No one likes to pay taxes. So, understandably, businesses who can afford to hire lobbyists go to the state capitol every year to figure out how to pay less of them. Some of these large corporations have been so successful, they don’t pay any taxes at all.
Take, for example, the beneficiaries of the R&D tax credit program, which in Arizona is so generous, there is an almost $2 billion carryforward of accrued credits which can be applied for 10 years. This effectively means that there are too many credits and not enough tax liability to absorb them. How would you like the ability to not pay taxes for the next decade?
For “small” businesses with fewer than 150 employees, they are eligible for a “refund” of up to 75% of the excess credits, capped at $5M every year. There is a word for a business receiving a tax refund when you have zero tax liability—it is a subsidy. Any tax system that excludes some businesses from paying while making everyone else pick up the tab is dubious tax policy. But to then allow those same businesses to collect additional subsidies—paid for by all other taxpayers—is downright wrong. It is nothing more than government redistribution to the politically connected.
It is also likely unconstitutional. For good reason, the framers of Arizona’s Constitution were suspicious of corporate interests accruing political power that outsized average taxpayers, seizing preferential treatment for themselves at the expense of everyone else. As such, Article 9, Section 7 of the Constitution, also known as “The Gift Clause,” prohibits donations, grants, or subsidies from the government to corporate or private interests. A refundable tax credit is irrefutably a subsidy.
That has not stopped lawmakers and lobbyists from pushing this year’s expansion of the program through SB1562. This bill would expand the existing program for “small” firms receiving refundable credits from $5M to $10M a year and creates a new program that allows up to $50M a year in unused credits by larger companies to be converted $0.75 on the dollar (i.e. made refundable) for reinvestment.
This is a massive expansion in the refundability of the program and lays the groundwork for all $2 billion to be given away in subsidies to big businesses. And considering the state only generates $850M a year in corporate taxes, lawmakers should instead look to cut corporate income taxes across the board, rather than look to creative ways to hand out $2B in subsidies.
Proponents may argue that these aren’t really subsidies, as the money must be used for qualifying reinvestment projects and that taxpayers ultimately benefit because these projects are a public good because they must be used for “sustainability” or water-saving capital projects or for various workforce development projects or tuition reimbursement. Well, this is a stretch to say the least. What business wouldn’t want regular capital projects designed to save them money overall or training, education, and employee benefits such as tuition reimbursement defrayed? While schemes such as Bernie Sanders “free” tuition to attend woke universities, compliments of the taxpayers, are wildly unpopular with the general public, SB1562 is a creative repackaging. The only hook is, to have your tuition footed by taxpayers, you have to work for a politically connected corporation.
In reality, there isn’t a difference to a business in giving them a bag of cash or reimbursing their normal business costs—it all serves their bottom line. Unfortunately for every other taxpayer, it comes out of their pocketbooks. Despite the army of lobbyists hired to push for SB1562, we hope taxpayers ultimately win the battle this year to expand corporate welfare at the legislature.
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