate would be applied regardless of the amount of taxable income. A question arises, however, as to what tax rate should be applied to determine the revenue impact of treating all taxpayers identically. One argument may be that since the highest tax rate is 5.04%, determining the impact of taxing all income at 5.04% would seem appropriate. However, no taxpayer currently pays 5.04% tax on all taxable income. If a flat tax rate of 5.04% was applied regardless of income level, all taxpayers increase. would experience a tax A more reasonable approach to a flat tax rate would be to apply the effective tax rate on taxable income for all fiduciary taxpayers. Applying this effective tax rate to all fiduciary taxpayers will result in the same tax collections as with the graduated tax rate structure; however, the burden of the tax will shift. The table below uses an effective tax rate of 4.44% of taxable income to illustrate the shift in tax burden when a flat tax rate is applied. 45 As can be seen from the table, changing the graduated tax rates to a flat tax rate results in taxpayers with lower taxable income paying more tax and taxpayers with higher taxable income paying less tax. In the $0.01 to $9,999 federal taxable income bracket, the total tax paid under the existing tax structure is Federal Adjusted Original Tax Liability Gross Income No income $230,264 $0.01-9,999 $980,225 $10,000-19,999 $1,036,896 $20,000-29,999 $940,811 $30,000-39,999 $832,089 $40,000-49,999 $796,402 $50,000-74,999 $1,607,837 $75,000-99,999 $1,275,344 $100,000$3,423,721 $200,000$4,276,978 $500,000$3,315,582 $1,000,000 and $18,880,174 Total $37,596,323 $980,225. Changing to a flat 4.44% tax rate increases this group's tax liability by $533,239 or 54.4%. For all federal taxable income brackets up to $199,999, the tax burden would increase as the flat tax rate is greater than the existing effective tax rate for these groups. New Tax Liability $178,614 $1,513,464 $1,542,865 $1,350,997 $1,132,212 $1,046,966 $1,962,633 $1,431,944 $3,566,829 $4,085,167 $3,022,094 $16,727,797 $37,561,582 CREDITS After fiduciary income tax liability is calculated, two credits can be subtracted from the tax liability. If the estate or trust is considered to be a resident of Arizona and also a resident of another state or country, the estate or trust will be allowed a tax credit against the Arizona income tax liability for taxes paid to the Difference % Change ($51,650) -22.43% $533,239 54.40% $505,969 48.80% $410,186 43.60% $300,123 36.07% $250,564 31.46% $354,796 22.07% $156,600 12.28% $143,108 4.18% ($191,811) -4.48% ($293,488) -8.85% ($2,152,377) -11.40% ($34,741) other state or country. In 2000, $1.6 million was claimed as credit for taxes paid to other states or countries. Additionally, if the trust or estate makes a contribution to the Clean Elections Fund, a credit may be claimed for those contributions. The total clean elections credit claimed in 2000 by estates or trusts was $514. Both credits are a direct reduction to tax liability. 46 SUMMARY OF FIDUCIARY INCOME TAX EXPENDITURES Revenue Gain SUBTRACTIONS IN CALCULATION OF FEDERAL TAXABLE INCOME: Deduction for interest paid......................................................................................NIA* Deductible taxes....................................................................................................... NIA Deductible fiduciary fees ......................................................................................... NIA Other miscellaneous deductions............................................................................... NIA Miscellaneous itemized deductions in excess of 2% AGI ....................................... NIA Income distribution deduction ................................................................................. NIA Estate tax paid .......................................................................................................... NIA $600/$300/$100 estate/trust exemption ................................................................... NIA SUBTRACTIONS FROM FEDERAL TAXABLE INCOME: Interest received on U.S. obligation Federal income from other fiduciaries Arizona estate tax deduction Arizona distribution to beneficiaries Agricultural crops donated to charitable organizations Alternative fuel vehicles and refueling equipment Other subtractions: U.S./state pensions not over $2,500 Certain IRA distributions or 401Ks Installment income recognized pursuant to IRC Income tax refunds from other states Annuity income included pursuant to §72 of the IRC Excess of a partner's share of income Excess of a partner's share of losses Excess of adjusted basis of property held for income production Amortization by a qualified defense contractor Gain on sale of capital investment by qualified defense contractor Lottery winnings, up to $5,000 Mining exploration expenses Social security and railroad retirement benefits Active military pay Medical savings accounts Qualified wood stoves and fireplaces Excess operating cost carryover Certain federal credits Qualified educational expenses TOTAL TAX VALUE OF SUBTRACTIONS FROM FEDERAL TAXABLE INCOME...............................................................................$25,099,000 * No Information Available. 47 TAX VALUE OF $1,000/$100 EXEMPTIONS FOR ESTATES/TRUSTS ....................................................................................... $320,000 CREDIT FOR TAXES PAID TO OTHER STATES/COUNTRIES ..... $1,618,000 CREDIT FOR CONTRIBUTIONS TO THE CLEAN ELECTION FUND...................................................................................................................... $500 TOTAL QUANTIFIABLE FIDUCIARY INCOME TAX EXPENDITURES12 .................................................................................................$27,037,500 Return to Table of Contents 12These expenditures represent foregone revenues to the state general fund and to the urban revenue sharing fund, which is distributed to incorporated cities and towns. 48 FLIGHT PROPERTY TAX EXPENDITURES 49 50 FLIGHT PROPERTY TAX EXPENDITURES The airline companies in Arizona pay a tax on the flight property within the state. The taxable value, or net assessed value, of the flight property is determined by multiplying the full cash value of the property by an assessment ratio. The tax rate that is applied to the net assessed value is equal to the statewide average tax rate, which was $12.55 in tax year 2001. EXEMPTIONS If an airline is operating in Arizona with a maximum passenger capacity of less than 56 seats and a maximum pay load capacity of less than 18,000 pounds (A.R.S. §42-14251.10), this small flight property shall be valued at 30% of its original cost less depreciation multiplied by the assessment ratio (A.R.S. §4214254C). Had the taxable value been 100%, the state would have raised $2.1 million more in fiscal year 2001/02. PREFERENTIAL ASSESSMENT RATIO Arizona statutes set out the assessment ratios to be used in determining the net assessed values of the various classes of property. These assessment ratios range from 25% to 5%. For flight property, the assessment ratio is equal to the ratio which the total net assessed valuation of all taxable property in class 1, class 6 paragraph 3 and personal property in class 2 bears to the total full cash value of such property (A.R.S. §42-14255). For tax year 2001, the assessment ratio used for flight property was 21%. This is considered to be a preferential assessment ratio because it is an average of the assessment ratios in several other classes of property. If flight property had an assessment ratio equal to the highest assessment ratio imposed, 25%, tax collections would have increased by $2.5 million. 51 SUMMARY OF FLIGHT PROPERTY TAX EXPENDITURES Revenue Gain EXEMPTION Tax value at 30% for small airplanes...................................................... $2,072,000 PREFERENTIAL ASSESSMENT RATIOS: Preferential assessment ratio at 25%....................................................... $2,487,000 TOTAL QUANTIFIABLE FLIGHT PROPERTY TAX EXPENDITURES13 .................................................................................................... $4,559,000 Return to Table of Contents 13These expenditures represent foregone revenues to the state aviation fund. 52 IN LIEU PROPERTY TAX EXPENDITURES 53 54 IN LIEU PROPERTY TAX EXPENDITURES Irrigation districts, power districts, electrical districts or agricultural improvement districts directly engaged in the sale of electric power or energy other than for irrigation purposes may elect to make voluntary contributions to Arizona and the political subdivisions thereof for property taxes. These districts are not legally liable for property taxes imposed by the state and the political subdivisions, so these voluntary contributions are known as in lieu property taxes. (However, according to A.R.S. §9-432B, water may not be transported from remote municipal property by a city, town or political subdivision, unless voluntary contributions have been paid.) The Department of Revenue determines the full cash value of the district electing to make in lieu property tax payments. The county assessor of each county where district electric facilities are located computes the gross contribution to be made. The district may subtract certain amounts from this gross contribution figure. A subtraction is allowed for the contribution related to that portion of the electric system related to pumping water (A.R.S. §48-242C1). A deduction of $10,000 is allowed from the gross contribution (A.R.S. §48242C2). Certain taxes or assessments paid to any political subdivision during the preceding calendar year may be deducted from the gross contribution (A.R.S. §48-242C3). The annual average of the total water costs devoted to municipal use during the last three calendar years is also deductible from the gross contribution (A.R.S. §48-242C4). The effect of these deductions from the gross contribution amount is that the district in question pays a certain percentage of the gross contribution. The primary contributor, Salt River Project, paid approximately 79.9% of the tax that would have been levied in fiscal year 2001/02 had they been legally bound to pay property tax. Given the repeal of the state rate, the dollar expenditure that previously appeared in this report is no longer applicable. However, because the exemptions filter through to the tax base at the local level, descriptions of the exemptions remain. Return to Table of Contents 55 56 INDIVIDUAL INCOME TAX EXPENDITURES 57 58 INDIVIDUAL INCOME TAX EXPENDITURES For tax year 2000 tax returns filed in calendar year 2001, the Arizona Department of Revenue collected over $2.2 billion in resident individual income taxes before credits. In the same tax year, the state allowed exemptions, deductions, exclusions, and credits worth as much as $1.4 billion in tax liability. This report details the value of each of these exemptions, deductions, exclusions, credits and preferential rates. The figures presented in this report were determined using the Individual Income Tax Simulation Model, containing a 2000 database. This Model contains 42,006 resident returns, selected using stratified sampling techniques. The information on the back of Arizona Individual Income Tax Form 140 and on Schedule A was entered for the sample returns, making the detailed information presented below available. Please remember these figures are for tax year 2000. All tax expenditures in this report refer to tax law in existence in 2000, filed in 2001. Examination of the detail presented in this section reveals that summing the tax value of certain tax expenditures individually does not produce the total value of removing all of those same tax expenditures at one time. (The sum of the parts is less than the whole.) Disallowing exemptions, subtractions or deductions can have the effect of changing the tax rate applied to a portion of a taxpayer's taxable income. For example, the taxpayer may have had taxable income of $40,000 prior to the removal of the tax exemption device, resulting in a tax rate of 3.74% on part of this income. Removal of deductions may result in pushing the taxpayer's taxable income to $55,000, resulting in a tax rate of 4.72% on part of this income. Removal of all exemptions, subtractions and deductions may make taxable income high enough to hit the 5.04% tax rate. Therefore, adding back income that was previously untaxed can push the taxpayer into two or three higher tax brackets. In other areas of this report, it can be seen that adding the impacts of individual deductions together results in a larger impact than what the figure for removal of the entire section indicates. (The sum of the parts is greater than the whole.) For example, if the components of the Taxes Paid Deduction on the Schedule A were added together, the total would be $140 million. However, removal of the entire Taxes Paid Deduction section results in a value of $138 million. In this case, removal of individual pieces may lower the Schedule A total and may or may not push the taxpayer into a higher tax bracket. Removal of the entire section, however, may push the Schedule A total below the standard deduction level. If this happens, the standard deduction amount is substituted for the Schedule A amount. Therefore, there is a constant deduction level (equal to the standard deduction) below which the taxpayer will not fall, regardless of how much of the Schedule A is removed. This constant deduction level serves to buffer the impact of losing the Schedule 59 A deductions and could potentially keep the taxpayer from moving into a higher tax bracket. Net income tax (corporate, individual and fiduciary) collections are deposited in the general fund after 14.8% of net income tax collections received two years prior is disbursed to cities and towns. In other words, 14.8% of net individual plus corporate plus fiduciary income tax received in Fiscal Year 2001/02 will be distributed to incorporated cities/towns in Fiscal Year 2003/04. When reviewing the tax value of individual income tax expenditures, therefore, the assumption can be made that 85.2% of the tax value is general fund revenue, although the remaining 14.8% is not actually disbursed for two years in the future. SUBTRACTIONS ALLOWED IN CALCULATING FEDERAL ADJUSTED GROSS INCOME The starting point for the calculation of Arizona individual income tax liability is federal adjusted gross income, as calculated on the federal form 1040, 1040A and 1040EZ U.S. Individual Income Tax returns. The Arizona legislature must approve legislation annually to conform to the definition of federal adjusted gross income as of January of the current year. In conforming to the definition of federal adjusted gross income, Arizona accepts the subtractions from gross income allowed by the federal government. These subtractions include: • Interest paid on student loans for qualified higher education expenses for individuals with qualifying incomes. • Contributions to a medical savings account. • Moving expenses in connection with a job or business, with certain requirements. • One-half of self-employment tax paid. • Up to 50% of self-employed health insurance payments. • Self-employed SEP, SIMPLE, and Qualified Plans. • Penalty on early withdrawal of savings. • Alimony paid. • Performing arts-related expenses that meet certain conditions. • Jury duty pay given to your employer. • Deductible expenses related to income from the rental of personal property. • Reforestation amortization. • Repayment of supplemental unemployment benefits under the Trade Act of 1974. • Contributions to section 501(c)(18) pension plans. • Deduction for clean-fuel vehicles. • Contributions by certain chaplains to section 403(b) plans. • Employee business expenses of fee-basis for state or local government officials. It is only possible to estimate the tax value of those subtractions that appear on the front of the federal 1040 tax return as subtractions to gross income. • Individual Retirement Account contributions for individuals with qualifying incomes. 60 SUBTRACTION Individual Retirement Account for qualifying individuals Student loan interest deduction Medical Savings Account deduction Moving expenses One-half of self-employment tax Self-employed health insurance deduction KEOGH retirement plan and self-employed SEP deduction Penalty on early withdrawal of savings Alimony paid TOTAL VALUE OF SUBTRACTIONS EXEMPTIONS Like the federal government, Arizona grants exemptions for taxpayers meeting certain conditions. For 2000, the federal government allowed $2,800 for personal and dependent exemptions. In Arizona, the amount of exemption varies according to type. Personal Exemption The personal exemption is the most broad-based of all exemptions: every taxpayer (and spouse) is eligible for one (A.R.S. §43-1043). Single taxpayers and those who are married but filing separately were allowed exemptions of $2,100 for tax year 2000. Married couples filing jointly with no children and unmarried head of household taxpayers were allowed $4,200 exemptions. The higher personal exemption allowed unmarried head of household filers is a preferential personal exemption amount, double the amount normally allowed for one person. 2000 (Millions) $3.88 1.27 0.03 0.49 7.02 3.28 7.36 0.17 4.78 $28.44 dependent are allowed an exemption of half this amount, $3,150. This higher personal exemption for married couples with children is also a preferential personal exemption. Age 65 or Older Exemption Taxpayers age 65 or older were eligible for an additional exemption equal to $2,100 for primary filer and for eligible spouse in 2000 (A.R.S. §43-1023D).. Dependent Exemption Arizona taxpayers may claim a dependent exemption for children and certain other relatives for whom they provide more than 50% support (A.R.S. §43-1023B). The dependent exemption was $2,300 in 2000. Blind Exemption Taxpayers who have corrected vision of no better than 20/200 or have a field of vision no wider than 20 degrees are eligible for a blind exemption (A.R.S. §43-1023A1). The exemption amount was $1,500 in 2000. Married couples filing jointly with at least one dependent are allowed a personal exemption of $6,300; married filing separate taxpayers with at least one 61 Qualifying Parents Exemption and Ancestors Arizona residents may claim a $10,000 exemption for each qualifying parent and ancestor. (A.R.S. §43-1023C) A qualifying parent or ancestor may be a parent, a parent's ancestor or a spouse's parent or spouse's parent ancestor. The qualifying parent or ancestor must have lived in the taxpayer's residence for the entire taxable year, was 65 years old or older and the taxpayer paid more than one-half of the support and maintenance costs of the parent or ancestor during the taxable year. Additionally, the parent or ancestor must have required assistance with activities of daily living. TYPE OF EXEMPTION 2000 (Millions) Personal exemption $190.35 Preferential personal exemption for Unmarried Head of Household filers 9.94 Preferential personal exemption for married filers claiming at least one dependent 23.85 Age 65 or older exemption 19.32 Dependent exemption 111.44 Blind exemption 0.23 Qualifying parent or ancestor exemption 1.79 TOTAL VALUE OF EXEMPTIONS $317.65 ARIZONA SUBTRACTIONS FROM INCOME Arizona taxpayers can subtract certain amounts from their gross income. The largest subtraction in 2000 was for Social Security or Railroad Retirement benefits included on the federal Form 1040 (A.R.S. §43-1022.18). Arizona also allowed these amounts to be subtracted: the first $2,500 of a federal, State or local retirement annuity (A.R.S. §43-1022.2), the first $5,000 in Arizona lottery winnings (A.R.S. §43-1022.16), interest on U.S. obligations (A.R.S. §43-1022.6), agricultural crops contributed to Arizona charitable organizations (A.R.S. §431022.14), certain amounts for purchases of, and equipment relating to alternative fuel vehicles (A.R.S. §43-1022.21), deposits or employee contributions into medical savings accounts, (A.R.S. §431022.23) and the amount of income tax refunds received from states other than Arizona and which were included as income in computing federal adjusted gross income (A.R.S. §43-1022.7). In addition, there were a myriad of "other subtractions" including, but not limited to: • A beneficiary's share of trust or estate income recognized pursuant to the internal revenue code (A.R.S. §431022.3). • Distributions from an individual retirement account as provided for in §408 of the internal revenue code or from a qualified retirement plan of a self-employed individual (A.R.S. §431022.4). • Income on an installment receivable which is recognizable pursuant to the internal revenue code and which has already been recognized on the death of the taxpayer for purposes of this title for 62 tax years ending before 1/90 (A.R.S. §43-1022.5). • Annuity income included in income pursuant to §72 of the internal revenue code if the first payment with respect to such annuity was received prior to 12/31/78 (A.R.S. §43-1022.8). • The excess of a partner's share of income required to be included under §702(a)(8) of the internal revenue code over the income required to be included under Chapter 14, article 2 of title 43 (A.R.S. §43-1022.9). • The excess of a partner's share of partnership losses determined pursuant to chapter 14, article 2 of title 43 over the losses allowable under §702(a)(8) of the internal revenue code (A.R.S. §43-1022.10). • The amount by which the adjusted basis of all property which is held for the production of income and which is sold or otherwise disposed of during the taxable year other than depreciable property used in a trade or business, computed pursuant to title 43 and the income tax act of 1954, as amended, exceeds the adjusted basis of such property computed pursuant to the internal revenue code (A.R.S. §431022.11). • The amount allowed for amortization, by a qualified defense contractor, of a capital investment for private commercial activities or the amount of gain included in income on the sale or disposition of a capital investment that a qualified contractor has elected to amortize (A.R.S. §431022.12, 13) • Any wages paid for the taxable year that is equal to the amount of the federal work opportunity credit, the empowerment zone employment credit, the credit for employer paid social security taxes on employee cash tips and the Indian employment credit (A.R.S. §43-1022.13). • Exploration expenses determined pursuant to §617 of the internal revenue code, which have been deferred in a taxable year ending before 1/90 and for which a subtraction has not been previously made (A.R.S. §43-1022.17). • To the extent not already excluded from gross income under §112 of the internal revenue code, compensation received for active service as a member of the armed forces of the U.S. for any month during any part of which the member served in a combat zone (A.R.S. §43-1022.19). • Unreimbursed medical and hospital costs, adoption counseling, legal and agency fees and other nonrecurring costs of adoption, not to exceed $3,000 (A.R.S. §43-1022.20). • Authorized amounts for purchase of, and nonoptional equipment directly related to the operation of, qualified wood stoves, wood fireplaces or gas fired fireplaces (A.R.S. §43-1022.22). • Qualified educational expenses distributed from a qualified state tuition program that is included in income (A.R.S. §43-1022.25). 63 TYPE OF ARIZONA SUBTRACTION Interest on U.S. obligations Exclusion for federal, Arizona or local pensions Exempt Arizona lottery winnings Social Security or Railroad Retirement benefits included in income Agricultural crop contributions Alternative fuel vehicles and refueling equipment Certain wages of Native Americans Income tax refunds from other states Other subtractions (from back of 140) Deposits and employee contributions into medical savings accounts Elective subtraction of 2000 federal retirement contributions TOTAL VALUE OF ARIZONA SUBTRACTIONS DEDUCTIONS Arizona taxpayers can deduct the part of their income used to pay for certain expenses, such as taxes or medical bills, by either listing (itemizing) deductions or taking a standard deduction. Arizona allows the same itemized deductions as the federal government, with three exceptions. Medical deductions are fully deductible in Arizona; gambling losses are adjusted to consider the lottery subtraction; and a property tax adjustment is made to offset a property tax credit claimed. Standard Deduction In 2000, the standard deduction was $3,600 for single and married filing separate filers and $7,200 for married filing joint and unmarried head of household filers (A.R.S. §43-1041). Removing the standard deduction would result in additional tax revenue of $133.3 million. The higher standard deduction 14 2000 (Millions) $14.76 7.81 0.06 56.41 0.00 0.0014 7.92 0.98 5.63 0.01 0.25 $95.83 amount allowed for unmarried head of household filers is a preferential deduction amount, double the amount normally allowed one person (A.R.S. §43-1041A2). The value of this preferential standard deduction was $12.38 million in 2000. Itemized Deductions (Schedule A): The provisions allowed on the Schedule A are in A.R.S. §43-1042 as described below. When calculating the impact of disallowing portions of the Schedule A and the entire Schedule A, the standard deduction replaces the Schedule A total if the Schedule A total drops below the standard deduction amount. In other words, if the Schedule A total dropped below $3,600 or $7,200 (the standard deduction amounts based on filing status) the standard deduction amount was used. The subtraction has a tax value of less than $2,000. 64 Medical Deduction The medical deduction on the federal Schedule A equals medical expenses greater than 7.5% of the taxpayer's federal adjusted gross income. This deduction is adjusted on the Arizona return to allow all medical expenses incurred. The value of the 2000 medical deductions was $63.23 million. Taxes Paid Deduction Deductions allowed for taxes included state and local income taxes, real estate taxes and other taxes, including personal property taxes. TYPE OF TAX DEDUCTION State and local income taxes Real estate taxes Personal property taxes Other taxes VALUE OF TAXES PAID DEDUCTIONS Interest Expense Deduction The interest expense deduction is the largest of all the itemized deductions. Deductible interest includes home mortgage interest, points paid on the purchase of a home and some investment interest. TYPE OF INTEREST EXPENSE DEDUCTION Home mortgage interest Deductible points Deductible investment interest VALUE OF INTEREST EXPENSE DEDUCTION Charitable Contribution Deduction Deductions were allowed for contributions made to religious, charitable, educational, scientific or literary organizations. The contributions 2000 (Millions) $179.49 0.90 11.67 $192.39 could be cash, property or out-or-pocket expenses incurred while doing volunteer work. TYPE OF CHARITABLE CONTRIBUTION DEDUCTION Cash contributions Contributions other than cash Carryover from prior year VALUE OF CHARITABLE CONTRIBUTION DEDUCTION Casualty and Theft Losses Losses on non-business property arising from theft, vandalism, fire, storm, and car, boat and other accidents or similar 2000 (Millions) $94.60 34.68 2.28 8.89 $137.58 2000 (Millions) $56.24 19.41 4.48 $79.01 causes are deductible. Money kept in a financial institution that was lost because of insolvency or bankruptcy of the institution was also deductible in some 65 cases. However, only those losses that exceeded 10% of Federal Adjusted Gross Income were deductible. The value of this type of deduction was $0.20 million in 2000. Job Expenses and Most Other Miscellaneous Deductions This deduction includes unreimbursed job expenses, tax return preparation fees, safe deposit box rental, certain legal and accounting fees, etc., which exceed 2% of Federal Adjusted Gross Income. The value of this deduction in 2000 was $29.36 million. Other Miscellaneous Deductions These fully deductible miscellaneous deductions include gambling losses to the extent of gambling winnings, federal estate tax on income in respect of a decedent, amortizable bond premiums on bonds acquired before 10/23/86, etc. Any gambling losses taken on the federal Schedule A were adjusted for Arizona to offset the subtraction for Arizona lottery winnings. Without this adjustment, a double deduction could have been allowed for gambling losses associated with the Arizona lottery. An adjustment is also made to the Arizona itemized deductions for the amount of property taxes included on the federal Schedule A for those qualified defense contractors who claim a credit. This deduction was worth $6.10 million in 2000. TYPE OF DEDUCTION Standard Deduction Preferential standard deduction for unmarried head of household filers Itemized Deductions: Medical and dental expenses Taxes paid Interest expense Charitable contributions Casualty or theft losses Job expenses and most other miscellaneous deductions Other miscellaneous deductions (nonlimited) Value of All Itemized Deductions VALUE OF STANDARD AND ITEMIZED DEDUCTIONS PREFERENTIAL TAX RATES Individual income tax for single and married filing separate filers is calculated 2000 (Millions) $133.30 12.38 63.23 137.58 192.39 79.01 0.20 29.36 6.10 $368.93 $671.89 according to a graduated tax rate schedule as presented below (double this for married filing joint and unmarried head of household filers): 66 at least $0 10,000 25,000 50,000 150,000 but less than $10,000 25,000 50,000 150,000 and over 2.87% of the amount 3.2% of the amount, less $33 3.74% of the amount, less $168 4.72% of the amount, less $658 5.04% of the amount, less $1,138 Lower taxable incomes are taxed at a lower level, or, in other words, are treated preferentially. If all taxpayers were treated identically, the same tax rate would be applied regardless of the level of taxable income. A question arises, however, as to what tax rate should be applied to determine the revenue impact of treating all taxpayers identically. One argument may be that since the highest tax rate is 5.04%, determining the impact of taxing all income at 5.04% would be appropriate. Using this reasoning, an additional $858.3 million would have been collected from individual income tax if a flat 5.04% tax rate had been used. However, no taxpayer is currently taxed solely at 5.04%; only that income greater than $150,000 is taxed at this rate. If a flat tax rate were applied to individual income, the logical tax rate applied would be the effective tax rate of all individual income taxpayers. Dividing total tax liability on individual income tax returns by the total Arizona taxable income results in an effective tax rate 3.6%. Applying this tax rate to all taxpayers results in the same individual income tax collections as with the graduated tax rate structure, but the burden of the tax will change. Taxpayers with lower Federal Adjusted Gross Income will pay more tax and taxpayers with higher Federal Adjusted Gross Income would pay less tax. CREDITS A tax credit differs from an exemption, subtraction or deduction in that it directly reduces tax liability, not taxable income. A $100 deduction, for example, would reduce tax liability by, at most, $5.04 ($100 times the maximum tax rate of 5.04%). On the other hand a $100 credit reduces tax liability by the full $100. Family Tax Credit Single and married filing separately filers with a federal adjusted gross income of $10,000 or less, and married filing jointly filers with a federal adjusted gross income of $31,000 or less with dependents, may claim the family tax credit (A.R.S. §43-1073). The amount of the credit is set at $40 per person in the household, and is capped at $240 for married filing jointly and unmarried head of household filers, and $120 for single and married filing separately filers. Property Tax Credit The property tax credit program was instituted to provide tax relief to the state's low-income elderly. Under this program, full-year residents age 65 or older with a household income of less than $5,500 are eligible for credits ranging from $56 to $502 (A.R.S. §431072). The property tax credit is refundable, meaning that those eligible for the credit receive money even if they had no income tax liability. 67 Clean Elections Credit A credit is allowed for donations made directly to the Clean Elections Fund or a clean election donation made on the individual income tax return. The credit is not to exceed 20% of the tax liability or $530 for single filers ($1,060 for married filing jointly) whichever is greater. The maximum credit is adjusted biennially (A.R.S. §16-954B). Other Credits Other credits are filed on a separate Schedule CR. In many instances, the credit claimed exceeds the tax liability on the return. Since these credits are nonrefundable, the unused portion of the credit is superfluous. For this reason, in order to generate the true expenditure associated with credits, each credit claim must be reviewed. Credit for Taxes Paid to Other States or Countries In the past, the majority of the credits claimed on the Schedule CR, in terms of dollars and volume, were for taxes paid to other states or countries (A.R.S. §431071). Enterprise Zone Credits Enterprise zone credits are income tax credits provided for non-retail businesses located in an enterprise zone established under Arizona law who have a net increase in employment of qualified employees (A.R.S. §43-1074). A maximum of $500 per each net new employee can be claimed in the first or partial year of employment. In the second year of continuous employment, a maximum of $1,000 per net new employee can be claimed. The limit in the third year of continuous employment is $1,500 per net new employee. Recycling Equipment Credit The recycling equipment credit is an income tax credit for businesses or individuals that acquire and place in service recycling equipment in the state (A.R.S. §43-1076). This credit is equal to 10% of the installed cost of the recycling equipment but not to exceed the lessor of 25% of the tax liability for that tax year or $5,000. Defense Contracting Credit Defense contracting credits are provided to qualified defense contractors for net increases in full-time employment positions under the United States Department of Defense contracts and for net increases in private commercial fulltime employment within Arizona by a qualified defense contractor (A.R.S. §431077). An income tax credit is also allowed equal to a portion of the amount paid as property taxes during the taxable year by a qualified defense contractor on property that is classified as Class 3 (A.R.S. §43-1078). Military Reuse Zone Credit The military reuse zone credit is a tax credit for net increases in employment by the taxpayer of full-time employees working in a military reuse zone who are primarily engaged in manufacturing, assembling or fabricating aviation or aerospace products (A.R.S. §43-1079). The amount of the credit is determined by a dollar amount allowed for net new employee positions other than dislocated military base employees and by a dollar amount allowed for net new dislocated military base employee positions. Environmental Technology Credit An income tax credit is provided for expenses incurred in constructing a qualified environmental technology manufacturing, producing or processing facility (A.R.S. §43-1080). The amount 68 of the credit is equal to 10% of the amount spent during the taxable year to construct the facility. Pollution Control Device Credit The pollution control device credit is a tax credit for expenses incurred to purchase real or personal property that is used in Arizona in the taxpayer's trade or business to control or prevent pollution (A.R.S. §43-1081). The amount of the credit is equal to the lesser of 10% of the purchase price or $5,000. Agricultural Pollution Control Equipment Credit A credit is allowed for expenses that a taxpayer (involved in the commercial production of livestock, livestock products or agricultural, horticultural, viticultural or floricultural corps or products) incurs to purchase tangible personal property that is primarily used in the taxpayer’s trade or business in the state to control or prevent pollution (A.R.S. §43-1081.01). Construction Materials Credit A.R.S. §43-1082 provides a tax credit of 5% of the purchase price of new construction materials incorporated into a qualifying facility located in Arizona if the facility has a total cost of $5 million. Solar Energy Device Credit A solar energy credit is provided for an individual who installs a solar energy device in his or her residence in Arizona. The credit for buying or installing such a device is 25% of the cost, including installation, or $1,000, whichever is less (A.R.S. §43-1083). Agricultural Water Conservation System Credit A credit is allowed for expenses incurred by a taxpayer to purchase and install an agricultural water conservation system (A.R.S. §43-1084). The agricultural water conservation system must be primarily designed to substantially conserve water on land that is used to produce agricultural products, raise, harvest or grow trees, or sustain livestock. The amount of the credit is 75% of the qualifying expenses. Underground Storage Tanks Credit Taxpayers that incur expenses for corrective actions taken with respect to the release of a regulated substance from an underground storage tank are allowed an income tax credit. The credit is 10% of the amount spent for corrective actions during the taxable year, if certified by the Department of Environmental Quality. (A.R.S. §43-1085) Alternative Fuel Vehicles Credit An income tax credit is provided for the purchase of one or more new alternative fuel vehicles for use in this state or for expense incurred for converting one or more conventional vehicles to operate on alternative fuel (A.R.S. §43-1086). The credit amount is determined based on various factors: the level of emissions (low, ultralow or zero), cost of conversion, and/or the weight of the vehicle. This credit is refundable for tax years 2000 and 2001 only. (The credit amount used for neighborhood electric vehicles are listed separately in the summary table.) Vehicle Refueling Apparatus Credit A.R.S. §43-1086.01 provides a credit for the purchase of a vehicle refueling apparatus including storage tanks, for installation on one or more properties in Arizona. The credit is equal to the cost of the vehicle refueling apparatus. This credit is refundable beginning in tax year 2000. 69 Alternative Fuel Delivery System Credit A credit is allowed for construction costs or operating costs for constructing or operating an alternative fuel delivery system in Arizona (A.R.S. §43-1086.02). This credit is refundable for tax year 2000 only. Employment of TANF Recipients Credit A.R.S. §43-1087 provides for an income tax credit for net increases in qualified employment of recipients of temporary assistance for needy families who are Arizona residents. A maximum of $500 per each net new employee can be claimed in the first year of employment, $1,000 in second year of employment and $1,500 in the third year. Contributions to Charities that Provide Assistance to the Working Poor Credit Up to $200 in voluntary cash contributions to a charitable organization that spends at least 50% of its budget on services to Arizona residents who receive TANF benefits or low income Arizona residents (income of less than 150% of the federal poverty level) can be taken as an income tax credit (A.R.S. §43-1088). Private School Tuition Organization Credit The private school tuition organization credit is allowed for cash contributions to a school tuition organization, up to $500. (A.R.S. §43-1089) Public School Extra Curricular Activity Fee Credit A.R.S. §43-1089.01 allows an income tax credit for the amount of fees paid to a public school located in Arizona for the support of extra curricular activities, up to $200. Solar Hot Water Heater Plumbing Stub Outs and Electric Vehicle Recharge Outlets Credit A credit is allowed for costs incurred of installing an electric vehicle recharge outlet and for including solar hot water heater plumbing stub outs in one or more houses in Arizona constructed by the taxpayer. (A.R.S. §43-1090) Donation of Motor Vehicles to Wheels to Work Program Credit A credit is allowed for the fair market value of any vehicle that is donated to the wheels to work program with a maximum credit of $1,500 per vehicle (A.R.S. §431090.01). 70 TYPE OF CREDIT Family tax credit Property tax credit Clean elections credit Credit for taxes paid to other states Enterprise zone credit Recycling equipment credit Defense contracting credit Military reuse zone credit Environmental technology credit Pollution control device credit Agricultural pollution control equipment credit Construction materials credit Solar energy device credit Agricultural water conservation system credit Underground storage tanks credit Alternative fuel vehicles credit (nonrefundable) Alternative fuel vehicles credit (refundable) Alternative fuel vehicle credit – neighborhood electric vehicle portion Vehicle refueling apparatus credit (nonrefundable) Vehicle refueling apparatus credit (refundable) Alternative fuel delivery system credit (nonrefundable) Alternative fuel delivery system credit (refundable) Employment of TANF recipients credit Contributions to charities that provide assistance to the working poor credit Private school tuition organization credit Public school extra curricular activity credit Solar hot water heater plumbing stub outs and electric vehicle recharge outlets credit Donation of motor vehicles to wheels to work program credit TOTAL VALUE OF ALL CREDITS (credit used and refunded) 2000 (Millions) $7.80 4.65 0.54 57.40 1.60 0.02 0.00 0.00 0.00 NR15 0.02 NR 0.90 1.29 0.00 0.32 94.11 17.01 0.21 3.19 0.04 2.86 0.00 1.00 17.62 17.53 0.12 0.55 $228.67 15 NR indicates that the information is not releasable due to Arizona confidentiality laws. Fewer than ten license holders took advantage of this refund. 71 INDIVIDUAL INCOME TAX EXPENDITURES Tax Year 2000 FEDERAL SUBTRACTIONS FROM INCOME: Individual Retirement Account for qualifying individuals ..........................$3,882,000 Student Loan Interest deduction ....................................................................1,270,000 Medical Savings Account deduction...................................................................30,000 Moving expenses...............................................................................................492,000 One-half of self-employment tax ...................................................................7,018,000 Self-employed health insurance deduction ....................................................3,278,000 Keogh retirement plan and self-employed SEP deduction ............................7,362,000 Penalty on early withdrawal of savings ............................................................167,000 Alimony paid..................................................................................................4,777,000 Total Value of Federal Subtractions from Income ...............................$28,437,000 EXEMPTIONS: Personal exemptions ................................................................................$190,354,000 Preferential personal exemption for unmarried head of household ...............9,935,000 Preferential personal exemption for married filers with one or more dependents...................................................................................................23,853,000 Age 65 or over exemptions ..........................................................................19,322,000 Dependent exemptions ...............................................................................111,442,000 Blind exemptions ..............................................................................................229,000 Qualifying parent or ancestor exemption................................................. 1,791,000 Total Value of Exemptions ....................................................................$317,645,000 SUBTRACTIONS FROM INCOME: Interest on US obligations..........................................................................$14,755,000 Exclusion for federal, Arizona state or local pensions ..................................7,810,000 Exempt Arizona state lottery winnings...............................................................61,000 Social Security or Railroad Retirement benefits included on federal form 1040 ................................................................................................56,408,000 Agricultural crop contributions....................................................................................0 Alternative fuel vehicles and refueling equipment ...............................................1,000 Certain wages of Native Americans...............................................................7,925,000 Income tax refunds from other states ................................................................981,000 Other Subtractions..........................................................................................5,632,000 Deposits and employee contributions into medical savings accounts ..................7,000 Elective subtraction of 2000 federal retirement contributions..........................251,000 Total Value of Subtractions ....................................................................$95,828,000 DEDUCTIONS: Standard deduction...................................................................................$133,297,000 Preferential standard deduction for unmarried head of household ..............12,384,000 Itemized deductions: Medical & dental expenses ..........................................................................63,229,000 72 Taxes paid: State and local income taxes.......................................... 94,605,000 Real estate taxes ............................................................ 34,681,000 Personal property taxes .................................................... 2,278,000 Other Taxes................................................................... 8,886,000 Total value of taxes paid deduction.....................................................$137,584,000 Interest Expense: Home Mortgage Interest.............................................. 179,492,000 Deductible Points................................................................ 903,000 Deductible Investment Interest.................................... 11,667,000 Total Value of Interest Expense ..........................................................$192,409,000 Charitable Contributions: Cash Contribution.......................................................... 56,241,000 Contributions Other Than Cash..................................... 19,415,000 Carryover From Prior Year........................................... 4,484,000 Total Value of Charitable Contributions ................................................ $79,013,000 Casualty & Theft Losses .................................................................................... 203,000 Job Expenses and Most Other Miscellaneous Deductions ........................... 29,359,000 Nonlimited Miscellaneous Deductions ........................................................... 6,103,000 Total Value of Itemized Deductions ......................................................... $368,935,000 Total Value of Standard and Itemized Deductions.............................. $671,894,000 CREDITS: Family tax credit ........................................................................................... $7,800,000 Property tax credit........................................................................................... 4,654,000 Clean elections fund credit................................................................................. 537,000 Credit for taxes paid to other states or countries........................................... 57,403,000 Enterprise zone credit...................................................................................... 1,597,000 Recycling equipment credit ................................................................................. 22,000 Defense contracting credit ............................................................................................ 0 Military reuse zone credit ............................................................................................. 0 Environmental technology credit .................................................................................. 0 Pollution control device credit ................................................................................ NR16 Agricultural pollution control equipment credit .................................................. 18,000 Construction materials credit .....................................................................................NR Solar energy device credit.................................................................................. 903,000 Agricultural water conservation system credit ............................................... 1,290,000 Underground storage tanks credit ................................................................................. 0 Alternative fuel vehicles credit ..................................................................... 94,433,000 Neighborhood electric vehicle credit ............................................................ 17,011,000 Alternative fuel delivery system credit ........................................................... 2,904,000 Vehicle refueling apparatus credit .................................................................. 3,400,000 Solar water heater plumbing stub outs and electric vehicle recharge 16 NR indicates that the information is not releasable due to Arizona confidentiality laws. Fewer than ten license holders took advantage of this refund. 73 Outlets credit ...................................................................................................... 12,000 Employment of TANF recipients credit........................................................................ 0 Contributions to charities providing assistance to working poor credit ......... 1,000,000 Private school tuition organization credit ..................................................... 17,620,000 Public school extra curricular activity fee credit .......................................... 17,530,000 Donation of motor vehicles to wheels to work program credit.......................... 547.000 Total Value of Credits............................................................................. $228,671,000 VALUE OF INDIVIDUAL INCOME TAX EXPENDITURES17 ............................................................................................. $1,419,050,000 Return to Table of Contents 17These expenditures represent foregone revenues to the state general fund and to the urban revenue sharing fund, which is distributed to incorporated cities and towns. 74 INSURANCE PREMIUM TAX EXPENDITURES 75 76 INSURANCE PREMIUM TAX EXPENDITURES 18 Each insurer in the state is required to file a report with the Arizona Department of Insurance annually, showing total direct premium income (A.R.S. § 20-224). Total direct premium income does not include “...applicable cancellations, returned premiums, the amount of reduction in or refund of premiums allowed to industrial life policyholders for payment of premiums direct to an office of the insurer, all policy dividends, refunds, savings coupons and other similar returns paid or credited to policyholders within this state and not reapplied as premiums for new, additional or extended insurance.” Direct premium income also excludes “considerations received on annuity contracts,” as well as the “unabsorbed portion of any premium deposit.” No information is available on the value of these exclusions from direct premium income because this information is not required to be reported to the Department of Insurance. However, there is data available for “considerations received on annuity contracts.” Insurance companies reported $1,404.6 million (of which $33.3 million were reported by fraternal benefit societies) in these considerations which, if taxed at a two-percent rate, would have resulted in $28.1 million in revenues to the state in fiscal year 2001/02. Insurers which are assessed by the Life and Disability Insurance Guaranty Fund or the Property and Casualty Insurance Guaranty Fund are permitted to offset their premium tax liabilities “in the amount of 20% of the assessment for the year of assessment and 20% of the assessment in each of the succeeding four years.” [A.R.S. §§ 20-674(B) and 20-692(B)]. Insurers were able to offset their calendar year 2000 insurance tax liabilities (and thus, fiscal year 2001/02 tax revenue) by an aggregate of $6.7 million. Domestic life and disability insurers and domestic life and disability reinsurers that pay their certificate of authority renewal fees are eligible for credits against their insurance premium taxes. A.R.S. §§ 20-224(B) and (C). The sum of these credits reduced fiscal year 2001/02 premium tax revenues by $29,600. Surplus lines brokers are not required to collect and remit insurance premium tax on “...reinsurance, ocean marine and foreign trade insurance, insurance on subjects located, resident or to be performed wholly outside this state, insurance on vehicles or aircraft owned and principally garaged outside this state, or insurance on property or 18Any figures presented for Insurance Premium Tax Expenditures were provided by the Department of Insurance. 77 operations of railroads engaged in interstate commerce.” [A.R.S. § 20420(A)]. Surplus lines tax is not imposed on coverage covering federally recognized Native American governments in accordance with Attorney General Opinion I95-13 (R9511). Surplus lines tax is not imposed on coverage provided to the State of Arizona pursuant to A.R.S. § 41-621(F), which exempts the Department of Administration from the provisions of Title 20, Chapter 2, Article 5 -- the Article that, in part, imposes the surplus lines tax. In total, surplus line brokers reported $4.9 million in premiums exempted from calendar year 2001 premium tax. The tax on these premiums would have been $147,500 if they were taxed at the three-percent rate at which non-exempt surplus lines premiums are taxed. Insurers are required to pay a 2.2% tax on fire insurance premiums “... except that the tax on fire insurance premiums on property located in [qualified locations including] incorporated cities or towns which procure the services of private fire companies ....” is 0.66% [A.R.S. § 20-224(B)]. Eighty-five percent of fire insurance premium taxes are deposited into the Insurance Premium Tax Clearing Account Fund for apportionment to fire districts and municipalities for the retirement plans of firefighters [A.R.S. §§ 20-224(C), 9-951, 9-952, 9-972]. The remaining 15% of fire insurance premium taxes are deposited with the General Fund (A.R.S. § 20-227). In calendar year 2001, insurers wrote $28.4 million of taxable fire insurance premium for risks in qualified locations resulting in $187,200 in insurance premium tax paid during fiscal year 2001/02 for those risks. If risks in qualified locations were subject to the 2.2% tax rate applied to other fire insurance premiums, insurers would have paid $623,900 in fiscal year 2001/02, a difference of $436,700. The portion of the difference allocable to the General Fund (15%) would have been $65,500 although for the purposes of this report, we suggest the tax expenditure is $436,700 (i.e. to include the amounts transferred for firefighter retirement plans). The effect of the tax rate difference may be mitigated by retaliatory tax, described later. Title 20, Chapter 4, Article 14, added by Laws 2001, Chapter 327, requires the Department of Insurance, effective July 1, 2002 to license “captive insurers.” All other states that license captive insurers impose upon them an insurance premium tax. Arizona law does not provide for a premium tax for captive insurers (however, the Director of Insurance has discretion over the license fees and renewal fees imposed upon captive insurers). Because captive insurer licensing has just begun (as of September 30, 2002, there is only one licensed captive insurer), we are unable to predict the magnitude of the tax expenditures associated with the absence of a captive insurer premium tax. Hospital, medical, dental and optometric service corporations, considered to be nonprofit institutions, are exempt from insurance premium taxes “... except on premiums received to effect or maintain its subscription contracts other than coverage concerning which the corporation’s relationship is as administrative or fiscal agent for national, state or municipal government or any political subdivision body thereof....”, or any premiums charged thereto (A.R.S. § 20-837). The total of exempted net premiums in calendar year 78 2001 was $209.2 million. If the state were able to apply the two-percent tax rate, which would apply without the exemption, the state would have collected $4.2 million in fiscal year 2001/02. Life and health insurance premiums paid by the Federal Employee Health Benefits (“FEHB”) Fund are exempt from taxation by the states [5 U.S.C. §§ 8714 and 8909(f)]. In calendar year 2001, FEHB premiums collected for life and health coverage procured by the FEHB Fund to provide life and health coverage for federal employees in Arizona totaled $268.3 million. If Arizona were able to tax those premiums at a two-percent rate, the state would have collected $5.4 million in fiscal year 2001/02. “Payments received by health care services organizations from the United States secretary of health and human services pursuant to a contract issued pursuant to 40 United States Code § 1395mm(g) are not taxable.” [A.R.S. § 20-1060(C)]. These are essentially Medicare insurance premiums. For calendar year 2001, exempt premiums totaled $1,368.3 million which, if taxed at a two-percent rate, would have yielded $27.4 million in additional premium taxes in fiscal year 2001/02. Premiums written by the Federal Crop Insurance Corporation (FCIC) to “...insure, or provide reinsurance for insurers of, producers of agricultural commodities grown in the United States....” (7 U.S.C. § 1508), are exempt from state insurance premium taxation (7 U.S.C § 1511). In calendar year 2001, insurers collected $5.4 million in insurance premiums written to the FCIC which, if taxable at a two-percent rate, would have resulted in an additional $109,000 being collected by the state in fiscal year 2001/02. In 1993, the Legislature enacted Laws 1993, Chapter 231 (A.R.S. §§ 20-2301 et seq.) to ensure the availability of small group health insurance in Arizona. Part of this legislation [A.R.S. § 202304(J)] reduces the premium tax rate applied to small group health insurance policies written by accountable health plans. . . . [B]eginning July 1, 1996, accountable health plans shall pay a premium tax of one per cent of the net premiums received for health benefits plans issued to small employers. Beginning July 1, 1997, accountable health plans are exempt from the premium taxes that are required by § 20-224, subsection B, §§ 20837, 20-1010 and 20-1060, for the net premiums received for health benefits plans issued to small employers. . . . During calendar year 2001, aggregate net premiums received for health benefits plans issued to small employers were $505.9 million. Had the tax rate on these premiums remained at two percent, an additional $10.1 million would have been deposited to the General Fund in fiscal year 2001/02. A.R.S. § 20-883 provides exemptions from insurance premium taxes (and other state, county, district, municipal and school taxes) to fraternal benefit societies that qualify under A.R.S. § 20893. Fraternal benefit society premiums exempted from tax totaled $62.4 million for calendar year 2001. This amount includes $33.3 million in annuity 79 considerations reflected earlier in this report. Were the $29.1 million in insurance premiums (excluding annuities) taxed at a two-percent rate for calendar year 2001, $581,500 in fiscal year 2001/02 premium taxes would have been generated. A.R.S. § 20-230 allows the Department of Insurance to charge foreign and alien insurers the same taxes, fees, fines, penalties, licenses, deposit and other obligations that the laws of their state or country will impose upon Arizona insurers doing business in their state or country. This retaliatory tax, as it is commonly known, guarantees that insurers headquartered in state “X,” pay the same rates of taxes and fees in Arizona as Arizona-based insurers pay in state “X.” Therefore, while domestic insurers may pay the tax rates mentioned above, foreign or alien insurers will pay the tax rates above plus the retaliatory tax if the combination of taxes and fees paid in the home state would be greater than the taxes and fees levied by Arizona. This is common practice among most states. Because the amount of retaliatory tax paid by foreign and alien insurers relies on the tax rates, fees and assessments charged by the insurer’s states of domicile, it is impossible to calculate the exact effect Arizona would realize if the above-described qualifications and exemptions of insurance premium taxes were not in place. Therefore, the estimates provided do not include consideration for the possible effect of retaliation. It is fair to say, however, that retaliatory tax would be diminished to some degree if tax expenditures were reduced. A.R.S. §§ 20-224.03 and 20-224.04, added by Laws 1999, Chapter 185, and amended by Laws 2002, Chapter 237 provide credits to insurers that increase their employment of individuals who reside in enterprise zones if the insurers meet a series of requirements, and provide credits to insurers that have offices established in military reuse zones as established in Title 41, Chapter 10, Article 3 and that meet other requirements. To date, two insurers have been certified by the Department of commerce as being eligible to use these credits, but we will not know the amount of credits (which include prior-year credits) to which the insurers are entitled until the credit requests are received. 80 SUMMARY OF INSURANCE PREMIUM TAX EXPENDITURES Revenue Gain SUBTRACTIONS FROM TOTAL PREMIUM INCOME: Applicable cancellations .........................................................................................NIA* Returned premiums .................................................................................................. NIA Reduction or refund for direct payment of industrial life insurance........................ NIA Policy dividends....................................................................................................... NIA Refunds .................................................................................................................... NIA Savings coupons....................................................................................................... NIA Other similar returns paid or credited to policyholders not reapplied as premiums ....................................................................................................... NIA Considerations received on annuity contracts (includes $1,052,000 of tax expenditures relating to considerations received by fraternal benefit societies) ................................................................................... $28,093,000 Unabsorbed portion of any premium deposit........................................................... NIA TOTAL QUANTIFIABLE SUBTRACTIONS FROM PREMIUM INCOME.................................................................................................... $28,093,000 INSURANCE GUARANTY FUND CREDITS ........................................ $6,719,000 DOMESTIC INSURER AND REINSURER TAX CREDITS..................... $29,600 EXEMPTIONS FOR SURPLUS LINE INSURANCE: Reinsurance .............................................................................................................. NIA Ocean marine and foreign trade insurance............................................................... NIA Insurance on subjects located, resident or to be wholly performed outside the state .............................................................................................................. NIA Insurance on vehicles or aircraft owned and principally garaged outside the state.................................................................................................. NIA Insurance on property or operations of railroads engaged in interstate commerce ........................................................................................... NIA Insurance on federally reorganized Native American governments........................ NIA Insurance on the State of Arizona ............................................................................ NIA TOTAL EXEMPTIONS FOR SURPLUS LINE INSURANCE................ $147,500 PREFERENTIAL RATE ON QUALIFIED FIRE INSURANCE ............ $436,700 ABSENCE OF CAPTIVE INSURANCE PREMIUM TAX .............................. NIA GOVERNMENT PROGRAM EXEMPTIONS: Hospital, medical, dental and optometric service corporation premiums paid by federal, state and municipal governments.................................. $4,185,000 Life and health insurance premiums paid by the Federal Employee *No Information Available. 81 Health Benefits Fund ................................................................................ 5,366,000 Health care services organization premiums received from the U.S. Secretary of Health and Human Services ............................................... 27,366,000 Premiums written by the Federal Crop Insurance Corporation ......................... 109,000 Accountable health plan group health insurance to small employers........... 10,118,000 Exempt fraternal benefit societies (other than annuity considerations reported earlier)............................................................................................ 581,500 Enterprise zone and military reuse zone tax credits............................................... NIA* TOTAL GOVERNMENT PROGRAM EXEMPTIONS ...................... $47,725,500 TOTAL QUANTIFIABLE INSURANCE PREMIUM TAX EXPENDITURES19 .................................................................................................. $83,151,300 Return to Table of Contents *No Information Available. 19These expenditures represent foregone revenues to the state general fund. 82 JET FUEL EXCISE AND U S E TA X E X P E N D I T U R E S 83 84 JET FUEL EXCISE AND USE TAX EXPENDITURES Arizona imposes a tax of 3.05¢ per gallon on the first ten million gallons of jet fuel sold. Jet fuel is defined as being expressly manufactured and blended for operating jet or turbine powered aircraft. The jet fuel use tax rate is also 3.05¢ per gallon and is levied on the first ten million gallons of jet fuel stored, used or consumed. The use tax applies to purchasers who originally purchased jet fuel for resale but instead used or consumed the jet fuel and on which excise tax has not been paid. The excise tax does not apply to the sale or use of jet fuel that has already been taxed by another state unless the tax imposed by another state is less than Arizona's tax rate. The difference between Arizona's rate and the rate of the other state is what will be levied and collected. PREFERENTIAL JET FUEL TAX RATES use tax. Fiscal year 1993/94 was the last year that amounts over ten million gallons were taxed. In that year, 179,413,000 gallons were taxed at the over ten million gallon tax rate of 1.05¢ per gallon. Using the same growth rate that has been experienced with jet fuel of less than ten million gallons, an additional $9.2 million could have been generated in fiscal year 2001/02 if sales of jet fuel over ten million gallons were taxed at 3.05¢ per gallon. JET FUEL TAX EXEMPTIONS Jet fuel sold to commercial airlines and used on flights that originate in Arizona and whose first outbound destination is outside of the United States is exempt from the jet fuel excise tax (A.R.S. §425354). Information is not available on this tax exemption. Amounts of jet fuel sold over ten million gallons are not subject to the excise or 85 SUMMARY OF JET FUEL EXCISE AND USE TAX EXPENDITURES Revenue Gain PREFERENTIAL TAX RATES: Jet fuel over 10 million gallons............................................................... $9,200,000 EXEMPTIONS: International flights which originated within the state .....................................NIA* TOTAL QUANTIFIABLE JET FUEL EXCISE AND USE TAX EXPENDITURES20 .................................................................................................... $9,200,000 Return to Table of Contents * No Information Available. expenditures represent foregone revenues to the state general fund, counties and incorporated cities and towns. 20These 86 LUXURY TAX EXPENDITURES 87 88 LUXURY TAX EXPENDITURES Luxury tax collected by the Arizona Department of Revenue totaled $210.2 million for fiscal year 2001/02. The potential for additional luxury tax collections would have been $421.9 million with the elimination of exemptions currently allowed, and with the adoption of a standard liquor tax rate. Repeal of exemptions currently in place would have resulted in an additional $7.7 million. The remaining $414.3 million would be the result of standardizing the liquor tax rate to $3.00 per gallon in exchange for the current rates. ITEMS TAXED AT A PREFERENTIAL RATE Current Arizona law (A.R.S. §42-3052) provides for liquor to be taxed at four different rates: (1) spirituous liquor at the rate of $3.00 per gallon; (2) on each container of vinous liquor, except cider, of which the alcoholic content is not greater than 24% by volume, at the rate of $0.84 per gallon (3) on each container of vinous liquor of which the alcoholic content is greater than 24% by volume21, containing eight ounces or less, $0.25; and (4) on each gallon of malt liquor or cider, $0.16. By applying the standard $3.00 per gallon rate across all liquor types, the resulting revenues would have been: FY 2001/02 Vinous At $3/gallon Actual Difference Malt 21The $32,268,414 $9,035,156 $23,233,258 department has received no tax collections for this liquor type. At $3/gallon Actual Difference Total $413,090,006 $22,031,467 $391,058,539 $414,291,797 This analysis ignores any decrease in demand due to increased prices, a probable result of raising all liquor taxes to $3.00 per gallon. An alternative to equalizing liquor prices but not raising all liquor taxes to the highest rate would be to determine the effective tax rate for all liquor and use this rate for taxation. This is accomplished by determining gallons sold for each type of liquor and dividing the total tax collections by this figure. The result is the effective tax rate, $0.34 per gallon. Applying this tax rate to all types of liquor will result in the same amount of tax collections; however, there will be a tax burden shift. Spirituous and vinous liquor are taxed at a lower rate under this scenario, and malt liquor is taxed at a higher rate. Therefore, the proportion of total taxes paid by each type of liquor shifts away from spirituous and vinous and towards malt. Type Spirituous Vinous Malt Total Original Tax Collections $21,574,744 $9,035,156 $22,031,467 $52,641,367 New Tax Collections $2,432,305 $3,637,894 $46,571,168 $52,641,367 Difference ($19,142,439) ($5,397,262) $24,539,701 $0 EXEMPTIONS FOR TOBACCO PRODUCTS Several exemptions from luxury tax on tobacco products are allowed. Tobacco powder or tobacco products used exclusively for agricultural or 89 horticultural purposes and unfit for human consumption are exempt from taxation according to A.R.S. §423052.06. Since this figure is exempt from taxation, the Arizona Department of Revenue does not require this figure to be reported. Therefore, no tax value of this tax expenditure is available. If proof is provided that cigarettes for which the stamps were purchased were exported from the state, luxury tax may be refunded (A.R.S. §42-3008A). No information is available on the value of this exemption. A.R.S. §42-3206 allows discounts on cigarette stamps. The luxury tax on cigarettes is in the form of a stamp affixed to the cigarette package, which is obtained from the Department of Revenue at the following rates: Liquids containing less than 1/2% alcohol by volume are exempt from luxury tax (A.R.S. §42-3001.10A, .13 & .14B). Since, reporting is not required by this group of taxpayers, there is no available information on potential luxury tax collections. 1. 96% of face value of stamp for first $36,000 worth of stamps. 2. 97% of face value of stamp for second $36,000 worth of stamps. 3. 98% of face value of stamp for additional stamps up to $165,000 in any month by a distributor. In addition, if the distributor purchases more than $165,000 worth of stamps, then the effective rate for all stamps purchased, including the first $72,000, will be 98% of face value. If all stamps were purchased at face value, revenue would have increased by $3.3 million in fiscal year 2001/02. According to A.R.S. §42-3209A, a distributor may return unused tobacco product stamps for a refund. Luxury tax is also refunded if the cigarettes become unfit for sale due to breakage or spoilage (A.R.S. §42-3008A2). Most often, staleness is the reason for refund. If the state considered this to be a hazard of doing business and disallowed such refunds, an additional $4.2 million in fiscal year 2001/02 in luxury revenues would have resulted. EXEMPTIONS FOR LIQUOR In accordance with A.R.S. §423001.10B, .13 & .14C, taxable liquors does not include medicines that are unsuitable for beverage purposes. No information is available on medicine, which includes liquor and is unsuitable for beverage purposes. According to A.R.S. §42-3008A, luxury tax is refunded if (1) proof is provided that the liquor for which the stamps were purchased was exported from the state and (2) if the liquor becomes unfit for sale due to breakage or spoilage. No information is available on liquor for which stamps were purchased and were then exported from the state. Liquor unfit for sale due to breakage or spoilage includes beer or wine which has exceeded its shelf life of three to six months and containers damaged in such a way that the product's quality is uncertain. Documents reporting destruction under this provision indicated $143,400 in tax revenue lost in fiscal year 2001/02. 90 SUMMARY OF LUXURY TAX EXPENDITURES Revenue Gain PREFERENTIAL TAX RATES ON LIQUOR: .................................. $414,292,000 TOBACCO PRODUCT EXEMPTIONS AND REFUNDS: Tobacco powder or products used exclusively for agricultural or horticultural purposes & unfit for human consumption....................................NIA* Discounts....................................................................................................... $3,344,000 Breakage or spoilage refunds.......................................................................... 4,169,000 Exported from state after cigarette stamps purchased ............................................. NIA TOTAL TOBACCO PRODUCT EXEMPTIONS AND REFUNDS ..... $7,513,000 LIQUOR EXEMPTIONS AND REFUNDS: Liquids containing less than 1/2% alcohol by volume ............................................ NIA Liquor contained in medicines, unsuitable for beverage purposes .......................... NIA Liquor exported from state after stamps were purchased ........................................ NIA Breakage or spoilage refunds........................................................................... $143,400 TOTAL LIQUOR EXEMPTIONS AND REFUNDS ................................. $143,400 TOTAL QUANTIFIABLE LUXURY TAX EXPENDITURES22 ................................................................................................ $421,948,400 Return to Table of Contents * No Information Available. expenditures represent foregone revenues to the state general fund and the corrections fund. 22These 91 92 MOTOR CARRIER FEE TAX EXPENDITURES 93 94 MOTOR CARRIER FEE EXPENDITURES Motor carrier fees were effective on October 1, 1997, replacing the motor carrier tax. Motor carriers are responsible for the following fees: motor carrier fee, gross weight fee, highway use fee, and title and registration fee. Receipts from these fees go into the highway user fund and are distributed to the state highway fund, counties, and cities/towns. PREFERENTIAL VEHICLE FEE RATES Motor Carrier Fee The basic motor carrier fee is set at amounts ranging from $64 to $800. The fees are flat amounts based on gross vehicle weight (A.R.S. §28-5854). The vehicle weight for this schedule ranges from 12,001 pounds to 80,000 pounds. Lightweight motor vehicles with a declared gross weight of 12,000 or fewer pounds pay a flat rate of $64 per vehicle (A.R.S. §28-5492). Lighter vehicles are granted preferential fee amounts. The value of this expenditure is currently unavailable. However, during fiscal year 2001/02, Arizona based carriers paid $14.7 million in motor carrier fees. A reduced motor carrier fee of 7/10 of the full rate is applied against motor vehicles (A.R.S. §28-5855) that pre qualified for the reduced motor carrier fee with the department and travel under the following conditions: 45% or more of the mileage reported is either (1) 23Figures 23 without a load; (2) with equipment which makes a motor vehicle ready for the road, (3) with restraining equipment which makes the load safe, (4) with equipment normally carried with the motor vehicle and used for load or unloading, (5) with empty containers being returned to the point of shipment, or (6) with commodities or goods being returned to the point of shipment as a result of damage or consignee returns. The value of this expenditure is unavailable. A reduced motor carrier tax rate of 7/10 of the full rate is applied against motor vehicles weighing 26,000 pounds or more. To qualify the vehicle must begin and end its trip at the same point without having added to its load any items other than those listed in the previous paragraph and at the midway point of a qualifying trip, the load is less than 45% of the full load capacity of the vehicle (A.R.S. §28-5856). The tax value of this information is not available. A reduced motor carrier tax rate of 7/10 of the full rate applies to motor vehicles or lightweight motor vehicles if the vehicle is used only for transporting agricultural products (A.R.S. §28-5857). Agricultural products are crops, livestock or supplies used or produced in farming operations or products, crops or livestock in their unmanufactured or unprocessed states. The value of this expenditure is unavailable. presented for Motor Carrier Tax Expenditures were provided by the Department of Transportation. 95 A $4.00 commercial registration fee is added to the gross weight fee for each registered vehicle. Commercial registration fees collected for Arizona based vehicles totaled $1.5 million during fiscal year 2001/02. However, there is not enough information to determine an appropriate preferential rate for this fee. Gross Weight Fee The gross weight fee is set at amounts ranging from $7.50 to $918, dependent upon vehicle weight (A.R.S. §28-5433). The vehicle weight for this schedule ranges from up to 8,000 pounds to 80,000 pounds. Vehicles in excess of 80,000 are subject to special permits. Lighter vehicles are granted preferential fee amounts. Total gross weight fees collections for Arizona based vehicles during fiscal year 2001/02 was $25.6 million. Unfortunately, there is no information on the value of this tax expenditure. If a motor vehicle is used for seasonal agricultural work, the annual fee will be reduced by 1/12th for each month the vehicle is not in use. The reduced fee is for a period of at least 90 days but less than a full year (A.R.S. §28-5436). The value of this expenditure is currently unavailable. If a privately owned school bus is temporarily operated for purposes other than providing transportation of children to and from school, the owner must pay 1/10th of the annual gross weight fee (A.R.S. §28-5432). The value of this expenditure is currently unavailable. Highway Use Fee The highway use fee is set at amounts ranging from $50 to $2,217, depending upon vehicle weight and age. Vehicle weight for this schedule ranges from up to 8,000 pounds to 80,000 pounds. Highway use fees collected for Arizona based vehicles totaled $4.4 million during fiscal year 2001/02. Vehicles in excess of 80,000 pounds are subject to special permits. If the model year of the vehicle is 1978 or older, the use fee schedule is lower, ranging from $50 to $1,095 (A.R.S. §28-5471). The values of these expenditures are currently unavailable. Due to reporting practices, the Department of Transportation is unable to split out foreign based motor carrier fee collections. However, the total amount received from both of these carriers in fiscal year 2001/02 was $74.9 million. This amount includes registration fees, motor carrier fees, gross weight fees, & highway use fees prorated for miles driven in Arizona. The values of these expenditures are also unavailable. EXEMPTIONS FROM VEHICLE FEES Motor vehicles, trailers or semitrailers owned and operated by religious institutions and used exclusively for the transportation of property produced and distributed for charitable purposes are exempt from the gross weight fee (A.R.S. §28-5432C1). No information is available for this tax exemption. Motor vehicles, trailers or semitrailers owned and operated by nonprofit schools which are recognized as being tax exempt by the federal or state government are exempt from the gross weight fee (A.R.S. §28-5432C2) if used exclusively for transportation of pupils in connection with school curriculum, training of pupils or transportation of property for charitable purposes without compensa- 96 tion. No information is available on the tax value of this exemption. A nonprofit organization which can present a form approved by the director of the division of emergency management may have its motor vehicles, trailers and semitrailers exempted from the gross weight fee (A.R.S. §28-5432C3). No information is available on this tax exemption. state or political subdivision of a state or by an Indian tribal government is exempt from the gross weight fee (A.R.S. §285432C4). No information is available on this tax exemption. A farm vehicle that is issued a farm vehicle license plate is exempt from highway use fees (A.R.S. §28-5473D). No information is available on this tax exemption. A vehicle owned and operated by a foreign government, a consul or any other official representative of a foreign government, by the United States, by a 97 SUMMARY OF MOTOR CARRIER TAX EXPENDITURES Revenue Gain PREFERENTIAL FEE RATES: Motor Carrier Fee Same motor carrier fees for all Arizona based vehicles......................................... NIA* Reduced motor carrier fee for lighter loads ............................................................. NIA Reduced motor carrier fee for trips starting and ending at the same point with a lighter load midway................................................................................. NIA Reduced motor carrier fee for agricultural loads ..................................................... NIA Commercial Registration Fee................................................................................... NIA Gross Weight Fee Same gross weight fees for all Arizona based vehicles ........................................... NIA Reduced gross weight fee for seasonal agricultural vehicles................................... NIA Reduced gross weight fee for privately owned school busses ................................. NIA Highway Use Fee Same use fees for all Arizona based vehicles .......................................................... NIA Foreign Based Carriers Registration fees, motor carrier fees, gross weight fees and highway use fees ....... NIA VEHICLE FEE EXEMPTIONS: Motor carriers owned by religious institutions and used for charitable purposes ............................................................................................................. NIA Motor carriers owned by nonprofit schools ............................................................. NIA Motor carriers owned by nonprofit organizations with a division of emergency maintenance form ............................................................................ NIA Motor carriers owned by governments .................................................................... NIA Farm vehicles .......................................................................................................... NIA TOTAL QUANTIFIABLE MOTOR CARRIER FEE EXPENDITURES24 ................................................................................................................ NIA Return to Table of Contents *No Information Available. 24These expenditures represent foregone revenues to the state highway fund, counties and incorporated cities/towns. 98 MOTOR VEHICLE FUEL TAX EXPENDITURES 99 100 MOTOR VEHICLE FUEL TAX EXPENDITURES 25 There is a tax of 18¢ per gallon on each gallon of motor vehicle fuel possessed, refined, manufactured, produced, blended or compounded by the supplier or imported by the supplier, whether in the original package or container in which it was imported or otherwise. Beginning January 1, 1998, all suppliers are required to pay tax on all fuel received. In order to qualify for an exemption, the taxpayer must then file for a refund (A.R.S. §28-5610B). The proceeds of this tax are distributed to the state highway fund, counties, incorporated cities and towns, the off-highway vehicle recreation fund and the state lake improvement fund. EXEMPTIONS FROM THE MOTOR VEHICLE FUEL TAX Motor vehicle fuel moving in interstate or foreign commerce, not destined or diverted to a point within this state is exempt from the motor vehicle fuel tax (A.R.S. §28-5610A5). No information is available on this tax expenditure. Motor vehicle fuel sold to the United States or an instrumentality or agency of the United States is exempt from the motor vehicle fuel tax (A.R.S. §285610A6). During fiscal year 2001/02, $428,300 was refunded for this exemption. Motor vehicle fuel that is sold within an Indian Reservation to an enrolled member of the Indian tribe is excluded from taxation per A.R.S. §28-5610A3. The total amount refunded for this provision during fiscal year 2001/02 was $449,600. A person who purchases and uses motor vehicle fuel other than in motor vehicles upon the highways of Arizona, and other than in watercraft upon the waterways in Arizona, and other than in motor vehicles operating on a transportation facility or toll road shall be repaid the motor vehicle fuel tax paid (A.R.S. §285611A). In fiscal year 2001/02, $1.9 million in motor vehicle fuel tax was refunded based on this exemption. Motor vehicle fuel purchased in Arizona, for which proof of export is available and either exported by a supplier or sold by a supplier to a distributor for immediate export is exempt from motor vehicle fuel tax (A.R.S. §28-5610A1-2). Requests for refunds against import liability in the amount of $2.9 million were received in fiscal year 2001/02. Anyone who purchases motor vehicle fuel and loses such fuel due to fire, theft or other accident may request a refund for the tax paid on this fuel (A.R.S. §285611A4). No refunds of this type were requested for fiscal year 2001/02. 25Any figures presented for Motor Vehicle Fuel Tax Expenditures were provided by the Arizona Department of Transportation. 101 SUMMARY OF MOTOR VEHICLE FUEL TAX EXPENDITURES Revenue Gain Motor vehicle fuel moving in interstate or foreign commerce ...............................NIA* Motor vehicle fuel sold to the United States or an instrumentality or agency of the United States ..................................................................................... $428,300 Motor vehicle fuel sold to Native Americans on Reservations ......................... 449,600 Motor vehicle fuel used other than in motor vehicles, watercraft and motor vehicles operating on a transportation facility or toll road ........................ 1,930,000 Motor vehicle fuel purchased for export......................................................... 2,861,000 Motor vehicle fuel lost due to fire, theft or other accident ........................................... 0 TOTAL QUANTIFIABLE MOTOR VEHICLE FUEL TAX EXPENDITURES26 .................................................................. $5,668,900 Return to Table of Contents * No Information Available. tax expenditures represent foregone revenues to the off-highway vehicle recreation fund, the state lake improvement fund, the state highway fund, counties and incorporated cities and towns. 26The 102 PARA-MUTUEL TAX EXPENDITURES 103 104 PARI-MUTUEL TAX EXPENDITURES HORSE OR HARNESS RACING PREFERENTIAL RATES For horse or harness races, the state receives 2% of the gross amount of the first $1 million handled on live races in pari-mutuel pools and 5% of the gross amount exceeding $1 million (A.R.S. §5111D). If the state received 5% of all proceeds, the state would have received an additional $1.8 million in fiscal year 2001/02. From the state share of the horse or harness racing revenues, the general fund received no revenues in fiscal year 2001/02. EXEMPTIONS FROM THE PARI-MUTUEL TAX Moneys handled in a pari-mutuel pool for wagering on simulcasts of out-of-state greyhound, horse or harness races are exempt from the state tax, as described above (A.R.S. §5-111D). The state share of the pari-mutuel tax was reduced by $4.5 million in fiscal year 2001/02 due to this exemption. Any county fair racing association may have one racing meeting each year (A.R.S. §5-111E). All such racing meetings are exempt from the state tax described above. If county fair racing meetings were not exempt from the tax, the state would have received an 27 additional $362,200 in pari-mutuel revenues in fiscal year 2001/02. Moneys from charity racing days are also exempt from the state tax (A.R.S. §5111F). Taxation of these events would have raised an additional $76,600 in fiscal year 2001/02 in pari-mutuel revenues. The percentage paid to the state for greyhound racing and for horse or harness racing shall be reduced by 1% of the total amount wagered in connection with a population of 500,000 or more and by 2% in all other counties for those permittees who make capital improvements to existing race tracks (A.R.S. §5-111.03A). The state share of the pari-mutuel tax was reduced by $901,600 due to this reduction in the percentage during fiscal year 2001/02. The percentage decrease in pari-mutuel wagering between the base year and the previous fiscal year determines a permittee's eligibility for a hardship tax credit. The state share of the pari-mutuel tax for greyhound racing and for horse or harness racing was reduced by the amount equal to the amount of the hardship tax credit (A.R.S. §5-111I). The state share of the pari-mutuel tax was reduced by $1.9 million in hardship tax credits in fiscal year 2001/02 . 27Any figures presented for Pari-mutuel Tax Expenditures were provided by the Arizona Department of Racing. 105 SUMMARY OF PARI-MUTUEL TAX EXPENDITURES Revenue Gain PREFERENTIAL TAX RATES FOR HORSE OR HARNESS RACING................................................................................................. $1,764,400 PARI-MUTUEL TAX EXEMPTIONS: Reduction in pari-mutuel tax on simulcast out-of-state races......................... 4,466,300 County fair racing association meetings ............................................................ 362,200 Charity racing days .............................................................................................. 76,600 Reduction in pari-mutuel tax for capital improvements to race tracks .............. 901,600 Reduction in pari-mutuel tax for hardship tax credit ...................................... 1,901,200 TOTAL QUANTIFIABLE PARI-MUTUEL TAX EXPENDITURES28 .................................................................................................... $9,472,300 Return to Table of Contents 28These expenditures represent foregone revenues to the breeders award fund; the county fairs' racing betterment fund; county fairs' livestock agriculture promotion fund; the coliseum and exposition center fund; the county fair racing fund; the administration of county fair racing betterment retirement fund; the breeders award fund; the stallion award fund; the greyhound adoption fund; the agriculture consulting and training fund; and the state general fund. 106 P R I VAT E C A R P R O P E RT Y TA X E X P E N D I T U R E S 107 108 PRIVATE CAR PROPERTY TAX EXPENDITURES Businesses which operate, furnish or lease railroad cars to be used for transporting or accommodating persons or freight over railroad lines not owned, leased or operated by the business are subject to a private car property tax in Arizona. The taxable value, or net assessed value, of the private car property is determined by multiplying the full cash value of the property by an assessment ratio. The tax rate that is applied to the net assessed value is equal to the average primary and secondary property tax rates in the taxing districts of the state, which was $12.55 in 2001. Arizona statutes set out the assessment ratios to be used in determining the net assessed values of the various classes of property. These assessment ratios range from 25% to 5%. For private car property, the assessment ratio is equal to the ratio which the total net assessed valuation of all taxable property in class 1, class 6 paragraph 3 and personal property in class 2 bears to the total full cash value of such property (A.R.S. §4214308). For tax year 2001, the assessment ratio used for private car property was 21%. This is considered to be a preferential assessment ratio because it is an average of the assessment ratios in several other classes of property. If private car property had an assessment ratio equal to the highest assessment ratio imposed, 25%, tax collections would have increased by $289,300. 109 SUMMARY OF PRIVATE CAR PROPERTY TAX EXPENDITURES Revenue Gain Preferential assessment ratio at 25%................................................................ $289,300 TOTAL QUANTIFIABLE PRIVATE CAR PROPERTY TAX EXPENDITURES29 ....................................................................................................... $289,300 Return to Table of Contents 29These expenditures represent foregone revenues to the state general fund. 110 PROPERTY TAX EXPENDITURES 111 112 PROPERTY TAX EXPENDITURES The property tax system in Arizona has many components. These components are intertwined, making it difficult to address the impact of tax expenditures on one component in isolation. The state no longer levies a property tax per $100 of net assessed value on primary values, so state revenues are affected by exemptions from property tax in three ways. homeowner's school district tax bill, up to $500. If a homeowner's tax bill increases due to higher tax rates, the state will be required to pay a larger amount of money. Finally, the state pays the part of a homeowner's primary tax bill that exceeds 1% of the limited property value. Higher tax rates could mean a larger state payment. First, basic state aid, or a basic level of funding for education per student statewide, is provided through the state, the county and school districts. The school district's responsibility is determined by multiplying a uniform tax rate by assessed valuation. If this amount is less than the basic level of funding, additional revenues are received from the county, funded by the county equalization rate of 49¢ (calculated annually) per $100 of net assessed value. If county equalization revenues cannot bring the school district to its basic level of funding, the state provides the rest of the basic state aid. Therefore, exemptions from the property tax base may increase the state's portion of basic state aid. Although the state property tax per $100 of net assessed value is now set at $0, exemptions filter through to the tax base at the local level. As mentioned earlier in this section, these exemptions do affect state revenues. The second and third methods concern taxation of homeowner property. Frequently, if a political subdivision sees a decline in property values, the tax rate imposed by that subdivision increases so that a consistent revenue stream is provided from the property tax. The same is true if the political subdivision sees its taxable base decrease, through exemptions from the property tax. Through a program called additional state aid (commonly known as homeowner's rebate), the state pays 35% of a Article IX of the Arizona Constitution exempts: • property owned by widows, subject to limitations • property owned by widowers, subject to limitations • property owned by disabled persons, subject to limitations • all federal, state, county and municipal property. • property of educational, charitable and religious associations or institutions not used or held for profit. • household goods owned by the user and used solely for noncommercial purposes. • stocks of raw or finished materials, unassembled parts, work in process or finished products constituting the inventory of a retailer or wholesale located within the state and principally engaged in the resale of such materials, parts or products, whether or not for resale to the ultimate consumer. 113 There are also exemptions from property taxation listed in the statutes, as follows: • Libraries, colleges, school buildings and other buildings used for education, with their furniture, libraries and equipment, and the lands appurtenant to and used with such buildings, as long as they are used for the purpose of education and not used or held for profit (42-11104A). • Property and buildings pursuant to a lease or lease-purchase agreement leased from a school district or a community college district (4211104B). • Hospitals for relief of the indigent or afflicted, appurtenant land and their fixtures and equipment to such buildings, as long as they are not used or held for profit (42-11105A). • Grounds and buildings owned by agricultural societies, as long as they are used for those purposes only, and not used or held for profit (42-11108). • Property or buildings used or held primarily for religious worship, including furniture and equipment, and the land and improvements appurtenant to and used with such buildings, as long as the property is not used or held for profit (42-11109A). • Cemeteries set apart and used for interring the dead, except such portions thereof that are used or held for profit (42-11110). • Observatories maintained for astronomical research and education for the public welfare, together with all property used in the work or maintenance of observatories, including property held in trust, as long as the observatories and other property are used for such purposes only and not used or held for profit (42-11112). • Property used for operation of a health care institution which provides medical, nursing or health-related services to handicapped persons or persons sixty-two years of age or older and which is not used or held for profit (42-11105B). • Property used for the operation of a residential apartment housing facility which is not used or held for profit, which is structured for handicapped persons or persons sixty-two years of age or older, which is located adjacent to a property exempted from taxation and which is owned and operated by the same persons or associations as such other adjacent property (4211106.01). • Property used for the operation of a residential apartment housing facility which is not used or held for profit, which is structured for handicapped persons or persons sixty-two years of age or older and for which a subsidy or payment is given by federal, state or local government or by nonprofit organizations in a substantial amount in relation to the amount given or the total annual operating expenses to pay for principal, interest and operating expenses as long as that organization was not created or operating for the primary purpose of providing the subsidy or payment (42-11106.02) • Property of charitable institutions for relief of the indigent or afflicted, including the lands appurtenant to such property, with their fixtures, equipment and other reasonably required property, as long as such institutions and property are not held or used for profit (42-11107). • Grounds and buildings belonging to societies for the prevention of cruelty to animals and for sheltering, caring for and controlling animals, as long as the grounds and buildings are used for those purposes only and not held or used for profit (42-11113). 114 • Property held by a charitable organization for transfer to this state or a political subdivision of this state to be used as parkland if no rent or valuable consideration is received by the charitable organization (42-11114A). • Property belonging to a volunteer fire department if the property is used exclusively for fire suppression and prevention activities and neither used nor occupied by or for the benefit of any person (42-11117). • Property held by a charitable organization to preserve and protect scientific, biological, geological, paleontological, natural or archaeological resources (42-11115) • Property that is owned by a volunteer nonprofit organization that is operated exclusively to promote social welfare and provide community quasigovernmental services in an unincorporated area of a county. (4211118A) • Property that is owned by a volunteer nonprofit organization, used exclusively for the purpose of performing roadway cleanup and beautification on a gratuitous basis, not used or held for profit and not used or occupied by or for the benefit of any person (42-11119). • Property of musical, dramatic, dance and community art groups, botanical gardens, museums and zoos as long as the property is used for those purposes and not used or held for profit (42-11116). • A commodity that is consigned for resale in a warehouse in this state in or from which the commodity is deliverable on a contract for future delivery subject to the rules of a commodity market regulated by the United States commodity futures trading commission (42-11122). • Animal and poultry feed, including salts, vitamins and other additives, for animal or poultry consumption (4211123). • Property that is owned by a United States Veterans' Organization that qualifies as a charitable organization and is recognized under either section 501 (C)(3) or 501 (C)(19) of the Internal Revenue Code if the property is used predominantly for those purposes and not used or held for profit (42-11120). • Property that is not used or held for profit and that is owned by a community service organization the mission of which is to serve a population that includes persons who are indigent or afflicted, as defined in this section, and that qualifies as a charitable organization and is recognized under §501 (C)(3) of the internal revenue code if the community service organization is primarily engaged in delivering services on that property consisting of fitness programs, camping programs, health and recreation services, youth programs, child care, senior citizen programs, individual and family counseling, employment and training programs, services for individuals with disabilities, meals, feeding programs and disaster relief (42-11121). • Personal property moving through the state or consigned to a warehouse in the state from a point outside this state for storage or assembly in transit to a final destination outside this state (42-11128A). • Property claimed to have no situs in this state for the purposes of taxation shall be considered property-in-transit or futures contract property (4211128B). • Airline company aircraft (4214255). 115 • Property owned or used by districts for the purpose of irrigation water delivery shall be exempt from taxation when used for district purposes (483472A). 2002 ADDITIONAL STATE AID TO EDUCATION Pursuant to A.R.S. §15-972, a report indicating the amount of additional State Aid to Education is prepared each year. This additional aid is the amount referred to as the "Homeowner's Rebate." (The state pays 35% of a homeowner's school district tax bill, up to $500. The summary at the end of this section shows the a Additional State Aid to Education tax roll that was billed in 2002, including additional amounts that were billed for legal class 3 property on the personal property tax roll. ADDITIONAL STATE AID TO EDUCATION Personal ASAE Tax Property Roll Tax Roll County Total Apache $391,988 $26,909 $418,897 Cochise 3,471,555 163,404 3,634,959 Coconino 5,551,968 75,651 5,627,619 Gila 2,368,955 59,268 2,428,223 Graham 496,348 54,548 550,895 Greenlee 96,541 8,269 104,810 La Paz 237,961 0 237,961 Maricopa 152,211,934 2,093,596 154,305,531 Mohave 5,982,451 139,273 6,121,724 Navajo 3,327,175 71,837 3,399,012 Pima 52,910,661 1,253,715 54,164,376 Pinal 7,504,044 1,120,800 8,624,844 Santa Cruz 1,412,627 15,574 1,428,201 Yavapai 8,015,253 147,756 8,163,009 Yuma 4,359,172 239,920 4,599,093 Total $248,338,634 $5,470,518 $253,809,152 116 SUMMARY OF PROPERTY TAX EXPENDITURES Revenue Gain ADDITIONAL STATE AID TO EDUCATION .................................. $253,809,000 TOTAL QUANTIFIABLE PROPERTY TAX EXPENDITURES30 ................................................................................................ $253,809,000 Return to Table of Contents 30These expenditures represent foregone revenues to the state general fund. 117 118 SEVERANCE TAX EXPENDITURES 119 120 SEVERANCE TAX EXPENDITURES Persons engaged in the business of mining or timbering in Arizona are subject to a severance tax. Mining severance is taxed at the rate of 2.5% (A.R.S. §42-5202C) and is levied upon the net severance base. The net severance base is defined as fifty percent of the difference between the gross value of production and the production costs. (A.R.S. §42-5204) The timber severance tax is levied on the timber products derived from timbering activity (A.R.S. §42-5202D). Due to unusual activity, total severance tax collections dropped to ($92,800) in fiscal year 2001/02. PREFERENTIAL SEVERANCE TAX RATES Timber severance is taxed depending on the type of timber product. The tax rate for ponderosa pine timber products is $2.13 per thousand board feet and the tax rate for all species except ponderosa pine is $1.51 per thousand board feet. The tax rate for all other species except ponderosa pine is a preferential rate over the ponderosa pine rate. If all other timber products were taxed at $2.13 per thousand board feet, timber severance tax collections would increase by $600. SEVERANCE TAX CREDITS A credit is allowed against severance tax imposed for accounting and reporting expenses incurred by the taxpayer (A.R.S. §42-5017A). The credit equals 1% of the amount of tax due, not to exceed $10,000 in any calendar year. In fiscal year 2001/02, the value of the severance tax accounting credit was $4,200. SEVERANCE TAX EXCLUSIONS Mining Severance Price, as a component in determining the gross value of production in the calculation of the net severance base, does not include the charges made by a severer for manufacturing, fabricating or other transforming activities of a refined metalliferous mineral product before making a sale (A.R.S. §42-5201.08). In reporting the severance tax to the Arizona Department of Revenue, however, the calculations involved in determining the net severance base are not submitted. Therefore, there is no information regarding the tax value of this exclusion. 121 SUMMARY OF SEVERANCE TAX EXPENDITURES Revenue Gain PREFERENTIAL TIMBER SEVERANCE TAX RATE FOR OTHER TIMBER PRODUCTS ............................................................................ 600 SEVERANCE TAX CREDITS: Accounting credit................................................................................................... 4,200 SEVERANCE TAX EXEMPTIONS: Charges made by a mining severer for manufacturing, fabricating or other transforming activities of a refined metalliferous mineral product...................NIA* TOTAL QUANTIFIABLE SEVERANCE TAX EXPENDITURES31 ........................................................................................................... $4,800 Return to Table of Contents * No Information Available. expenditures represent foregone revenues to the state general fund, counties and incorporated cities and towns. 31These 122 TRANSACTION PRIVILEGE AND USE TA X E X P E N D I T U R E S 123 124 TRANSACTION PRIVILEGE AND USE TAX EXPENDITURES Transaction privilege and use tax gross collections in fiscal year 2001/02 totaled nearly $3.8 billion. Of that amount, $817 million was distributed to the counties and cities. The remaining $3 billion was deposited into the State General Fund. Potential transaction privilege and use tax collections from the various transaction privilege tax exemptions would have, at a minimum, increased collections by more than 178%. The quantifiable exemptions discussed in this report represent potential collections of $5.8 billion. Additionally, lost revenues due to preferential tax rates, e.g., those items taxed at a rate below 5%, total $263.4 million while credits totaled $18.1 million. Therefore, the State of Arizona could be collecting at least an additional $6.1 billion in transaction privilege and use tax if the credits, exempted items and items taxed at a preferential rate were taxed at a 5% rate. Fiscal year 2001/02 was the first year with the 0.6% Proposition 301-Education Tax, for which $439 million was collected. While the two taxes are collected on roughly the same tax base, the Proposition 301 monies are dedicated to Education related funds. We continue to present the value of exemptions at the 5% rate. The effect of these exemptions on Proposition 301 can be estimated by taking 12% of the amounts shown later in this section. For fiscal year 2001/02, the value of the exemptions on the Proposition 301 Education funds was $692 million. PREFERENTIAL TRANSACTION PRIVILEGE TAX RATES In most categories, sales in Arizona are taxed at a 5% rate. Three categories of taxable activities, however, are taxed at a lower rate. These activities and the corresponding tax rates are as follows: CODE 2 13 28 TAXABLE ACTIVITIES Non-Metal Mining, Oil & Gas Production Commercial Lease32 Rental Occupancy Tax RATE 3.125% 0% 3.0% If the activities in these categories had been taxed at a 5% rate in fiscal year 2001/02, additional transaction privilege tax of $263.4 million would have been collected. TRANSACTION PRIVILEGE AND USE TAX REFUNDS AND CREDITS A motion picture production company that produces at least one motion picture in Arizona in a year may apply for a refund, considered to be a remission of transaction privilege and use taxes paid (A.R.S. §42-5015). The amount of the refund is 50% of the transaction privilege and use taxes imposed with respect to tangible personal property purchased by the motion picture production company. Due to confidentiality guidelines, 32The tax rate for this class changed to 0% from 1.0% effective July 1, 1997. 125 information on this exemption cannot be released. A credit is allowed against transaction privilege tax imposed for accounting and reporting expenses incurred by the taxpayer (A.R.S. §42-5017). The credit equals 1% of the amount of tax due, not to exceed $10,000 in any calendar year. In fiscal year 2001/02, the value of the accounting credit equaled $18.1 million. TRANSACTION PRIVILEGE AND USE TAX EXEMPTIONS Certain types of income or sales by businesses are exempt from transaction privilege and use tax. Some of these businesses have taxable sales as well as exempt sales; some have no taxable sales at all. In the case of those businesses that have both taxable and exempt sales, there is some information on the value of the exemption. Those businesses that only have exempt sales generally do not file transaction privilege tax returns; therefore, no figures are reported for the value of the exempt business. The following information lists all exemptions identified in the Arizona Revised Statutes, whether information was available on the tax value of the exemption or not. The primary type of business exempt from transaction privilege tax in Arizona is the business of providing a service (A.R.S. §42-5061A1, A2). Service industries can be broken down into three major categories: (1) professional; (2) business; and, (3) personal services. Examples of professional services include legal, engineering and medical businesses. Types of business services include repair shops and management consulting. Cleaning services, beauty shops, sports and social services, such as day care, are examples of the personal service category. A summary of potential transaction privilege tax revenue from these three major categories is as follows: Professional Services Business Services Personal Services $553,027,000 $541,260,000 $ 80,281,000 Total transaction privilege tax revenue available from these businesses is $1,174.6 million. Although the estimate of potential tax collections provided here does not include estimates for all services, the majority has been captured. A detailed list of the services included can be found in the table at the end of this section. The business of selling tangible personal property at wholesale, by definition, is not taxable. During fiscal year 2001/02, wholesale trade was estimated to be $51.1 billion. If taxed at a 5% rate, collections from this category would be $2.6 billion. The transaction privilege and use tax is levied upon the gross income or the gross proceeds of sales. Gross proceeds of sales do not include cash discounts allowed (A.R.S. §42-5001.5). The value of merchandise traded in on the purchase of new merchandise when the trade-in allowance is deducted from the sales price of the new merchandise before completion of the sale is exempt (A.R.S. §42-5001.6). No information is available on the value of cash discounts or tradeins. Sales of warranty or service contracts are exempt from transaction privilege tax (A.R.S. §42-5061A3). No information is available on this tax expenditure. 126 Sales of tangible personal property by any nonprofit organization and operated exclusively for charitable purposes and recognized by the department and the United States Internal Revenue Service as such a nonprofit organization for charitable purposes are exempt from transaction privilege and use tax (A.R.S. §42-5061A4; 42-5074B6; A.R.S. §425159A15a). No information is available on this tax expenditure. The sale of stocks and bonds is not subject to transaction privilege tax in Arizona (A.R.S. §42-5061A7). Using the 1997 Census of Financial, Insurance, and Real Estate Industries and inflating the Arizona receipts for security brokers & dealers, the potential tax collections from the act of the sale of stocks and bonds (not including the value of the investment) at a 5% tax rate would be an estimated $92.7 million in fiscal year 2001/02. No information is available on the value of the exemption on the investment themselves. Items required by prescription, such as prescription drugs and medical oxygen (A.R.S. §42-5061A8, A.R.S. §425159A16), insulin, syringes, glucose test strips (A.R.S. §42-5061A10, A.R.S. §425159A19), and eyeglasses and contact lenses (A.R.S. 42-5061A11, A.R.S. §425159A18) are exempt from transaction privilege and use tax. Sales of prescription drugs in Arizona are believed to be approximately $3.1 billion. Taxing these sales at a 5% rate would result in $154.0 million in additional tax collections to the state. Potential tax collections of $7.6 million would result from taxing sales of eyeglasses and contact lenses. Prosthetic appliances prescribed or recommended by a physician, dentist or other professional (A.R.S. §42-5061A9, A.R.S. §42-5159A17) and hearing aids (A.R.S. §42-5061A12, A.R.S. §425159A20) are exempt from transaction privilege and use tax, as are durable medical equipment (A.R.S. §425061A13, A.R.S. §42-5159A21). No information is available for this tax expenditure. Sales to nonresidents of Arizona for use outside Arizona if the vendor ships or delivers the tangible personal property outside of the state are exempt from transaction privilege tax (A.R.S. §425061A14). No information is available on this tax expenditure. Food for home consumption (A.R.S. §425061A15, A.R.S. §42-5159A22) was exempted from transaction privilege and use tax effective July 1980. This includes items purchased with food stamps (A.R.S. §42-5061A16, A.R.S. §42-5159A23). Food sales deductions are still reported but very difficult to capture. A survey of deductions reported by the state's largest grocery and warehouse stores provides an estimate of food sales in fiscal year 2001/02 of $8.6 billion. A 5% tax on these would have brought in $430.0 million in additional revenues. Textbooks sold by any bookstore that are required by any state university or community college are not subject to the transaction privilege or use tax (A.R.S. §42-5061A17, A.R.S. §42-5159A28) Information about this exemption is not yet available. Meals provided to employees of restaurants are exempt from transaction privilege and use taxation (A.R.S. §42127 5061A18, A.R.S. §42-5159A24). Using an average value of $6.81 per meal, employees of restaurants working five days per week would consume meals worth $265.8 million. This converts to tax collections of $13.3 million at a 5% tax rate for fiscal year 2001/02. No transaction privilege or use tax is applied to food, drink or condiment purchased for school lunches (A.R.S. §42-5061A19, A.R.S. §42-5159A26). No information is available for this tax expenditure. Arizona lottery ticket sales (A.R.S. §425061A20, A.R.S. §42-5159A27), amounting to $294.8 million in fiscal year 2001/02, are not taxable. Additional tax collections of $14.7 million would have been received if the sales were taxed at a 5% rate. The sale of precious metal bullion and monetized bullion to the ultimate consumer is exempt from transaction privilege tax (A.R.S. §42-5061A21). Precious metal bullion is defined as precious metal, including gold, silver, platinum, etc., which has been smelted or refined so that its value depends on its contents and not on its form. Monetized bullion means coins and other forms of money which are manufactured from gold, silver, etc., and which have been used as a medium of exchange. No information is available for this tax expenditure. Tangible personal property sold to a qualifying hospital or a qualifying health care organization used by the organization solely to provide health and medical related educational and charitable services is exempt from transaction privilege and use tax (A.R.S. §42-5061A25a,b, §42-5063C3, §42- 5065B2, §42-5066B3, §42-5067B, §425074B8; A.R.S. §42-5159A13a, b, d). No information is available on this tax expenditure. Tangible personal property sold to or purchased by qualifying community health centers and health care organizations dedicated to assisting blind, visually impaired, and multihandicapped children are exempt from transaction privilege and use tax (A.R.S. §42-5061A25c, A.R.S. §42-5061A25d, A.R.S. §42-5159A13e, A.R.S. §425159A13i). No data is available on the value of this exemption. Sales of tangible personal property to a nonprofit charitable organization that regularly serves meals to the needy and indigent on a continuing basis at no cost is exempt from the transaction privilege and use tax (A.R.S. §42-5061A25e, A.R.S. §42-5159A13j). No information is available on the value of this exemption. No transaction privilege or use tax is charged on magazines or other periodicals or other publications by this state to encourage tourist travel (A.R.S. §42-5061A26, 42-5065A2, A.R.S. §425159A29). Arizona Highways magazine is the primary publication of this type. In fiscal year 2001/02, Arizona Highways generated $0.3 million in paid subscription sales. This would have generated $0.02 million had the sales been taxed at 5%. Articles or materials purchased to be incorporated into a final product for sale are exempt from transaction privilege and use tax. Two examples of this exemption can be quantified. Sales of articles to a contractor with a transaction privilege tax license for incorporation or 128 fabrication under a construction contract (A.R.S. §42-5061A27) were estimated using the 1997 Census of Construction Industries for Arizona. On the basis of estimated sales of $4.0 billion in this category, potential tax collections at a 5% tax rate would have been $201.0 million. Sales of articles to be incorporated into a manufactured product (ACRR R15-51839, A.R.S. §42-5159A4) were estimated using the 1997 Census of Manufacturing. On the basis of estimated sales of $12.3 billion, potential tax collections at a 5% tax rate would have been $612.9 million in fiscal year 2001/02. classifications by a nonprofit organization if the organization is associated with a major league baseball team or a national touring professional golf association is not subject to transaction privilege or use tax (A.R.S. §42-5061A30; 42-5073A5 42-5074B4; A.R.S. §42-5159A15b). Similar qualified organizations which sponsor or operate a rodeo featuring primarily farm and ranch animals are also exempt from the transaction privilege and use tax (A.R.S. §42-5061A32, 42-5073A6; 425074B5; A.R.S. §42-5159A15c). No information is available on these tax expenditures. The sale of a motor vehicle is exempt from transaction privilege tax under two conditions (A.R.S. §42-5061A28). If the buyer is a nonresident of this state and the state of residence does not allow a corresponding use tax exemption and if the nonresident has secured a special thirty-day nonresident vehicle registration, the transaction is not taxable. Also, if the purchaser is an enrolled member of an Indian tribe who resides on the Indian reservation established for that tribe, no tax can be imposed. No information is available for this tax expenditure. Sales of commodities, as defined by title 7 United States Code § 2, that are consigned for resale in a warehouse in or from which the commodity is deliverable on a contract for future delivery subject to the rules of a commodity market are exempt from transaction privilege and use tax (A.R.S. §42-5061A31, A.R.S. §42-5159A14). No information is available on the tax value of this exemption. Tangible personal property purchased or leased by a nonprofit charitable organization that engages in and uses such property exclusively for training, job placement or rehabilitation programs or testing for mentally or physically handicapped persons is exempt from the transaction privilege and use tax (A.R.S. §42-5061A29, A.R.S. §42-5159A13f). No information is available on the tax value of this exemption. Tangible personal property sold and sales under the amusement and restaurant There is no transaction privilege or use tax on the sale of seeds, seedlings, roots, bulbs, cuttings and other propogative material to persons who uses those items to commercially produce agricultural, horticultural, viticultural or floricultural crops in Arizona (A.R.S. §42-5061A33, A.R.S. §42-5159A9). No information is available on the tax value of this exemption. Machinery, equipment and certain supplies used to assist the physically or developmentally disabled or those persons with head injuries are exempt from transaction privilege and use tax (A.R.S. §42-5061A34, A.R.S. §42- 129 5159A34). No information is available on the value of this exemption. Tangible personal property shipped or delivered directly to a foreign country for use in that country is exempt from transaction privilege tax (A.R.S. §425061A35). No data is available on the value of this exemption. Sales of natural gas or liquefied petroleum gas used to propel a motor vehicle are exempt from transaction privilege and use tax (A.R.S. §425061A36, A.R.S. §42-5063B3, A.R.S. §42-5159A33). No information is available on the value of this exemption. Paper machine clothing sold to a paper manufacturer and directly used or consumed in paper manufacturing is exempt from transaction privilege and use tax (A.R.S. §42-5061A37, A.R.S. §42-5159A30). No information is available for this expenditure. The gross proceeds of sales or gross income derived from sales of machinery, equipment, utility product, materials and other tangible personal property used directly to construct a qualified environmental technology manufacturing, producing or processing facility are deducted from transaction privilege tax base (A.R.S. §42-5061E, 42-5063C4). Use tax does not apply to the storage, use or consumption in Arizona of machinery, equipment, materials or other tangible personal property if use directly to construct a qualified environmental technology manufacturing, producing or processing facility (A.R.S. §42-5159E). Information is not available on these expenditures. Sales of coal, petroleum, coke, natural gas, virgin fuel oil and electricity to an environmental technology manufacturer, producer or processor and that are directly used or consumed in the generation or provision of on-site power or energy are exempt from transaction privilege and use tax (A.R.S. §425061A38, A.R.S. §42-5159A31). Information is not available on the value of these expenditures. Sales of liquid, solid or gaseous chemicals used in manufacturing, processing, fabricating, mining, refining, metallurgical operations or research and development are exempt from transaction privilege and use tax if the chemicals are used for the purpose of causing or permitting a chemical or physical change to occur in the materials as a part of the production process (A.R.S. §425061A39, A.R.S. §42-5159A35). Information is not available on this expenditure. Under the retail classification and the restaurant classification, sales of food, drink or condiment for consumption within the premises of any jail or prison or any other institution under the jurisdiction of the county sheriff, DOC, DPS, or DYTR are exempt from transaction privilege and use tax, (A.R.S. §42-5061A41; 42-5074B9; A.R.S. §425159A36). No data is available on the value of this exemption. Motor vehicles and any repair and tangible personal property that becomes a part of the motor vehicles sold to a licensed motor carrier subject to a fee under title 28, chapter 9, article 6 who lease or rent the property are not subject to transaction privilege or use tax (A.R.S. §42-5061A42, A.R.S. §42-5159A37). No information is available on the value of this exemption. 130 Livestock, poultry, feed and supplies for use or consumption in the businesses of farming, ranching and feeding livestock and poultry, not including fertilizers, herbicides and insecticides are not subject to use tax in Arizona (A.R.S. §425159A8). Sales of livestock and poultry feed, salts, vitamins for livestock or poultry consumption sold to persons engaged in producing livestock, poultry or products are exempt from transaction privilege tax (A.R.S. §42-5061A43). The sale of animal feed was estimated using the 1997 Census of Agriculture and was inflated by the feed portion of the Producer Price Index. On the basis of estimated feed sales of $269.0 million, potential tax collections at a 5% tax rate would have been $13.4 in Fiscal Year 2001/02. §42-5159A13k). Information is not available on this expenditure. There is no transaction privilege or use tax on the sale or purchase of implants used as growth promotants and injectable medicines for livestock and poultry owned by persons engaged in producing or feeding livestock or poultry (A.R.S. §42-5061A44, A.R.S. §425159A7). Information is not available on this expenditure. Under the retail classification and the restaurant classification, tangible personal property sold to or purchased by a commercial airline that consist of food, beverages and condiments and accessories used for serving, if the items are provided without additional charge, are exempt from transaction privilege and use tax (A.R.S. §42-5061A49; 42-5074C; A.R.S. §42-5159A43). Information is not available on this expenditure. Sales of motor vehicles at auction to nonresidents of this state for use outside this state if the vehicles are shipped or delivered outside of the state are exempt from the transaction privilege tax (A.R.S. §42-5061A45). No information is available on the value of this exemption. Transaction privilege and use tax does not apply to sales of tangible personal property to persons engaged in business under the transient lodging classification if the property is personal hygiene products which are furnished to and to be consumed by the transient during his occupancy (A.R.S. §42-5061A46, A.R.S. Sales or purchases of alternative fuel to a used oil fuel burner who is permitted under §49-426 or §49-480 to burn used oil or used oil fuel are exempt from transaction privilege and use tax (A.R.S. §42-5061A47, A.R.S. §42-5159A42). No information is available on this tax expenditure. Printed, photographic, electronic or digital media materials for use in libraries funded with public moneys in Arizona, are exempt from transaction privilege and use tax (A.R.S. §425061A48, A.R.S. §42-5159A12). No information is available on the value of this tax expenditure. Sales of new alternative fuel vehicles, as defined in A.R.S. §43-1086, if the vehicle was manufactured as a diesel fuel vehicle and converted to operate on alternative fuel, and equipment that is installed in a conventional diesel fuel motor vehicle to convert the vehicle to operate on an alternative fuel. (A.R.S. §42-5061A50, A.R.S. §42-5159A44) Information is not available on this expenditure. Sales of any spirituous, vinous or malt liquor by a person that is licensed in this state as a wholesaler by the department 131 of liquor licenses and control. (A.R.S. §42-5061A51) No information is available on the value of this tax expenditure. Sales of tangible personal property to be incorporated or installed as part of environmental response or remediation activities under A.R.S. §42-5075B6. (A.R.S. §42-5061A52) No information is available on the value of this tax expenditure. Sales of tangible personal property by a nonprofit organization if the organization produces, organizes or promotes cultural or civic related festivals or events and no part of the organization’s net earnings inures to the benefit of any private shareholder or individual. (A.R.S. §425061A53) No information is available on the value of this tax expenditure. Machinery or equipment used directly in manufacturing, processing, fabricating, job printing, refining or metallurgical operations is not subject to transaction privilege or use tax (A.R.S. §42-5061B1, A.R.S. §42-5159B1). Limited information is available on this type of machinery or equipment. Using the 1997 Census of Manufacturing and inflating this figure by the rate of increase in the Producer Price Index for machinery and equipment, an estimated $2.4 billion in sales of this machinery taxed at 5% would have brought in an additional $122.4 million in revenues. Sales of machinery or equipment used in mining directly in the process of extracting ores or minerals from the earth for commercial purposes (A.R.S. §425061B2, A.R.S. §42-5159B2) and sales of machinery or equipment used in drilling for or extracting oil or gas from the earth (A.R.S. §42-5061B10, A.R.S. §42-5159B10) are not taxed. The Census of Mining provided figures for capital expenditures of machinery and equipment for 1997. Inflating this figure by the rate of increase in the Producer Price Index for machinery and equipment resulted in an estimate of $324.4 million for sales of this machinery in fiscal year 2001/02. A 5% tax on this machinery would have brought in $16.2 million in additional revenues. Tangible personal property sold to persons engaged in business under the telecommunications classification, consisting of central office switching equipment, switchboards, private branch exchange equipment, microwave radio equipment and carrier equipment including optical fiber, coaxial cable and other transmission media which are components of carrier systems are exempt from the transaction privilege and use tax (A.R.S. §42-5061B3, A.R.S. §42-5159B3). No information is available on this tax expenditure. Machinery, equipment or transmission lines used directly in producing or transmitting electrical power, but not including distribution is exempt from the transaction privilege and use tax (A.R.S. §42-5061B4, A.R.S. §42-5159B4). Transformers and control equipment used in transmission substation sites are included in this exemption. No information is available on this exemption. Neat animals, horses, asses, sheep, swine or goats used or to be used as breeding or production stock are not subject to the transaction privilege or use tax (A.R.S. §42-5061B5, A.R.S. §42-5159B5). No information is available on the tax value of this exemption. 132 There is no transaction privilege or use tax on pipes or valves four inches in diameter or larger used to transport oil, natural gas, artificial gas, water or coal slurry (A.R.S. §42-5061B6, A.R.S. §425159B6). No information is available on the value of this tax expenditure. Aircraft, navigational and communication instruments sold to (a) a person holding a federal certificate of public convenience and necessity or foreign air carrier permit for air transportation in intrastate, interstate or foreign commerce, (b) any foreign government for use outside of Arizona, or (c) nonresidents who will not use such property in Arizona other than in removing such property from Arizona are not subject to the transaction privilege and use tax (A.R.S. §42-5061B7, A.R.S. §42-5159B7). No data is available on the value of this exemption. Machinery, tools, equipment and related supplies used or consumed directly in repairing, remodeling or maintaining aircraft, aircraft engines or aircraft component parts by or on behalf of a certified or licensed carrier of persons or property are exempt from tax (A.R.S. §42-5061B8, A.R.S. §42-5159B8). No information is available on this exemption. Railroad rolling stock, rails, ties and signal control equipment used directly to transport persons or property in intrastate or interstate transportation for hire is exempt from the transaction privilege and use tax (A.R.S. §425061B9, A.R.S. §42-5159B9). No data is available on the value of this exemption. Transaction privilege and use tax do not apply to sales of buses or other urban mass transit vehicles which are used directly to transport persons or property for hire or pursuant to a governmentally adopted and controlled urban mass transportation program and which are sold to bus companies holding a federal certificate of convenience and necessity (A.R.S. §42-5061B11, A.R.S. §425159B11). No information is available on this exemption. Groundwater measuring devices and their installation required under A.R.S. §45-604 are exempt from transaction privilege and use tax (A.R.S. §425061B12, A.R.S. §42-5075B2, A.R.S. §42-5159B12). No information is available on the value of these devices. New machinery and equipment (never sold at retail pursuant to leases or rentals which do not total two years or more) used for commercial production of agricultural, horticultural, viticultural and floricultural crops in Arizona are exempt from transaction privilege and use tax (A.R.S. §42-5061B13, A.R.S. §42-5159B13). This equipment consists of tractors, tractor-drawn implements, self-powered implements and drip irrigation lines. No information is available on the value of this exemption. Transaction privilege and use tax does not apply to sales of machinery or equipment used in research and development. Research and development means basic and applied research in the sciences and engineering, and designing, developing or testing prototypes, processes or new products, including research and development of computer software that is embedded in or an integral part of the prototype or new product or that is required for machinery or equipment to function effectively (A.R.S. §42-5061B14, A.R.S. §425159B14). No information is available on the value of this exemption. 133 Machinery and equipment purchased by or on behalf of owners of a soundstage complex and primarily used for motion picture, multimedia or interactive video production are exempt from transaction privilege and use tax (A.R.S. §425061B15, A.R.S. §42-5159B15). Information is not available on the value of this exemption. Tangible personal property used by any direct broadcast satellite television or data transmission service or facility to receive, store, convert, produce, generate, decode, encode, control or transmit telecommunications information is exempt from transaction privilege and use tax (A.R.S. §42-5061B16, A.R.S. §42-5159B16a). The broadcast satellite television or data transmission service or facility must operate within federal regulations. Sales of services by direct broadcast satellite television services that operate within federal regulation are not taxable under the telecommunications classification (A.R.S. §42-5064B4). No information is available on the value of these exemptions. Clean rooms that are used for manufacturing, processing, fabrication or research and development of semiconductor products are exempt from transaction privilege and use taxes (A.R.S. §42-5061B17, A.R.S. §425159B17). This includes the integrated systems, fixtures, piping, movable partitions, lighting and property that is necessary for control of the clean room. No information is available on the value of this exemption. The income derived from the installation, assembly, repair or maintenance of the clean rooms is exempt from taxation under the contracting classification. (A.R.S. §42- 5075B12). No information is available on the value of this exemption. Machinery and equipment used directly in the feeding of poultry, the environmental control of housing for poultry, the movement of eggs within a production and packaging facility or the sorting or cooling of eggs. (A.R.S. §425061B18, A.R.S. §42-5159B18). No information is available on the value of this exemption. Machinery or equipment, including related structural components, that is employed in connection with manufacturing, processing, fabricating, job printing, refining, mining, natural gas pipelines, metallurgical operations, telecommunications, producing or transmitting electricity or research and development and that is used directly to meet or exceed rules or regulations adopted by the federal energy regulatory commission, the United States environmental protection agency, the United States nuclear regulatory commission, the Arizona department of environmental quality or a political subdivision of this state to prevent monitor, control or reduce land, water or air pollution. (A.R.S. §42-5061B19, A.R.S. §42-5159B19) No information is available on the value of this exemption. Machinery and equipment that are sold to a person engaged in the commercial production of livestock, livestock products or agricultural, horticultural, viticultural or floricultural crops or products in this state and that are used directly and primarily to prevent, monitor, control or reduce air, water or land pollution. (A.R.S. §42-5061B20, A.R.S. §42-5159B20) No information is available on the value of this exemption. 134 Machinery or equipment that enables a television station to originate and broadcast or to receive and broadcast digital television signals and that was purchased to facilitate compliance with the telecommunications act of 1996. . (A.R.S. §42-5061B21, A.R.S. §425159B21) No information is available on the value of this exemption. The portion of the sales price of luxury automobiles (A.R.S. §42-5061D) and portion of the sales price of heavy trucks and trailers that reflect the federal luxury excise tax (A.R.S. §42-5061F) are exempt from transaction privilege tax. The portion of the sales price of use fuel that reflects the federal luxury excise tax is also exempt from transaction privilege tax (A.R.S. §42-5061G). Information is not available on these expenditures. The gross proceeds of sales or gross income derived from sales of machinery, equipment, materials and other tangible personal property used directly and predominantly to construct a qualified environmental technology manufacturing, producing or processing facility as described in A.R.S. §411514.02. (A.R.S. §42-5061E) No information is available on the tax value of this exemption. Sales of overhead materials or other tangible personal property to a manufacturer, modifier, assembler or repairer are exempt from transaction privilege and use tax if the gross proceeds of sales derived from the property are exempt from transaction privilege tax due to performing a contract between the United States government and the manufacturer, modifier, assembler or repairer (A.R.S. §42-5061K, A.R.S. §42-5159A39). For those sales of tangible personal property made directly to the United States government that are not deducted under A.R.S. §42-5061K, 50% of the gross proceeds or gross income derived will be deducted from the tax base (A.R.S. §42-5061L). Data is not available on the value of these exemptions. The gross proceeds of sales or gross income derived from a manufacturer’s cash rebate on the sales price of a motor vehicle if the buyer assigns the buyer’s right in the rebate to the retailer; or the waste tire disposal fee imposed pursuant to A.R.S. §44-1302. (A.R.S. §42-5061N1, §42-5061N2). No data is available on the tax value of this exemption. Sales of solar energy devices and the contractor’s retail cost of a solar energy device that the contractor supplied and installed are to be deducted from the tax base, but the deduction is not to exceed $5,000 for each device (A.R.S. §425061O, A.R.S. §42-5075B14). Information is not available on this expenditure. Sales of wireless telecommunication equipment to a person who holds the equipment for sale or transfer to a customer as an inducement to enter into or continue a contract for telecommunications services taxable under A.R.S. §42-5064 is considered a sale for resale under the transaction privilege and use taxes (A.R.S. §425061Q, A.R.S. §42-5159A41). In addition, the gross proceeds of sales or gross income do not include the sales commissions received as a result of a customer entering or continuing a contract (A.R.S. §42-5061P). Information is not available on these expenditures. 135 Ambulances or ambulance services provided under Title 48 or certified pursuant to Title 36, chapter 21.1 or provided by a city or town in a county with a population of less than 150,000 is not subject to taxation under the transporting classification of the transaction privilege tax (A.R.S. §425062A3). No information is available on the tax value of this exemption. The transporting classification of the transaction privilege tax excludes public transportation services for the dial-a-ride programs and special needs transportation services (A.R.S. §425062A4). No information is available on the tax value of this exemption. The transporting classification of the transaction privilege tax also excludes transporting freight or property for hire by a railroad operating exclusively in this state if the transportation comprises a portion of a single shipment of freight or property, involving more than one railroad, either from a point in this state to a point outside this state or from a point outside this state to a point in this state. (A.R.S. §42-5062A5) No information is available on the tax value of this exemption. The gross proceeds of sales or gross income derived from transporting for hire persons, freight or property by a railroad pursuant to a contract with another railroad is exempt from transaction privilege tax if the other railroad has already paid the transaction privilege tax on the transporting of goods (A.R.S. §42-5062B1). No data is available on the tax value of this exemption. Sales of electricity to a distributor who has a transaction privilege tax license (A.R.S. §42-5063B1) are essentially sales of electricity for resale. Information on this activity is not available at this time from the Arizona Corporation Commission. Sales of natural gas or liquefied petroleum gas used to propel a motor vehicle are not taxable under the utility classification of transaction privilege tax (A.R.S. §42-5063B2). No data is available on the tax value of this exemption. Sales of alternative fuel, as defined in A.R.S. §1-215 to a used oil fuel burner who has received a permit to burn used oil or used oil fuel under A.R.S. §49-426 or 49-480. (A.R.S. §42-5063B3) No data is available on the tax value of this exemption. Sales of ancillary services, electric distribution services, electric generation services, electric transmission services and other services that are related to providing electricity to a retail electric customer who is located outside this state for use outside this state if the electricity is delivered to a point of sale outside this state. (A.R.S. §42-5063B4) No data is available on the tax value of this exemption. Revenues received by a municipally owned utility in the form of fees charged to persons constructing residential, commercial or industrial developments or connecting residential, commercial or industrial developments to a municipal utility system if the fees are segregated and used only for capital expansion, system enlargement or debt service of the utility system are excluded from the taxable base under the utilities classification of transaction privilege tax (A.R.S. §42-5063c1). No information is 136 available on the tax value of this exemption. Revenues received by any person owning a utility system in the form of reimbursement or contribution compensation for property and equipment installed to provide utility access to, on or across the land of an actual utility consumer if the property and equipment become the property of the utility are excluded from the taxable base under the utilities classification of the transaction privilege tax (A.R.S. §425063c2). No information is available on the tax value of this exemption. Interstate sales of electricity, natural gas and water (ACRR R15-5-2014) are exempt from transaction privilege tax. In searching for the information on these transactions, it was found that interstate sales of natural gas and water are minimal, if such sales occur at all. Information is not available for this expenditure at this time. Income from interstate telcommunication services (A.R.S. §42-5064) is not taxable under the telecommunications classification of transaction privilege tax. Revenue data for local telephone companies and long distance inter LATA companies is not available from the Arizona Corporation Commission. Sales of intrastate telecommunications services by a cable television system or by a microwave television transmission system that transmits television programming to multiple subscribers are not subject to transaction privilege tax (A.R.S. §42-5064A1). The National Cable Television Association provides that in 2001, Arizona had 1,068,006 basic cable subscribers. Assuming that a certain percentage pay the average basic monthly fee of $31.58 and the remainder pay an average of $7.64 to include premium packages, the estimated revenues were $476.0 million. Potential collections from a tax rate of 5% would equal an estimated $23.8 million in fiscal year 2001/02. Sales of internet access services to subscribers and customers. (A.R.S. §425064A2). No information is available on the tax value of this exemption. End user common line charges and carrier access charges established by federal communications regulations are exempt from transaction privilege tax (A.R.S. §42-5064B2, A.R.S. §425064B3). No information is available on the tax value of this exemption. Sales of direct broadcast satellite television services pursuant to 47 Code of Federal Regulations parts 25 and 100 by a direct broadcast satellite television service that operates pursuant to 47 Code of Federal Regulations parts 25 and 100. (A.R.S. §42-5064B4) No data is available on the tax value of this exemption. The gross proceeds from manufacturing or publishing books are exempt from transaction privilege tax (A.R.S. §425065A1). No data is available on the tax value of this exemption. The gross income derived from advertising is excluded from the tax base for the publication classification under transaction privilege tax (A.R.S. §425065B1). Advertising receipts for fiscal year 2001/02 were estimated using the 1997 Census of Scientific and Technical Services to be $464.1 million. A 5% tax on advertising would have resulted in $23.2 million in potential tax collections. 137 The gross proceeds of sales to a person in Arizona who has a transaction privilege tax license and who distributes printing, engraving, embossing or copying without consideration in connection with the publication of a newspaper or magazine are not included in the taxable base under the job printing classification of the transaction privilege tax (A.R.S. §425066B1). No information is available on this exemption. Sales of job printing, engraving, embossing, and copying for use outside the state if the materials are shipped or delivered out of the state, regardless of where title to the materials passes or their free on board point are exempt from the job printing classification (A.R.S. §42-5066B2). No data is available on the tax value of this exemption. Leasing or renting four or fewer rooms of an owner-occupied residential home, furnishing no more than a breakfast meal, with no more than 50% average annual occupancy rate is not subject to the transaction privilege tax under the transient lodging classification (A.R.S. §42-5070B3). No information is available on the value of this exemption. Leasing or renting films, tapes or slides used by theaters or movies, which are engaged in business under the amusement classification, or use by television stations or radio stations is not subject to the transaction privilege tax under the personal property rental classification (A.R.S. §42-5071A1). No information is available on the value of this exemption. Operating coin operated washing, drying and dry cleaning machines or coin operated car washing machines at establishments for the use of such machines are not subject to transaction privilege tax (A.R.S. §42-5071A4). Potential tax revenue for fiscal year 2001/02 is $11.8 million from coinoperated laundries and dry cleaning services and $1.0 million from coinoperated car washing machines. Leasing or renting semitrailers manufactured in Arizona, as defined in §28-101, to a person who holds a United States department of transportation number for use in interstate commerce. (A.R.S. §42-5071A5) No data is available on the value of this exemption. Leasing or renting tangible personal property for incorporation into comprising any part of a qualified environmental technology facility. (A.R.S. §42-5071A6) No data is available on the value of this exemption. Leasing or renting aircraft, flight simulators or similar training equipment to students or staff by nonprofit, accredited educational institutions that offer associate or bachelor’s degrees in aviation or aerospace related fields. (A.R.S. §42-5071A7) No data is available on the value of this exemption. Leasing or renting photographs, transparencies or other creative works used by this state on internet web sites, in magazines or in other publications that encourage tourism. (A.R.S. §42-5071A8) No data is available on the value of this exemption. Freight charges included in the sales price of any nonmetalliferous mineral product are subtracted from the taxable base under the mining classification of the transaction privilege tax (A.R.S. §42- 138 5072C). No data is available on the value of this exemption. Tuition and fees paid to universities and community colleges (A.R.S. §425073A1) are exempt from transaction privilege tax. Information on tuition figures for fiscal year 2001/02 were not available at this time. Private or group instructional activities and membership and initiation fees for health or fitness clubs or private recreational establishments with memberships greater than 28 days are exempt from the amusement classification of transaction privilege tax (A.R.S. §42-5073A2, A.R.S. §425073B1). Potential tax revenue can be estimated by growing the 1997 Census of Arts, Entertainment, and Recreation and Education Services receipt data for Arizona. Estimated sales for the above categories equal $345.6 million, which gives a potential collection figure of $17.3 million for fiscal year 2001/02. Events sponsored by the Arizona Coliseum and Exposition Center Board (A.R.S. §42-5071A2, §42-5073A3) are not subject to transaction privilege tax. Information about this exemption is not yet available. A musical, dramatic or dance group or a botanical garden, museum or zoo that qualified as a nonprofit charitable organization is exempt from transaction privilege tax under the amusements classification (A.R.S. §42-5073A4). The impact of this exemption can be quantified by growing the 1997 Census of Arts, Entertainment and Recreation data for Arizona. On the basis of estimated sales of $103.1 million for those categories, potential tax collections at a 5% rate equal $5.2 million in fiscal year 2001/02. Sales of admissions to intercollegiate football contests if the contests are operated by a nonprofit organization are exempt from transaction privilege tax (A.R.S. §42-5073A7). During fiscal year 2001/02, admissions to such contests are estimated to have been $12.6 million. At 5%, potential tax collections would have been $0.6 million. Fees and assessments received by a homeowners organization from members or guests of members are not taxable under the amusement classification (A.R.S. §42-5073A8). The value of this exemption is not available. Under the restaurant classification of transaction privilege tax, sales by a congressionally chartered veterans organization of food or drink prepared for consumption on the premises leased, owned or maintained by the organization are exempt from tax (A.R.S. §425074B2). No information is available on the value of this exemption. Sales by churches, fraternal benefit societies and other nonprofit organizations which do not regularly engage or continue in the restaurant business for the purpose of fund raising are exempt from transaction privilege tax (A.R.S. §42-5074B3). No information is available on the value of this tax expenditure. Under the restaurant classification of transaction privilege tax, sales to qualifying hospitals. (A.R.S. §425074B7). No information is available on the value of this tax expenditure. Gross proceeds of sales or gross income derived from contracts to perform postconstruction treatment of real property 139 for termite and general pest control, including wood destroying organisms. A.R.S. §42-5075B17) No information is available on the value of this tax exemption. While income from prime contracting is taxable, both the sale price of land and the wages and salaries paid for any labor employed in construction (A.R.S. §425075B and B1) are not taxable. The tax is limited to that portion which is essentially materials (tax is applied to 65% of gross proceeds). The amount of contracting wages and salaries estimated by the Department of Economic Security for fiscal year 2001/02 was $5.6 billion. At a 5% tax rate, the tax on the labor component is $280.3 million. An estimate for the total sales price of land is not available. The gross proceeds of sales or gross income received from a contract entered into for the construction, alteration, repair, addition, subtraction, improvement, movement, wrecking or demolition of any building, highway, road, railroad, excavation or other structure, project, development or improvement located in a military reuse zone for a manufacturer, assembler or fabricator of aviation or aerospace products is exempt from transaction privilege tax under the prime contracting classification (A.R.S. §42-5075B4). No information is available for this exemption. The gross proceeds of sales derived from a contract to construct a qualified environmental technology manufacturing, producing or processing facility is exempt from transaction privilege tax under the prime contracting classification (A.R.S. §42-5075B5). The value of this exemption is not available. The gross proceeds of sales from a contract to provide response to a release or suspected release of a hazardous substance is exempt from the prime contracting classification of transaction privilege tax (A.R.S. §42-5075B6). Information is not available on this expenditure. The gross proceeds of sales that are from a contract entered into for the installation, assembly, repair or maintenance of machinery or other tangible personal property that is deducted under the retail classification A.R.S. §42-5061B and that does not become permanently attached to the structure or project is exempt from the prime contracting classification of transaction privilege tax (A.R.S. §425075B7). No information is available on the value of this tax expenditure. Income received from a contract for constructing a lake facility development in a commercial enhancement reuse district is exempt from the prime contracting classification of transaction privilege tax (A.R.S. §42-5075B8). Information is not available on this expenditure. Income from a contract for the construction of an environmentally controlled facility for the raising of poultry for the production of eggs and the sorting, cooling and packaging of eggs is exempt from the prime contracting classification of transaction privilege tax (A.R.S. §42-5075B10). Information is not available on this expenditure. Income from a contract with a person in the agricultural industry for construction, alteration, repair, improvement movement, wrecking, demolition, addition to or subtraction from any 140 building, highway, road, excavation, manufactured building or other structure, development or improvement used directly and primarily to prevent, monitor, control or reduce air water or land pollution. (A.R.S. §42-5075B11) No information about this expenditure is available. Income from a contract entered into for the construction of a launch site, as defined in 14 Code of Federal Regulations section 401.5. (A.R.S. §425075B15) No information about this expenditure is available. Income from a contract entered into for the construction of a domestic violence shelter that is owned and operated by a nonprofit charitable organization. (A.R.S. §42-5075B16) No information about this expenditure is available. Use tax does not apply for tangible personal property not exceeding $200 in any one month purchased by an individual at retail outside the continental limits of the United States for personal use and enjoyment (A.R.S. §425159A10). No data is available on the value of this exemption. All purchases made by a residential care institution that is operated in conjunction with licensed nursing care institutions are exempt from use tax (A.R.S. §425159A13c). Information is not available on this expenditure. Tangible personal property purchased by a nonprofit charitable organization from the parent or affiliate organization that is located out of state is exempt from use tax (A.R.S. §42-5159A13h). No data is available on the value of this exemption. Motor vehicles that are removed from inventory and are provided to charitable or educational institutions or state universities or their affiliated organizations are exempt from use tax (A.R.S. §42-5159A32). No information is available on the value of this exemption. Use tax does not apply to tangible personal property that is or directly enters into and becomes an ingredient or part of cards used as prescription plan identification cards (A.R.S. §425159A38). Information is not available on this expenditure. 141 TRANSACTION PRIVILEGE AND USE TAX EXPENDITURES Additional Collections PREFERENTIAL TAX RATE CATEGORIES At A 5% Rate Nonmetalliferous Mining; Oil and Gas Production .....................................$3,906,000 Commercial Lease......................................................................................259,408,000 Rental Occupancy Tax ......................................................................................119,000 Total Preferential Tax Rates.................................................................$263,433,000 CREDITS Motion Picture Production Company refund .........................................................NR33 Accounting Credit ......................................................................................$18,149,000 Total Credits.............................................................................................$18,149,000 EXEMPTIONS Professional Services: Legal ............................................................................ $94,065,000 Engineering.................................................................... 67,224,000 Architectural .................................................................. 20,369,000 Surveying......................................................................... 2,277,000 Accounting, Auditing & Bookkeeping.......................... 40,773,000 Physicians .................................................................... 163,114,000 Optometrists..................................................................... 5,021,000 Chiropractors ................................................................... 8,922,000 Dentists .......................................................................... 45,463,000 Physical, Occupational & Speech Therapists.................. 7,966,000 Nursing & Personal Care Facilities ............................... 45,724,000 Outpatient Care.............................................................. 19,211,000 Home Health Care Services........................................... 19,720,000 Other Ambulatory Health Services................................ 13,178,000 Total Reportable Professional Services ............................................... $553,027,000 Business Services: Services to Dwellings & Other Buildings ................... $34,790,000 Credit Reporting, Collection Agencies.......................... 11,476,000 Advertising Agencies ....................................................................34 Public Relations............................................................... 1,484,000 Market Research .............................................................. 5,216,000 Telemarketing Bureaus.................................................. 12,227,000 Direct Mail Advertising................................................................. 34 Display Advertising.......................................................................34 Document Prep Services................................................ $2,529,000 33NR indicates that the information is not releasable due to Arizona confidentiality laws. Fewer than ten license holders took advantage of this refund. 34 The value of exempting this service is reported elsewhere as a specific exemption (A.R.S. §42-5065B1.) 142 Stenographic Services ..................................................... 1,139,000 Graphic Design ................................................................ 6,006,000 Commercial Photography ................................................ 1,125,000 Computer Programming ................................................ 22,221,000 Computer Systems Design Services .............................. 32,054,000 Management Consulting Services ................................. 40,119,000 Environmental Consulting Services ................................ 3,400,000 Scientific & Technical Consulting Services.................... 6,205,000 Scientific Research & Development.............................. 13,768,000 Testing Laboratories & Facilities .................................... 9,073,000 Investigation & Security Services ................................. 17,417,000 Interior Design................................................................. 5,583,000 Telephone Answering Service......................................... 5,866,000 Business Service Centers............................................... 11,963,000 Employee Leasing Services........................................... 66,461,000 Temporary Help Services .............................................. 68,507,000 Linen & Uniform Supply................................................. 8,616,000 Automobile Parking......................................................... 2,151,000 Automotive Repair Shops.............................................. 89,190,000 Automotive Services, Except Repair............................. 19,333,000 Electronic & Machinery Repair Shops.......................... 38,257,000 Re-upholstery & Furniture Repair................................... 1,504,000 Watch, Clock & Jewelry Repair ......................................... 652,000 Miscellaneous Repair & Related Services ...................... 2,929,000 Total Business Services ....................................................................... $541,260,000 Personal Services: Dry cleaning & Laundry................................................ $6,663,000 Hair, Nail & Skin Care Services.................................... 13,867,000 Footwear, Leather & Garment Repair & Alteration........... 467,000 Death Care Services......................................................... 7,321,000 Photographic Studios, Portraits ....................................... 2,766,000 Diet Reducing Services .................................................. 2,030,000 Personal & Household Goods Repair............................ 12,315,000 Miscellaneous Personal Services..................................... 1,760,000 Child Day Care Services.................................................. 9,931,000 Other Social Services .................................................... 14,720,000 Technical & Trade Schools ............................................. 8,440,000 Total Personal Services..............................................................................$80,281,000 Wholesale Trade ...................................................................................$2,552,694,000 Cash Discounts...................................................................................................... NIA* Trade-Ins .................................................................................................................NIA Sale of Warranty or Service Contracts....................................................................NIA Sale of Tangible Personal Property by a Nonprofit Organization ........................ NIA* * * No Information Available. No Information Available. 143 Sale of Stocks and Bonds35 ........................................................................$92,741,000 Prescription Drugs and Medical Oxygen ...................................................153,978,000 Eyeglasses and Contact Lenses......................................................................7,559,000 Insulin, Insulin Syringe and Glucose Test Strips....................................................NIA Prosthetic Appliances..............................................................................................NIA Hearing Aids ...........................................................................................................NIA Durable medical equipment ....................................................................................NIA Sales to Nonresidents for use outside Arizona if the property is shipped or delivered outside the state ..................................................................................NIA Food for Home Consumption.....................................................................429,954,000 Textbooks that are required by any state university or community college.................................................................................................................NIA Meals Provided to Employees of Restaurants..............................................13,291,000 Food Used in School Lunches ................................................................................NIA Sale of Arizona Lottery Tickets ...................................................................14,741,000 Precious Metal Bullion and Monetized Bullion......................................................NIA Tangible Personal Property sold to a Qualifying Hospital or a Qualifying Health Care Organization ...................................................................................NIA Tangible Personal Property Sold to or Purchased by Qualifying Community Health Centers and Health Care Organizations..................................................NIA Tangible Personal Property Sold to a Non-Profitable Organization which Regularly Serves Meals to the Needy and Indigent ...........................................NIA Magazines or other Periodicals or other Publications To Encourage Tourist Travel .................................................................................................17,000 Sale of Articles to a Contractor for Incorporation or Fabrication Under a Contract....................................................................................200,969,000 Sale of Articles to be Incorporated into a Manufactured Product .............612,912,000 Exempt Motor Vehicle Sales (certain nonresidents and Indians) ...........................NIA Tangible Personal Property Purchased by a Nonprofit Charitable Organization that uses such property for training, etc., for mentally or physically handicapped persons .....................................................................NIA Tangible Personal Property Sold by a Nonprofit Organization associated with a major league baseball team or a national touring professional golf association ...................................................................................................NIA Tangible Personal Property Sold by a Nonprofit Organization associated with a rodeo featuring primarily farm and ranch animals ..................................NIA Sales of Commodities under Futures Contracts Consigned to a Warehouse for Resale............................................................................................................NIA Sales of New Semitrailers or New Semitrailer Parts Manufactured in Arizona ...............................................................................................................NIA Seeds, Seedlings, Roots, Bulbs, Cuttings and Other Propogative Material used to commercially produce agricultural, horticultural, viticultural or floricultural crops in Arizona .........................................................................NIA Machinery, Equipment and Certain Supplies Used to Assist the Physically 35 This includes the value of the securities activities, not the value of the stocks and bonds. 144 or Developmentally Disabled or those Persons with Head Injuries ................. NIA* Tangible Personal Property Shipped or Delivered Directly to a Foreign Country for use in that Country..........................................................................NIA Sales of Natural Gas or Liquefied Petroleum Gas used to Propel a Motor Vehicle.....................................................................................................NIA Paper Machine Clothing Used or Consumed in Paper Manufacturing...................NIA Machinery, Equipment, Utility Product, Materials and Other Tangible Personal Property Used to Construct a Qualified Environmental Technology Facility ................................................................................................................NIA Sales of Coal, Petroleum, Coke, Natural Gas, Virgin Fuel Oil and Electricity to an Environmental Technology Facility ..........................................................NIA Sales of Liquid, Solid or Gaseous Chemicals Used in Manufacturing, Processing Fabricating, Mining, Refining, Metallugical Operations or Research and Development.......................................................................................................NIA Sales of Food or Drink Consumed on the Premises of a Jail, Prison, or any Other Institution and Nonprofit Charitable Organizations that Regularly Serve Meals to the Needy and Indigent on a Continuing Basis .........................NIA Motor Vehicles and any Tangible Personal Property or Repair that Becomes a Part of the Motor Vehicles sold to a Licensed Motor Operator that Lease or Rent the Property............................................................................................NIA Livestock, Poultry, Feed and Supplies for Use or Consumption in the Businesses of Farming, Ranching and Feeding Livestock and Poultry ...................................................................................................$13,449,000 Sale or Purchase of Implants Used as Growth Promotants and Injectable Medicine .............................................................................................................NIA Sales of Motor Vehicles at Auction to Nonresidents of this State for Use Outside of this State............................................................................................NIA Personal Hygiene Products Which are Furnished to and to be Consumed by Hotel Occupant ...................................................................................................NIA Sales or Purchases of Alternative Fuel to a Used Oil Fuel Burner .........................NIA Printed, Photographic, Electronic or Digital Media Materials for use in Publicly Funded Libraries ..................................................................................NIA Tangible Personal Property Consisting of Food, Beverages and Condiments Sold to or Purchased by a Commercial Airline ..................................................NIA Sale of New Alternative Fuel Vehicles and Conversion Equipment ......................NIA Sale of Spirituous, Vinous or Malt Liquor by a Liquor Wholesaler.......................NIA Property to be Incorporated as Part of Environmental Response or Remediation Activities .......................................................................................NIA Tangible Personal Property by a Nonprofit that Produces, Organizes or Promotes Cultural or Civic Related Festivals ....................................................NIA Machinery or Equipment used directly in Manufacturing, Processing, Fabricating, Job Printing, Refining or Metallurgical Operations ..........122,374,000 Sale of Machinery or Equipment Used in Mining and in Drilling for or Extracting Oil or Gas from the Earth ......................................................................$16,220,000 * No Information Available. 145 Certain Equipment used in the Telecommunications Industry ............................. NIA* Machinery, Equipment or Transmission Lines used directly in Producing or Transmitting Electrical Power ............................................................................NIA Neat Animals, Horses, Asses, Sheep, Swine or Goats used or to be used as breeding or production stock ..............................................................................NIA Pipes or Valves Four Inches in Diameter Used to Transport Oil, Natural Gas, Artificial Gas, Water or Coal Slurry...................................................................NIA Certain Aircraft, Navigational and Communication Instruments ...........................NIA Machinery, Tools, Equipment Used in Repairing, Remodeling or Maintaining Aircraft, Aircraft Engines or Aircraft Component Parts ....................................NIA Railroad Rolling Stock, Rails, Ties and Signal Control Equipment Used to Transport Persons or Property for hire ...............................................................NIA Buses or Other Urban Mass Transit Vehicles Used to Transport Persons for hire or pursuant to a governmentally adopted and controlled urban mass transportation program ....................................................................NIA Certain Groundwater Measuring Devices and their installation.............................NIA New Machinery and Equipment Used for Commercial Production of Agricultural, Horticultural, Viticultural and Floricultural Crops .......................NIA Machinery or Equipment used in Research and Development ...............................NIA Machinery and Equipment Purchased by or on Behalf of Owners of a Soundstage Complex ..........................................................................................NIA Tangible Personal Property Used by any Direct Broadcast Satellite Television or Data Transmission Service or Facility ...........................................................NIA Sales of Services by Direct Broadcast Satellite Television Services......................NIA Clean Rooms Used for Manufacturing, Processing Fabrication or Research and Development................................................................................................NIA Gross Income from Installation, Assembly, Repair or Maintenance Clean Rooms.......................................................................................................NIA Machinery and Equipment Used in the Feeding of Poultry or Production and Packaging of Eggs .......................................................................................NIA Machinery and Equipment used to Meet Land, Water and Air Quality Standards ............................................................................................................NIA Machinery and Equipment used by Agriculture to Prevent, Monitor, Control or Reduce Pollution ...............................................................................NIA Digital Television Machinery and Equipment Purchases for Compliance with the Telecommunications Act of 1996.........................................................NIA Portion of Sales Price of Luxury Automobiles that Reflects the Federal Luxury Excise Tax..............................................................................................NIA Portion of Sales Price of Use Fuel that Reflects the Federal Luxury Excise Tax ..........................................................................................................NIA Gross Income from Machinery, Equipment and Materials used Directly to Construct a Qualified Environmental Technology Facility ...........................NIA Sales of Overhead Materials or Other Tangible Personal Property to a Manufacturer, Modifier, Assembler or Repairer if Performing a Contract * No Information Available. 146 between the United States Government and the Manufacturer ........................ NIA* Sales of Tangible Personal Property made to the United States Government Not Deducted under A.R.S. §42-5061L .............................................................NIA Gross Income from Motor Vehicle Manufacturer’s Cash Rebates if Assigned to the Retailer......................................................................................NIA Gross Income derived from the Waste Tire Disposal Fee ......................................NIA Sales of Solar Energy Devices ................................................................................NIA Sales of Wireless Telecommunication Equipment as an Inducement to Enter Into or Continue a Contract for Telecommunication Services or Sales Commissions Received .............................................................................NIA Ambulances or Ambulance Services ......................................................................NIA Public Transportation Services for Dial-A-Ride Programs and Special Needs Transportation Services ......................................................................................NIA Gross Proceeds for Transporting Freight or Property by an Exclusively Arizona Railroad for Portions of Single Shipments Involving Other Railroads..............NIA Gross Proceeds of Sales or Gross Income Derived from Transporting For Hire Persons, Freight or Property by a Railroad Pursuant to a Contract with Another Railroad ........................................................................................NIA Sales of Electricity to a Distributor.........................................................................NIA Sales of Natural Gas or Liquefied Petroleum Gas used to Propel a Motor Vehicle................................................................................................................NIA Sales of Alternative Fuel to a Used Oil Fuel Burner ..............................................NIA Sales of Electric Services to a Retail Electric Customer Who Is Located Outside This State for Delivery and Use Outside the State................................NIA Revenues Received by a Municipally Owned Utility in the form of Fees Charged to Persons Constructing Residential, Commercial or Industrial Developments .....................................................................................................NIA Revenues Received By Any Person Owning a Utility System in the Form of Reimbursement or Contribution Compensation for Property and Equipment Installed to Provide Utility Access to, on or across the land of an actual utility consumer ..................................................................................................NIA Interstate Sales of Electricity, Natural Gas & Water ..............................................NIA Interstate Telecommunication Services ..................................................................NIA Sales of Intrastate Telecommunications Services by a Cable Television System or by a Microwave Television Transmission System............................$23,801,000 Sales of internet access services………………………..........................................NIA End User Common Line Charges and Carrier Access Charges Established by Federal Communications Regulations................................................................NIA Sales of Direct Broadcast Satellite Television Services .........................................NIA Manufacturing or Publishing Books .......................................................................NIA Gross Income of Publications Derived from Advertising............................23,204,000 Sales to a Person who Distributes Printing, Engraving, Embossing or Copying Without Consideration In Connection With the Publication of a Newspaper or Magazine ...................................................................................................... NIA* * * No Information Available. No Information Available. 147 Sales of Job Printing, Engraving, Embossing, and Copying for Use Outside the State if the Materials are Shipped or Delivered Out of the State .................NIA Leasing or Renting Four or Fewer Rooms of an Owner Occupied Residence Bed and Breakfast with less than 50% Average Annual Occupancy .................NIA Leasing Films, Tapes or Slides Used by Theaters or Movies or Used By Television Stations or Radio Stations.................................................................NIA Operating Coin Operated Washing, Drying and Dry Cleaning Machines................................................................................................$11,792,000 Operating Coin Operated Car Washing Machines.........................................1,043,000 Leasing or Renting Semitrailers Manufactured in Arizona ...................................NIA Leasing or Renting Personal Property for Incorporation into a Qualified Environmental Technology Facility ...................................................................NIA Leasing or Renting Aircraft or Training Equipment by a Non-Profit School Offering Aviation and Aerospace Degrees.........................................................NIA Leasing or Renting Photographs, Transparencies or Other Creative Works used by this State on Internet Web Sites, in Magazines or Other Publications that Encourage Tourism.................................................................NIA Freight Charges Relating Nonmetalliferous Mineral Products...............................NIA Tuition and Fees Paid to Universities & Community Colleges ..............................NIA Private or Group Instructional Activities and Membership and Initiation Fees for Health or Fitness Clubs or Private Recreational Establishments with Memberships Greater than 28 Days ........................................................17,280,000 Events Sponsored by the Arizona Coliseum & Exposition Board..........................NIA Musical, Dramatic or Dance groups or a Botanical Garden, Museum or Zoo that Qualifies as a Nonprofit Charitable Organization ..............................5,157,000 Sales of Admissions to Intercollegiate Football Contests.................................630,000 Fees and Assessments Received by a Homeowners Organization .........................NIA Sales By a Congressionally Chartered Veterans Organization of Food or Drink...............................................................................................................NIA Sales By Churches, Fraternal Benefit Societies and Other Nonprofit Organizations Which Do Not Regularly Engage or Continue in the Restaurant Business for the purpose of fund raising ...........................................................................NIA Restaurant Sales to Qualifying Hospitals................................................................NIA Gross Proceeds from Contracts to Perform Post-Construction Treatment of Real Property for Termite and General Pest Control..................................................NIA Wages & Salaries for Labor Employed in Construction............................280,282,000 Contracting in a Military Reuse Zone for a Manufacturer, Assembler or Fabricator of Aviation or Aerospace Products ...................................................NIA Gross Proceeds from Contracts to Construct a Qualified Environmental Technology Facility............................................................................................NIA Gross Proceeds of Sales from a Contract to Provide Response to a Release or Suspected Release of a Hazardous Substance................................................NIA Gross Proceeds of Sales from a Contract to Install, Assemble, Repair or Maintain Machinery that does not become permanently attached. .................. NIA* Income Received from a Contract for Constructing a Lake Facility * No Information Available. 148 Development in a Commercial Enhancement Reuse District ............................NIA Income from Contracts for Construction of Facilities for Raising Egg Producing Poultry, or the Production and Packaging of Eggs............................................ NIA Income from Contracts for Construction Work to Prevent, Monitor, Control or Reduce Pollution in the Agriculture Industry ................................................NIA Income from Contracts for Construction of a Launch Site .....................................NIA Income from Contracts for Construction of a Domestic Violence Shelter .............NIA Tangible Personal Property Not Exceeding $200 Purchased By An Individual at Retail Outside the Continental United States – USE TAX ONLY ................NIA Purchases Made by a Residential Care Institution that is Operated in Conjunction with Licensed Nursing Care Institutions – USE TAX ONLY ...........................NIA Tangible Personal Property Purchased by a Nonprofit Charitable Organization from the Parent or Affiliate Organization located Out of StateUSE TAX ONLY ...............................................................................................NIA Motor Vehicles Removed From Inventory and Provided to Charitable or Educational Institutions or State Universities or their Affiliated OrganizationUSE TAX ONLY ...............................................................................................NIA Tangible Personal Property which Directly Enters into or becomes an Ingredient or Part of Cards Used as Prescription Plan Identification Cards - USE TAX ONLY .............................................................................................NIA Total Exemptions ................................................................................$5,768,657,000 TOTAL QUANTIFIABLE TRANSACTION PRIVILEGE AND USE TAX EXPENDITURES36 ..............................................$6,050,240,00037 Value of Exemptions from the Proposition 301-Education Tax ........$692,239,000 Return to Table of Contents 36These expenditures represent foregone revenues to the state general fund, counties and incorporated cities/towns. 37Changes from previous years may be a result of changes in the Census/Base year figures and/or measurable changes in economic activity, as in the case of construction-based figures. 149 150 UNDERGROUND STORAGE TANK TAX EXPENDITURES 151 152 UNDERGROUND STORAGE TANK TAX EXPENDITURES 38 An underground storage tank tax is imposed by A.R.S. §49-1031. For purposes of this tax, it is presumed until proven differently that all regulated substances which are motor vehicle fuel, aviation fuel and diesel and which are refined, manufactured, produced, compounded or blended in Arizona, or imported into the state, will be placed in an underground storage tank from which the fuel is dispensed to users who consume the fuel and do not further distribute it. The tax is levied at the rate of 1¢ per gallon of regulated substance. Revenue from this tax is deposited into the Department of Environmental Quality Assurance Account, used for corrective action projects. This tax does not apply to underground storage tanks operated by the United States or Arizona and its agencies (A.R.S. §49-1031C). Currently, there are 108 federal tanks in use with an average tank capacity of 9,650 gallons. There are 72 state tanks currently in use with an average tank capacity of 10,760 gallons. The Department of Environmental Quality does not require the owners/operators of these tanks to report the total number of times they are refueled. Therefore, there is no information on the tax value of this tax expenditure. Underground storage tanks used for the purpose of storing, handling or distributing naphtha-type jet fuel or kerosene-type jet fuel are exempt from the underground storage tank tax (A.R.S. §49-1031C). Since the Arizona Department of Environmental Quality does not regulate these types of tanks they are not required to be registered with the department and can no longer be tracked. As with the underground storage tanks owned by the federal government and the state of Arizona, the owner/operators of these types of underground storage tanks are not required to report the number of times their tanks are refueled. Due to the lack of information, there is no way to calculate the impact of this tax expenditure. Above-ground storage tanks are not subject to this tax. The owners/operators of these types of tanks are not required to register their tanks with the Department of Environmental Quality nor with the State Fire Marshal. Municipalities regulate these types of tanks in their own city. Thus, due to the lack of information, it is not possible to determine the impact. 38Any figures presented for Underground Storage Tank Tax Expenditures were provided by the Arizona Department of Environmental Quality. 153 SUMMARY OF UNDERGROUND STORAGE TANK TAX EXPENDITURES Revenue Gain Underground Storage Tanks Operated by the U.S. or Arizona ..............................NIA* Tanks used for Naphtha-Type or Kerosene-Type Jet Fuel ...................................... NIA Above-Ground Storage Tanks ................................................................................. NIA TOTAL QUANTIFIABLE UNDERGROUND STORAGE TANK TAX EXPENDITURES39 ............................................................................................................... NIA * No Information Available. expenditures represent foregone revenues to the DEQ Assurance Account. 39These 154 UNEMPLOYMENT INSURANCE TAX EXPENDITURES 155 156 UNEMPLOYMENT INSURANCE TAX EXPENDITURES 40 Unemployment insurance is based upon the wages paid by the employer to the employee during the calendar year. A.R.S. §23-622 sets out the following exemptions from the definition of wages: • That part of the remuneration in excess of $7,000 paid in a calendar year to an individual by an employer with respect to employment during the calendar year, unless that part of the above specified excess remuneration is subject to a tax, under federal law, against which credit may be taken for contributions required to be paid into a state unemployment fund by employers subject to the federal law. • The amount of any payment, including monies paid by an employer for insurance or annuities, made to or on behalf of an employee or his/her dependents under a plan or system established by an employer which makes provision for the employees generally on account of sickness or accident disability, medical or hospitalization expenses in connection with sickness or accident disability or death. • The payment by an employer, without deduction from the remuneration of the employee, of the tax imposed upon an employee under § 3101 of the Internal Revenue Code relating to federal insurance contributions with respect to remuneration paid to an employee for domestic service in a private home or for agricultural labor. • Any payment on account of sickness or accident disability, or medical or hospitalization expenses in connection with sickness or accident disability, made by an employing unit to an employee after the expiration of six calendar months following the last calendar month in which the employee worked for such employing unit. • Any payment made to an employee or his/her beneficiary; (1) from or to a trust described in § 401(a) of the Internal Revenue Code relating to qualified pension, profit sharing and stock bonus plans which is exempt from tax under § 501(a) of the Internal Revenue Code; (2) under or to an annuity plan which is a plan described in § 403(a) of the Internal Revenue Code; (3) under a simplified employee pension as defined in § 408(k)(1) of the Internal Revenue Code other than contributions described in § 408(k)(6) of the Internal Revenue Code; (4) under or to an annuity contract described in § 403(b) of the Internal Revenue Code; 40Any figures presented for Unemployment Insurance Tax Expenditures were provided by the Arizona Department of Economic Security. 157 (5) under or to an exempt governmental deferred compensation plan; (6) to supplement pension benefits under a plan or trust described in this paragraph to take into account some portion of the increase in the cost of living since retirement; (7) or under a cafeteria plan within the meaning of § 125 of the Internal Revenue Code if such a payment would not be treated as wages without regard to such plan. • Remuneration paid in any medium other than cash to an employee for service not in the course of the employing unit's trade or business. • Remuneration paid for agricultural labor performed in any medium other than cash. • Any tip, gratuity or service charge received by an employee, with certain exceptions. • Remuneration which the individual receives for drill, training or other national guard or reserve activity which occurs on not more than one weekend per month. • Remuneration paid to an employee if at the time of the payment it is reasonable to believe that a corresponding deduction is allowable under § 217 of the Internal Revenue Code relating to moving expenses. • Any contribution, payment or service provided by an employer, which may be excluded from gross income under the provisions of § 120 of the Internal Revenue Code. • Any payment made or benefit furnished to an employee if it is reasonable to believe that the employee will be able to exclude the payment or benefit from income under § 127, relating to educational assistance, or § 129, relating to dependent care assistance, of the Internal Revenue Code. • The value of meals or lodging furnished by the employer if it is reasonable to believe that the employee will be able to exclude these items from income under § 119 of the Internal Revenue Code. • Any payment made by an employer to a survivor or the estate of a former employee after the calendar year in which the employee died. • Any benefit provided to an employee if it is reasonable to believe that the employee will be able to exclude the benefit from income under § 74(c) relating to employee achievement awards, section 117 relating to qualified scholarships or § 132 relating to certain fringe benefits of the Internal Revenue Code. An employee is an individual who performs services for an employer and who is subject to the direction, rule or control of the employer as to both the method of performing the services and the result to be accomplished. This definition, per A.R.S. §23-613.01A, does not include: • An individual who performs services as an independent contractor, business person, agent or consultant, or in a capacity characteristic of an independent profession, trade, skill or occupation. • An individual subject to the direction, rule, control or subject to the right of direction, rule or control of an employing unit solely because of a provision of law regulating the employing unit. • An individual or class of workers that have been exempted by the Internal 158 Revenue Service from paying Federal Unemployment Tax. • An individual or class or workers that have been exempted by the Internal Revenue Service from paying Federal Unemployment Tax for a certain period of time. • An individual or class of workers that have previously been found not to be workers in prior audits by the Department, but have currently been found to be employees due to prior audit errors, will not be charged for any previous time but will be required to begin reporting those workers during the next quarter. Employment means any service of whatever nature performed by an employee for an employer. Exclusions, which are found in A.R.S. §23-615.06D, for governmental entities or §501C3 nonprofit employers, include the following services: • Services performed in the employ of a church, convention, association of churches or an organization supervised, controlled or principally supported by a church, convention or association of churches operated primarily for religious purposes. • Services performed by a duly ordained, commissioned, or licensed minister of a church in the exercise of his or her ministry; or by a member of a religious order in the exercise of duties required by such order. • Services performed by an elected official, member of the legislature or judiciary of this state or a political subdivision, in the exercise of his or her duties. • Services performed as a member of the state National Guard or Air National Guard. • Services performed as an employee on a temporary basis in case of a fire, storm, snow, earthquake, flood or similar emergency. • Services in a position which is designated under or pursuant to state law as a major non tenured policy making or advisory position, or a policy making or advisory position of which the duties ordinarily do not require more than eight hours per week. • Services performed by impaired individuals who cannot be readily absorbed into the competitive labor market in a facility conducted for the purpose of providing a program of rehabilitation for such individuals. • Services performed by an individual in an unemployment work relief or work training program financed in part or in whole by a governmental entity. • Services performed by an inmate of a custodial or penal institution. Types of exempt employment are set out in A.R.S. §23-617, as follows: • Agricultural labor which works less than some portion of twenty weeks in a given calendar year or unless the labor receives wages of $20,000 or more in a calendar quarter. • Domestic service in a private home, local college club or local chapter of a college fraternity or sorority, which receives less than $1,000 in wages in a calendar quarter. • Service performed on a vessel or aircraft not an American vessel or American aircraft, if the employee is employed on such vessel or aircraft when outside the United States. • Service performed by an individual in the employ of his/her children or spouse, and service performed by an 159 individual under the age of 21 in the employ of a parent. • Service performed in the employ of another state, or any political subdivision of another state, or an instrumentality of one or more thereof which is wholly owned by one or more other states or political subdivisions and which exercises only governmental as distinguished from proprietary functions, and service performed in the employ of any political subdivision of this or any other state to the extent the instrumentality, with respect to such service, is exempt under the Constitution of the United States from the tax imposed by §3301 of the federal Internal Revenue Code. • Service with respect to which unemployment compensation is payable under an unemployment compensation established by an act of Congress. • Service performed in a calendar quarter in the employ of an organization exempt from income tax under § 501(a) or § 521 of the Internal Revenue Code, if the remuneration for the services is less than $50. • Service performed in the employ of a school, college or university, if the service is performed by a student enrolled and regularly attending classes, or by the spouse of such a student. • Service performed in the employ of a corporation, community chest fund or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational; purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of a private shareholder or individual and with further qualifications. • Services performed by a student nurse in the employ of a hospital or a nurses' training school by an individual enrolled and regularly attending classes, and service performed as an intern in the employ of a hospital by an individual who has completed a four years' course in a medical school. • Service performed by an individual for an employing unit as an insurance agent, if paid by commission. • Service performed by an individual under the age of 18 in the delivery or distribution of newspapers or shopping news, with qualifications. • Service performed by an individual for an employing unit as a licensed real estate broker or licensed cemetery broker or a licensed real estate salesman or licensed cemetery salesman, if paid by commission. • Service performed in the employ of a foreign government including service as a consular or other officer or employee or a non diplomatic representative. • Service performed in the employ of an instrumentality wholly owned by a foreign government if certain qualifications are met. • Service covered by an arrangement between the department and agency charged with the administration of any other state or federal unemployment compensation law pursuant to which all services performed by an individual for an employing unit is deemed to be performed entirely within such agency's state. • Casual labor not in the course of the employer's trade or business. • Service performed by an individual for an employing unit as a securities salesman, if paid solely by commission. • Service performed in the employ of a hospital if such service is performed by a patient of the hospital. • Service performed by individuals solely to the extent that the 160 compensation includes commissions, overrides or profits realized on sales primarily resulting from the in-person solicitation of orders for or making sales of consumer goods in the home. • Services performed by an individual for an employing unit in the preparation of tax returns and related schedules and documents if all such services are performed for remuneration solely by commission. There is no requirement for wages or remuneration exemptions mentioned above, no information is available on of these tax expenditures. way of reporting for the therefore, the value 161 SUMMARY OF UNEMPLOYMENT INSURANCE TAX EXPENDITURES Revenue Gain Exemptions from wages..........................................................................................NIA* Exemptions from the definition of employee........................................................... NIA Exemptions from employment ................................................................................. NIA TOTAL QUANTIFIABLE UNEMPLOYMENT INSURANCE TAX EXPENDITURES41 ............................................................................................................... NIA * No Information Available. expenditures represent foregone revenues to the state unemployment insurance fund. 41These 162 USE FUEL TAX EXPENDITURES 163 164 USE FUEL TAX EXPENDITURES There is a tax of 27¢ per gallon on each gallon of use fuel (all fuel that is not considered motor vehicle fuel, like diesel fuel) used in the propulsion of a motor vehicle on any highway within this state, with the exception of clean burning use fuel. The proceeds of this tax are distributed to the state highway fund, counties and incorporated cities and towns. There is a $0.02 per gallon credit for all use fuel purchased in Arizona and used outside of the state (A.R.S. §285728). The total amount refunded for this type of purchase during fiscal year 2001/02 was $633,800. PREFERENTIAL USE FUEL TAX RATES Fuel used on light class motor vehicles used on a highway in this state for convenience and facility or on vehicles exempt from gross weight fees is taxed at $0.18 per gallon (A.R.S. §28-5709). The amount of refunds issued for fiscal year 2001/02 was $9.7 million. Liquid use fuel, used for export purposes is taxed at a $0.26 per gallon rate. The amount refunded for this type of use fuel was $783,100. EXEMPTIONS TO THE USE FUEL TAX Farm tractors and implements of husbandry designed primarily for or used in agricultural operations and only incidentally operated or moved upon a highway are exempt from the use fuel tax 42 (A.R.S. §28-5716A7a). Road rollers or vehicles which are designed and used primarily for grading, paving, earth moving and other construction work on highways and which are not designed or used primarily for transportation of persons or property and which are incidentally operated or moved over the highway are also exempt from use fuel tax (A.R.S. §28-5716A7b). Refunds granted for these types of exemptions together totaled $4.7 million in fiscal year 2001/02. Liquid use fuel sold within an Indian reservation to an enrolled member of the tribe is excluded from taxation per A.R.S. 28-5716A3. The total amount refunded for this provision during fiscal year 2001/02 was $100,900. Each supplier that properly remits use fuel tax may retain four-tenths of one per cent of the tax imposed to cover the costs of administration of the tax (A.R.S. §285751). This amount would have been collected by the state if this provision were not in effect. The value of this provision for fiscal year 2001/02 is $2.1 million. Effective April 1, 1997, all clean burning fuels are no longer taxed (A.R.S. §285708A2). Since taxpayers who consume alternative fuels are not required to report their use information to the department, no information is available on this exemption. 42Any figures presented for Use Fuel Tax Expenditures were provided by the Arizona Department of Transportation. 165 SUMMARY OF USE FUEL TAX EXPENDITURES Revenue Gain PREFERENTIAL TAX RATES: Fuel purchased in Arizona and used outside the state ..................................... $633,800 Light class and exempt vehicles use rate ........................................................ 9,700,000 Liquid use fuel used for export .......................................................................... 783,100 EXEMPTIONS: Farm tractors, implements of husbandry and road rollers or vehicles designed and used for grading, paving, earth moving and other construction work on highways ................................................................ 4,662,000 Native American Refunds .................................................................................. 100,900 Administration exemption for use fuel suppliers............................................ 2,100,000 Exemption for clean burning fuels......................................................................... NIA* TOTAL QUANTIFIABLE USE FUEL TAX EXPENDITURES43 .................................................................................................. $17,979,800 *No Information Available. 43These tax expenditures represent foregone revenues to the state highway fund, counties and incorporated cities and towns. 166 VEHICLE LICENSE TAX EXPENDITURES 167 168 VEHICLE LICENSE TAX EXPENDITURES Under current law, Arizona imposes a vehicle license tax at the rate of $2.95 for each $100 in vehicle value during the first twelve months of life of the vehicle. During the succeeding periods, the tax rate is $3.04. However, the vehicle value is 60% of the manufacturer's base retail price in the first year and declines by 16.25% each year thereafter. The minimum vehicle license tax is $10. The proceeds of this tax are distributed to the state highway fund, counties, incorporated cities and towns, county assessors and the state general fund. PREFERENTIAL VEHICLE LICENSE TAX RATES Three classes of motor vehicles pay lower vehicle license tax rates. Privately owned motor vehicles which are exclusively operated as a school bus (A.R.S. §28-5804), privately owned ambulances and fire fighting vehicles (A.R.S. §28-5806), and motor vehicles powered by alternative fuels (A.R.S. §285805) have a vehicle value in the first year of 1% of the manufacturer's base retail price. The minimum tax for these vehicles is $5.00. The information on this tax expenditure is not available at this time. EXEMPTIONS FROM THE VEHICLE LICENSE TAX 44 Any vehicle, which is not required to be registered in Arizona, is not required to pay a vehicle license tax. Vehicles which are exempt from registration are: • Farm tractors (A.R.S. §282153D1) • Trailers used solely in the operation of a farm for transporting the unprocessed fiber or forage products of a farm or any implement of husbandry designed primarily for or used in agricultural operations and only incidentally operated or moved upon a highway (A.R.S. §28-2153D2) • Road rollers or road machinery, including power sweepers, temporarily operating or moved upon the highway (A.R.S. §28-2153D3) • Vehicles operated by an owner under special provisions relating to lienholders, manufacturers, dealers and nonresidents (A.R.S. §28-2153D4) • Motorized or nonmotorized equipment designed primarily for and used in mining operations and only incidentally operated or moved on a highway (A.R.S. §28-2153D5) • A motor vehicle being towed by a tow truck which has been registered (A.R.S. §28-2153D6) • A golf cart or other motor vehicle used in the operation of a golf course and only incidentally operated or moved on a highway (A.R.S. §282153D7) • Wheeled equipment, such as compressors, forklifts, portable cement mixers, tow dollies, tar pots, water 44Any figures presented for Vehicle License Tax Expenditures were provided by the Arizona Department of Transportation. 169 trailers, welders, etc. (A.R.S. §282153D8) Also exempt from vehicle license taxes are vehicles purchased by an enrolled member of an Indian tribe who resides on the Indian reservation established for that tribe and who purchases an unregistered vehicle for removal to the Indian reservation (A.R.S. §28-2154C). Information on this exemption is not available. Vehicles owned by a foreign government, by a consul or other official representative of a foreign government, by the United States, by a state or political subdivision of a state, by an Indian tribal government or by a nonprofit organization which presents to the motor vehicle division a form approved by the director of the division of emergency management (A.R.S. §282511A) are exempt from vehicle license tax. There is no information available on this tax exemption. There are vehicle license tax exemptions allowed for veterans, under certain conditions, and for disabled individuals, within stated limits. A veteran residing in Arizona is exempt from license tax for a vehicle acquired by financial aid from the veterans' administration (A.R.S. §285802). Any veteran that is certified by the veterans' administration to be 100% disabled and drawing compensation on that basis is not required to pay vehicle license tax (A.R.S. §28-5802). There is no information available on vehicle license tax exemptions granted to veterans in fiscal year 2001/02. Disabled Arizona residents are not required to pay vehicle license tax on a vehicle they own if they are a recipient of public monies as a disabled individual under title 16 of the Social Security Act. However, only one vehicle may be claimed for this exemption (A.R.S. §28-5803). Information is not available on this expenditure. 170 SUMMARY OF VEHICLE LICENSE TAX EXPENDITURES Revenue Gain PREFERENTIAL TAX RATES: School buses............................................................................................................NIA* Ambulances and fire fighting vehicles..................................................................... NIA Motor vehicles operated by alternative fuels ........................................................... NIA EXEMPTIONS: Farm tractors ............................................................................................................ NIA Trailers used solely in the operation of a farm for transporting the unprocessed fiber or forage products of a farm or any implement of husbandry designed primarily for or used in agricultural operations ............ NIA Road rollers or road machinery................................................................................ NIA Any owner permitted to operate a vehicle under special provisions relating to lienholders, manufacturers, dealers and nonresidents ...................... NIA Motorized or nonmotorized equipment designed primarily for and used in mining operations........................................................................................... NIA Motor vehicles being towed by a tow truck............................................................. NIA Golf carts or other motor vehicles on a golf course................................................. NIA Wheeled equipment.................................................................................................. NIA Vehicles purchased by Indians residing on the reservations ................................... NIA Vehicles owned by a government or by a nonprofit organization with a form approved by the division of emergency management ............................... NIA Vehicles owned by certain veterans......................................................................... NIA Vehicle owned by disabled individuals ................................................................... NIA TOTAL QUANTIFIABLE VEHICLE LICENSE TAX EXPENDITURES45 ............................................................................................................... NIA *No Information Available. tax expenditures represent foregone revenues to the counties, incorporated cities and towns, county assessors, the state highway fund and the state general fund. 45These 171 172 WATERCRAFT LICENSE TAX EXPENDITURES 173 174 WATERCRAFT LICENSE TAX EXPENDITURES 46 Arizona imposes a watercraft license tax on watercraft operating on all of the waterways of this state. Revenues received from this tax are deposited in the watercraft licensing fund, the state lake improvement fund, the law enforcement fund and the boating safety fund. WATERCRAFT LICENSE TAX PREFERENTIAL RATES The watercraft license tax is 45¢ per foot of length of each watercraft up to and including eighteen feet and 68¢ per foot of length for each foot over eighteen feet (A.R.S. §5-321A) for resident owners. The taxation of smaller watercraft at a lower rate than larger watercraft is a preferential tax rate. If the tax on watercraft were 68¢ per foot regardless of length, additional revenues of $443,900 would have been collected in fiscal year 2001/02. For nonresident owners, the watercraft license tax is $2.90 per foot of length of each watercraft up to and including eighteen feet and $5.50 per foot of length for each foot over eighteen feet. If the tax on the watercraft were $5.50 per foot regardless of length, $803,300 in additional revenues would have been received in fiscal year 2001/02. Watercraft agents are boat dealers who have been given the authority to issue temporary watercraft certificates for new boats only. This is pursuant to A.R.S. §5-322A4, which states undocumented watercraft can operate under a valid temporary certificate issued pursuant to the rules adopted by the Game and Fish Commission. The customer may use his/her boat while the paperwork is being processed. Since the watercraft agent is responsible for submitting the fees and license tax along with the paperwork, the value for this type of watercraft is included in the preferential tax rates previously mentioned. EXEMPTIONS FROM WATERCRAFT LICENSE TAX Vessels owned by agencies of the federal government in performance of their official duties are exempt from the watercraft license tax (A.R.S. §5-302A). These vessels are also covered under A.R.S. §5-322A2 under the exemption for military or public vessels of the United States. It is estimated that approximately 50 federal boats are on Arizona waters with an average length of 16 feet. If these vessels were subject to taxation, an additional $500 in watercraft license tax revenues would have been collected in fiscal year 2001/02. 46Any figures presented for Watercraft License Tax Expenditures were provided by the Arizona Department of Game and Fish. 175 Watercraft dealer registration is different than any other. Decals and certificates that are issued are not attached to a specific boat; they can be switched between boats owned by the same dealer for the purpose of demonstrating the boats for sale. The fee for this type of registration, per A.R.S. §5-321C is $2.50. Since we have no way of knowing how many boats a dealer has on his lot at any given time, we are unable to give an estimate of the revenue. Foreign watercraft temporarily using the waters of the state (A.R.S. §5-322A1) are exempt from the watercraft license tax. The only time that foreign vessels operate in this state would be during a major regatta or race. A large majority of these races occur on the Colorado River, specifically Lake Havasu, which is a navigable waterway under the jurisdiction of the U.S. Coast Guard. The loss of revenue from this exemption is in the negligible to non-existent range. Also exempt from the watercraft license tax are watercraft used solely as lifeboats (A.R.S. §5-322A3). Due to the makeup of the boating population in Arizona, the incidence of lifeboats is nearly nonexistent. Only very large boats on large bodies of water have the need or can even physically accommodate a lifeboat. Therefore, any revenue lost due to this exemption would be in the negligible to non-existent range. Any watercraft owned by the state or by any political subdivision is exempt from the watercraft license tax (A.R.S. §5322B). The state and its political subdivisions would have been subject to tax in the amount of $4,100 in fiscal year 2001/02 if their watercraft were not exempt from this tax. A.R.S. §5-322H exempts owners of commercial watercraft from the license tax but those taxpayers are not exempt from the advalorem property taxes. If this type of watercraft had been taxed in fiscal year 2001/02, an additional $17,100 would have been collected. Military personnel stationed in Arizona who can provide proof that they are nonresidents, they are exempt from this tax. This exemption resulted in a tax expenditure of $10,400 in fiscal year 2001/02. Residents of Indian reservations, who can provide proof that they reside on that portion of the reservation within the boundaries of Arizona established for the tribe of which they are a member, are exempt from this tax. If reservations were taxed in fiscal year 2001/02, an additional $200 would have been collected. 176 SUMMARY OF WATERCRAFT LICENSE TAX EXPENDITURES Revenue Gain PREFERENTIAL TAX RATES: Resident preferential rates................................................................................ $443,900 Nonresident preferential rates ............................................................................ 803,300 EXEMPTIONS: Vessels owned by the agencies of the federal government..................................... $500 Persons doing business as marine dealers and licensed in Arizona........................NIA* Foreign watercraft temporarily using the waters of the state................................... NIA Life boats.................................................................................................................. NIA Watercraft owned by the state or by a political subdivision .................................. 4,100 Owners of commercial watercraft not exempt from ad valorem tax ................... 17,100 Watercraft owned by non-resident military personnel......................................... 10,400 Watercraft owned by residents of Indian reservations.............................................. 200 TOTAL QUANTIFIABLE WATERCRAFT LICENSE TAX EXPENDITURES47 .................................................................................................... $1,279,500 * No Information Available. tax expenditures represent foregone revenues to the watercraft licensing fund, the state lake improvement fund and the law enforcement and boating safety fund. 47These 177 178 W O R K E R S ’ C O M P E N S AT I O N PREMIUM LIEU TA X E X P E N D I T U R E S 179 180 WORKERS’ COMPENSATION PREMIUM LIEU TAX EXPENDITURES 48 Workers’ compensation premiums are taxed at a rate up to 3% on all premiums collected during the calendar year, less certain deductions from total premiums (A.R.S. §23-961G). These deductions are for applicable cancellations, returned premiums, and policy dividends or refunds paid or credited to policyholders within Arizona and not reapplied as premiums for new, additional or extended insurance. During calendar year 2001 the deductions from premiums totaled $57.5 million which results in a tax expenditure of $1.7 million. 48Any figures presented for Workers’ Compensation Premium Lieu Tax Expenditures were provided by the Industrial Commission of Arizona. 181 SUMMARY OF WORKERS’ COMPENSATION PREMIUM LIEU TAX EXPENDITURES Revenue Gain Deductions from total premiums................................................................... $1,726,000 TOTAL QUANTIFIABLE WORKERS’ COMPENSATION PREMIUM LIEU TAX EXPENDITURES49 .................................................................................................... $1,726,000 49These expenditures represent foregone revenues to the Administrative and Special Funds of the Industrial Commission. 182