Costly Rural Tax Credit Program Moving Again at the Legislature

Last year’s Rural Tax Credit bill has popped up again at the legislature, a $30 million hit to the budget when Arizona can least afford it.  Proponents of the bill are drawing support by selling this idea as a way to spark investment and growth in rural areas of Arizona.

The crux of the legislation is $30 million in salable tax credits which the few eligible “investment firms” use to raise a maximum of $50 million in investible capital.  The tax credits may be utilized to offset corporate income, individual income, or premium insurance taxes for the qualified investors for the fund.  The money is essentially raised leveraging a taxpayer-subsidized risk pool and then used to invest in rural businesses.

HB 2590 is very similar to programs tried in other states under the name CAPCO (Capital Companies,) that have had dismal results. CAPCO has been widely regarded as one of the most inefficient ways to raise capital, and ineffective ways to invest capital.  Because CAPCO has earned a terrible reputation for wasting millions of dollars, the program is continually rebranded and repackaged when pitched in different states.

Proponents of the bill claim this legislation is different and includes significant accountability provisions that make it different than other CAPCO plans.

These “protections” include a business plan, commitments for jobs created and retained, prohibition on charging management fees, requirement to have the approved credit-eligible capital 100 percent invested, and a demonstration that the investment result in greater local and state tax revenues than the aggregate of the tax credits received.

A two-part series written by the Pew Charitable Foundation points out the easy gamesmanship of many of these reporting requirements, concluding that “the investment firm typically bolster their claims using reports written by academics they hired.  Independent policy analysts say the authors of the studies use methods that inflate the economic benefits of the programs.”  Under HB 2590 it will be very easy to inflate the benefits since the language allows the investment fund to take credit for both created and “retained” jobs. In other words, they can invest in a company that never grows and they would claim 100% of the business activity in their economic analysis.

Management fees have been a source of abuse in other programs which stemmed the amount of money that made it to businesses.  Though the legislation prohibits management fees, the mechanics of the investing structure is so complex it is not clear that other types of fees could not be charged using a different accounting label.

And though all of the approved credit-eligible capital for the program (up to $50 million) must be continuously invested in rural business for at least 3 years, this provision doesn’t make it a better deal for taxpayers.  After all, the investment firm makes profit off monetizing the tax credit to begin with, as well as selling the investments.

Last year, lawmakers funded a $10 million special investment tax credit program, which can be used by these same investors to funnel investment dollars into rural Arizona.  We encourage lawmakers to reject HB2590 and instead support better alternatives that don’t pick winners or losers or require taxpayers to subsidize the risk of investors.


Universities Don’t Belong in the Real Estate Business

Arizona’s framers and past policymakers were extremely mindful about protecting the state’s property tax system from being gamed by private interests.

Arizona’s Constitution requires property taxes to be uniform between comparable property uses.  It also prohibits government from subsidizing private businesses.  And lastly, it restricts the granting of tax exemptions for properties that were taken by government in order to evade property taxes.

These guardrails make sense given the zero-sum nature of property taxes.  When a tax levy amount is set, that total is divided and paid amongst the community’s individual residential and commercial taxpayers.  Like a balloon being squeezed, when one taxpayer is taken off the property tax rolls, everyone else pays more.

Which brings us to the Board of Regents and Arizona State University. Like other political subdivisions in Arizona, ABOR and ASU is exempt from paying property taxes on land that they own.

Included in this exemption is the ASU University Research Park that was granted to ASU in the 1980s to promote their academic mission, fuel innovation and pursue higher learning and research in partnership with private enterprise.  Yet upon closer examination, it has become evident that this “research park” is more about luring private development and corporate headquarters than engaging in academic endeavors.

The same can be said about other ABOR owned land as well. The most visible example is the “Marina Heights” development – 2.2 million square feet of office space that overlooks Tempe Town Lake.  This project made headlines last month for being the largest real estate deal in Arizona history – selling for almost a billion dollars!

Normally a private business is required to pay property taxes regardless if they are located on government property or not.  Yet the Universities have been able to dance around these legal obstacles by creating a lease-back of the property; retaining ownership and collecting a tariff from their private tenants.

In the case of the Marina Heights development, commercial businesses are dodging $12.1 million in property taxes a year.   That means Tempe Union school districts, Maricopa Community College District, and the other receiving jurisdictions are shorted and that gaping hole in the property tax revenues must be made up by everyone else in the district.

But not only are local taxpayers impacted; so is everyone else in the state.  Arizona’s K-12 system is financed only in part by the property tax formula; the rest is backfilled by the State’s general fund.  ABOR’s State Farm building costs the State’s general fund $3.45 million and its “Research Park” upwards of $6 million.

Furthermore, this creative wading into the lucrative real estate business hasn’t stopped the university from asking for more state money or raising tuitions on students.

Hopefully lawmakers will see fit to close this property tax loophole. Rep. Vince Leach has introduced HB 2280, which would prohibit any development that doesn’t serve an academic purpose on University property from being exempt from paying property taxes. The bill passed out of House Ways and Means committee this week, and is awaiting a vote on the floor. The Club urges lawmakers to pass this commonsense fix and protect property owners from these unfair tax shifts.