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.