There are plenty of problems with the Arizona Commerce Authority. Since its inception in 2011, criticisms were raised concerning its freewheeling powers to dole out taxpayer money with practically no legislative oversight and broad exemptions from important guardrails such as the prohibition of using outside counsel (rather than the Attorney General’s office.) These issues have resurfaced over the years in critical Auditor General reports that have highlighted the insufficient reporting and record keeping for the administration of grants and awards provided by the agency to private businesses. This led to a mere 2-year extension of the agency in 2016, and a controversial reauthorization in 2018 when Republicans and Democrats alike banged the table for reforms. And most recently, the agency has come under fire by the Attorney General herself, for unconstitutional gifts in the way of wining and dining and Super Bowl tickets for CEOs.
Despite consistent criticism across the aisle and over the years, the ACA has evaded any real substantial reforms. That could very well change this year.
There now seems to be bipartisan interest in reining in an unaccountable agency with a $226M budget and a multi-million-dollar slush fund. Additionally, Republicans are unhappy that the ACA has been utilized by Governor Hobbs to pursue radical goals on abortion, water, and social equity…(digital equity plan). Democrats, on the other hand, must straddle support for a Hobbs-regime that is at cross purposes with purported opposition to corporatism and degradation of tax revenues that could be used elsewhere.
So, the question isn’t whether the ACA will be reformed this session, but which reforms will ultimately be adopted.
Among the reforms being considered, by far the most important and inarguable is a statutory “test” on the Gift Clause. Arizona’s constitution includes a protection for taxpayers from the “depletion of the public treasury or inflation of public debt by engag[ing] in non-public enterprises or by giving advantages to special interests.” This critical protection called the Gift Clause has been litigated over the years, yet arguably, the most important ruling occurred in 2021, well after the ACA was formed. The Schires Decision put forth a two-part test to clarify when an expenditure tripped the line into a Gift Clause violation. First, an expenditure must serve a public purpose, admittedly a low and subjective bar, according to the court. And secondly, the “the value to be received by the public is far exceeded by the consideration being paid by the public.” Schires clarified that, “relevant ‘consideration’ consists of direct benefits that are ‘bargained for as part of the contracting party’s promised performance’ and does not include ‘anticipated indirect benefits.’”
In other words, the customary “economic impact” metrics used by the Commerce Authority are not relevant factors to satisfy consideration, including tax revenues generated by the private business, as the court argued calculating such factors would “eviscerate the Gift Clause” altogether. Instead, the ACA must receive a “bargained-for benefit as part of the private party’s performance, and the payment of public funds must not be grossly disproportionate to the fair market value of that benefit.”
The Arizona Commerce Authority is in blatant violation of the Gift Clause and most urgently needs reform to ensure its compliance going forward. The bill that passed out of Senate Government on March 21 includes just that, codifying the Schires test in statute and obligating the ACA to analyze all grants and loans accordingly. A failure to adopt this obvious reform this session would be total neglect by the legislature, it would invite litigation of nearly all the Authority’s programs and leave the decimation of the Authority to the courts.
Additionally, the bill reformed all current refundable tax credits (Qualified Facilities, Research and Development, and Film tax credits) administered by the Authority by making them non-refundable. This would ensure these programs comply with the Gift Clause as the refundable portion of the credit is, strictly speaking, a subsidy, for which statute currently does not require bargained-for benefits to receive.
Aside from these two most critical reforms to simply ensure the agency is constitutional, the legislature should prioritize making the agency more transparent in its reporting by defining its terms of performance, give small businesses and taxpayers a voice in its administration by diversifying the board of directors, and eliminate exemptions that make the agency less accountable, including allowing them to have their own in house counsel and permitting them to compete with the private industries. Moreover, the Authority could provide invaluable information to policymakers and businesses alike if they were required to focus their resources on monitoring the tax and regulatory environment, especially locally, as often those are the most important factors considered by businesses for location and relocation.
With no shortage of legal and functional problems at the Arizona Commerce Authority, lawmakers should seize on the opportunity to pass long-overdue reforms this year.
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