SB1643 Would Give Large Companies Billions in Taxpayer Dollars to Fund Liberal Causes

SB1643 Would Give Large Companies Billions in Taxpayer Dollars to Fund Liberal Causes

It is no secret that the Club is critical of special interest tax credit programs that distort our tax code and pick winners and losers in the market. Though a few of these tax credits have been enacted by the legislature over the years, there is one program on the books that has grown into the billions and has successfully evaded any real scrutiny: the Research and Development tax credit program.

The Research and Development tax credit program piggybacks off the federal program and operates under the premise that it will increase the amount of investment corporations make in Arizona on research and development. The program is very generous, allowing corporations to claim a 24% credit on the first $2.5M in qualifying expenses and an additional 15% up and above the $2.5M. If a corporation effectively eliminates their tax liability, they are allowed to carry forward the excess credits for up to 10 years. For businesses with fewer than 150 employees, the pot is even sweeter, as they are allowed to claim a refund of up to 75% of the excess credits and cash out up to $5M every year in what is called a “refundable” tax credit. In other words, direct taxpayer subsidies for select businesses.

Because of the sheer size of the R&D tax credit program and the fact that the credits are not capped, the bank of unused tax credits being carried forward has grown to almost $2B! For perspective, the state only generates around $850M in corporate taxes a year – this clearly demonstrates that there is simply not enough corporate income tax liability (taxes being paid) to draw down the available credits. As these unused credits have grown, there has been more pressure from corporate lobbies that currently have zero corporate income tax liability to find creative ways to simply cash the credits out.

This year’s attempt has taken shape in SB1643, which expands 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 (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 business.

Considering how the program has ballooned, lawmakers would be far better served to examine the structure and necessity of the corporate income tax entirely, instead of creating complicated credit schemes.

SB1643 is bad policy and bad politics

Under the provisions of the bill, corporate entities can apply their unused credits at a rate of $0.60 per dollar for qualifying expenses which include everything from “sustainability” projects, updating R&D facilities, “workforce development projects,” tuition reimbursement for employees, and capital expenditures supported by federal matching dollars, or national grant programs.

In other words, large companies will get taxpayer money to fund various liberal endeavors, including efforts to combat climate change, empower HR departments’ woke workforce initiatives, and promote the out-of-control spending of the federal government.

This isn’t just conjecture—many of these corporations have implemented these activities in the workplace, and SB1643 simply forces taxpayers to now subsidize these woke initiatives.

And while republican lawmakers tell their constituents that they oppose taxpayer subsidies, oppose CRT, and dislike green new deal policies, a majority of Republican Senators voted for SB1643 as did a majority of House Republicans in the Appropriations committee. Their opposition is schizophrenic, to say the least.

Now we are moving into budget season at the legislature, and it is becoming more and more likely that this corporate welfare R&D package will be rammed into the budget. The only question now is when that occurs, who will stand up against this woke taxpayer giveaway, and who will be for it.

Tell Your Senators to Vote NO on Corporate Welfare Bill SB1643!

SB1643 would allow $50M a year in tax credits for R&D companies and increase the “refundability” from $5 M to $10 M a year. There are currently over $1 BILLION in backlogged R&D tax credits because the state programs have generously allowed these companies to entirely zero out their tax liability!!

SB1643 is a straight $10M/year appropriation to these companies subsidized by TAXPAYERS. This is CORPORATE WELFARE and it’s WRONG!!

Send a message to Arizona Senators right now and tell them to vote NO on SB1643! 

Arizona Lawmakers Want to Send Your Hard-Earned Tax Dollars to Woke Hollywood

Arizona Lawmakers Want to Send Your Hard-Earned Tax Dollars to Woke Hollywood

Arizona lawmakers are currently living in “La La Land.” No, really. They want to dole out $150 million of your dollars to sign checks to woke Hollywood producers to literally California our Arizona.

SB1708, sponsored by Senator David Gowan, passed out of the Senate last week by a vote of 21-7. It provides a tax credit for a percentage of movie production costs: 15% for productions up to $10 million, 17.5% for productions between $10 and $35 million, 20% for productions over $35 million, and the opportunity for an extra 2.5% on top for positions held by Arizona residents, if the production is filmed in a qualified facility or primarily on location, or if it was produced in association with a long-term tenant in a qualified production facility.

The worst part—it’s refundable. This means that if Hollywood producers wipe out their tax liability to zero, the remaining tax credits come as a check from you, the taxpayer.

Movie production is a multi-billion-dollar industry. They do not need a subsidy. But because one state was willing to cut them a check a few decades ago, they now seek the highest bidder. It’s a race to the bottom for Arizona. Very soon, $150 million won’t be enough, and the industry will send more lobbyists down to the Capitol to razzle dazzle lawmakers into doling out more taxpayer dollars.

These production companies are more than able and happy to pick up and jet-set from one location another—even in the middle of production. If Arizona isn’t willing to pay more, another state or country will, and we’ll be left in the dust.

Georgia taxpayers gave the movie industry $1.2 billion last year. To keep up, California, home of actual Hollywood, is doubling its cap from $330 million a year to $660 million. Kevin Costner is currently lobbying the Utah legislature to provide a carveout in their $8.3 million cap for credits, raising it for movie productions in rural areas. Costner is telling Utah he wants to film 5 films there if the cap is raised. And star struck New Mexico recently more than doubled its cap, after spending hundreds of millions from their general fund to pay off a backlog of credits.

But while these states are fighting to out-bid each other, others have scrapped the idea. 13 states have eliminated their Hollywood subsidies in the past 10 years, and several others have scaled theirs back. And for good reason. A recent study of the subsidies in New York, Louisiana, Georgia, Connecticut and Massachusetts found that despite $10 billion in taxpayer dollars spent, there was no statistically significant impact on employment.

If this seems like such a bad idea that it should be illegal—it likely is. The Arizona Supreme Court recently ruled that the government cannot include “anticipated indirect benefits” such as projected sales and tax revenue as part of the consideration with a private party under the Gift Clause in the Arizona Constitution. In other words, Hollywood dazzling lawmakers with projected economic development leading to increased tax revenue is an “irrelevant indirect benefit” that cannot be included in the consideration.

In addition to the bill’s terrible tax policy and obvious unconstitutionality, Arizonans do not want their hard-earned dollars being used to send checks to Hollywood. We do not want to subsidize their woke movies, and do not want thousands of liberal California voters shipped into Arizona on our own dime.

Tell Your Lawmakers to OPPOSE SB1708!

Right now, lawmakers are considering a $150 million REFUNDABLE tax credit for woke Hollywood producers.

Arizonans have been shouting “Don’t California my Arizona” for years. But SB1708 pays to literally California our Arizona, shipping in thousands of Hollywood voters on the taxpayer’s dime. Regardless of the industry, Arizona taxpayers don’t want their hard-earned dollars going to corporate welfare with any refundable credit. 

Send a message to Arizona lawmakers today and tell them Don’t California our Arizona: OPPOSE corporate welfare and OPPOSE SB1708! 

HB 2409 Would Exempt Wealthy Investors from Paying Income and Capital Gains Tax

HB 2409 Would Exempt Wealthy Investors from Paying Income and Capital Gains Tax

As usual, bad ideas at the legislature just don’t seem to die. Lawmakers are considering legislation to expand the “Angel Investment” Tax Credit Program, a scheme that would dole out millions to wealthy investors to subsidize their risky venture capital investments in Arizona. Even worse, these same investors and businesses will also be exempt from paying any capital gains tax to the state.

Under the bill, employees at the Arizona Commerce Authority will select “qualified” investors (I.E. politically connected millionaires with relationships with the Arizona Commerce Authority) for a generous tax credit to hedge their potential losses in risky new start-up companies.  And if the business venture does pan out, the investor can then sell and pay zero to the state in capital gains. Great deal for them, a bad deal for every other taxpayer in the state.

The argument made in defense of the program is that Arizona needs the tax credit to attract more venture capital to Arizona, otherwise good ideas won’t locate here.  This of course is not true.  Good business ideas will attract capital because investors stand to gain millions of dollars in profit to do so.

And if a business is unable to attract the start-up capital it needs without the credit, it means the venture is extremely risky and should be avoided.  After all, we don’t stand to benefit monetarily from the businesses’ success, why should we therefore shoulder the losses of its failures?  And if a business was to attract the necessary start-up capital regardless of the tax credit, why are taxpayers subsidizing a business activity which would have occurred anyway?

Venture capital investing is inherently risky.  Successful speculations have the potential to enrich their investors immensely.  The Arizona Commerce Authority is not better equipped than the free market to facilitate these types of transactions or properly gauge risk.

Taxpayers should not be in the business of subsidizing risky venture capital investments by wealthy investors that stand to reap windfall tax benefits. It’s a program that picks winners and losers among taxpayers, among venture capital investors, and among aspiring entrepreneurs.

Swampy D.C Program Rampant With Fraud, Being Pushed in Arizona.

Swampy D.C Program Rampant With Fraud, Being Pushed in Arizona.

Every legislative session, lawmakers are duped by rosy tax credit programs, sold as either robust jobs programs or silver bullets to our social woes. 

This year HB2732, sponsored by Representative Ben Weninger, is being sold as both.  The Low-Income Housing Tax Credit (LIHTC) program is a federal program by which qualified investors are incentivized to build housing projects for low-income persons with generous income tax subsidies.

How it works.

It is a sweetheart deal for banks, insurance companies and investors.  The Arizona program allows for $8 Million a year of tax credits that can be matched with the subsidies offered through the federal program.  The bills mirror the federal LIHTC percentages and can be carried over for 5 years.

To illustrate the business model, a $10 Million project qualifies for 9 percent tax credits.  That is $900,000 a year and $9 Million over the course of the 10 year carry forward period.  Banks sell these credits to other investors who make up a pool to finance the project.  Some projects are even able to bridge financing gaps with other government programs. But not only are almost the entire project costs subsidized by the taxpayer, another $2.2 Million is generated through tax write offs from real estate losses, depreciation and interest expenses.

This mechanism is supported by many layers of middlemen who add to the cost of building these projects.  As a result, the program is lucrative for investors, and very costly for the taxpayers.

How it actually doesn’t work.

For several years now, this program has been sharply scrutinized by various parties including the Office of Government Accountability (OGA), think tanks, and the media. 

The overarching theme: this is a costly and inefficient program, susceptible to fraud and dubious in its impacts to shelter low-income Americans.

Much of the gamesmanship of the program revolves around the submittal of construction costs which the OGA determined varied drastically from state to state and project to project.

 The average LIHTC project cost $218,000, yet only $9,400 of it was the cost of the land; a ratio observably out of whack. This is par for the course for a program which in the past has been scandalized by construction kick-back schemes.  The program has been gamed in other ways.  Just last Fall, Wells Fargo made an over $2 Billion settlement with the Department of Justice for nation-wide collusion to devalue the tax credits.  Hundreds of millions of dollars have been siphoned from the program in these ways resulting in far fewer units being built for the poor at a great cost to taxpayers. 

Neither at the state nor federal level, did necessary oversight exist to ferret out inflated budget projections and fraud.  In fact, only seven of the 56 agencies around the country awarding these credits has been audited in the program’s 30-year history.

And yet the feds continue to soak increasing dollars into the program each year, though the actual number of units being constructed dwindles.  According to an investigation conducted by NPR, the $9 Billion LIHTC program is producing fewer units than it did 20 years ago yet taxpayers are paying 66 percent more in tax credits.  Aside from the fraud, another factor likely being the many syndicators, consultants, and financiers that work in their margins into the complicated process.

What else this reveals.

The OGA’s report on the vast cost variations in building state to state, reveal another critically important truth.  Jurisdictions with onerous and restrictive land use regulations drive the high costs to build there.  These incentive programs in fact reward states that cause their own affordable housing crises and fleece taxpayers all at the same time.  A report issued by the National Association of Homebuilders and the National Multifamily Housing Council estimated that 32 percent of multifamily costs were attributable to regulation

In fact, studies of housing prices have shown costs have directly increased with land use regulations.  As a result, federal housing affordability spending is almost two times higher in the most regulated states than the least regulated states.

There are better ways.

It is long-time policymakers address affordable housing for American families by addressing the root of the problem and tailoring assistance programs that serve those in poverty, not only those seeking a profit

Under the new federal administration, director of Housing and Urban Development (HUD) Ben Carson, has looked to do just that.  Instead of continuing to reward bad behavior by local governments, his agency has discussed attaching HUD grants to regulatory reforms proven to lower housing costs.  HUD’s position that they won’t continue to aid in the affordable housing problem by subsidizing it – is also a signal to states that they should look to curb their own contributions to the problem instead of simply seeking more federal handouts.  In Arizona, one of those factors is the residential rental tax – which disproportionately impacts low-income individuals.

Reforming land regs is a long-term endeavor and won’t solve the immediate need for low-income people in unaffordable housing markets. 

But there are better ways to structure programs than the convoluted LIHTC program.  One such proposal with bipartisan support are “Housing Choice Vouchers (HCV).”  Instead of incentivizing profiteers to supply housing – HCVs empower individuals and families to access housing in places they desire to live. 

This approach allows low-income families to move to higher income places which often gives them access to better jobs and school districts and affords children of low-income families’ greater opportunities to succeed.  Because the LIHTC programs provide greater incentives for building in designated areas of greater poverty, it has the direct effect of actually concentrating poverty and segregating poor people.

Arizona lawmakers should help poor people and protect taxpayers.

The expansion of this 34-year-old failed federal program in Arizona would be a big mistake. The bill being pedaled this year is not being backed by advocates for the poor; but by those who stand to gain the most – insurance companies, investors and banks.  If lawmakers truly care about the poor – and the taxpayer – they will resoundingly reject HB2732.

New Study Shows Low Income Housing Tax Credit Program Fails at Delivering Affordable Housing in Arizona

New Study Shows Low Income Housing Tax Credit Program Fails at Delivering Affordable Housing in Arizona

Today the Arizona Free Enterprise Club released a new study evaluating the cost of Low-Income Housing Tax Credits (LIHTC) in Arizona and Washington and how LIHTC have performed compared to other government backed housing affordability programs. The review determined that in both states, LIHTC have led to a significant increase in the cost of development and construction when compared to similar market rate housing.

In his analysis, economist Everett Stamm determined that a “lack of oversight and transparency, requirements to pay higher wages and inadequate cost control measures all attribute to the higher development costs” associated with LIHTC.  Stamm concludes that even if proper reforms were implemented with LIHTC, other tenant-based programs, such as the Housing Choice Voucher Program, are better suited to provide housing for low income residents than LIHTC.

Evidence that LIHTC drive up construction costs and fail to keep housing affordable add to the list of concerns that exist with the program. “There is ample evidence, both from the Government Accountability Office and the US Department of Justice, that the Low-Income Housing tax Credit Program has been rampant with fraud and other criminal activity and lacks basic oversight to determine any tangible benefits,” said Scot Mussi, President of the Arizona Free Enterprise Club.

“If the legislature is serious about addressing housing affordability, they should look at options that are tenant based and that drive down the cost of construction. Low income housing tax credits accomplish exactly the opposite,” Mussi continued.

In Arizona, there is currently a proposal to spend $8 Million to expand the LIHTC program, which is being aggressively pushed by developers and investors that will financially benefit from the tax credits.

The complete study by the Club on LIHTC can be viewed by clicking HERE.

AG Brnovich Tackling Corporate Welfare at ASU

AG Brnovich Tackling Corporate Welfare at ASU

For months now, the AZ Attorney General Mark Brnovich and the Arizona Board of Regents (ABOR, the governing body for Arizona State University) have been in embroiled in a hot legal battle over taxpayer subsidies for wealthy developers.

At the center of the legal dispute is whether ABOR has violated several provisions of the Arizona constitution designed to protect taxpayers from crony capitalist giveaways.

Evidence suggests that they have.

The framers of Arizona’s constitution understood that property taxes are a zero-sum game, and that any levy assessed should be as fair and equitable as possible.  If someone pays less as a result of a special interest carve-out, everyone else will be forced to pay more.   To prevent picking winners and losers through the property tax code, the framers installed several key protections in our constitution:

  1. Uniformity Clause, “all taxes shall be uniform upon the same class of property within the territorial limits of the authority levying the tax, and shall be levied and collected for public purposes only.”
  2. No Evasions, “no property shall be exempt which has been conveyed to evade taxation”
  3. No Exceptions, “All property in the state not exempt under the laws of the United States or under this constitution or exempt by law under the provisions of this section shall be subject to taxation to be ascertained as provided by law.
  4. No Gifts, “Neither the state, nor any county, city, town, municipality, or other subdivision of the state shall ever give or loan its credit in the aid of, or make any donation or grant, by subsidy or otherwise, to any individual, association, or corporation.”

Governmental entities, including public universities, do not pay property tax.  This makes sense as the money to pay the taxes would have to be taken from taxpayers in the form of more taxes.  But for decades now, local cities as well as ABOR have devised creative solutions to exploit their exemption from property taxes and “lend” it to private developers.

ASU Projects: Research Park, Marina Heights, and Omni Hotel Are Evidence of Gamesmanship:      

“Research Parks”

In the 1980’s ASU formed a “research park” which strived to have private business and students working alongside each other in educational pursuits to launch ideas into the marketplace.  This was permitted legislatively, and the university paid the same rate of taxation as other users in the same classification but on a mere 1 percent of their property value.  It soon became quite obvious that the mission of the research park was creeping beyond the original intent of the legislation and as a result, major corporations were enjoying major tax deference for what was their normal business operations. 

Between the research parks of University of Arizona and ASU, they host approximately 50 companies in 4 million square feet.  These companies don’t pay property taxes but instead pay a “tariff” to the university as well as the city.  All the other jurisdictions, including the State of Arizona who rely on property taxes, get absolutely nothing.

Marina Heights

Marina Heights is located on Tempe Town Lake and includes the well-known “State Farm” building.   In December 2017, with a deal that captured headlines in the state, the building’s “lease-back” was sold to a business partnership that includes Arizona icon and business insider Jerry Colangelo for almost $1 Billion – one of the largest commercial land transactions in state history.

One of the most valuable assets of the property was the value of not paying taxes.  In fact, that value is approximately $12.1 Million a year of which $3.45 would be owed to the State, $6.6 to the Tempe Elementary and Tempe Union school districts, and $1.2 million to the Maricopa Community College District.  Not only do these jurisdictions have to back fill their budgets and other property owners make up that difference, but other like businesses must try to compete with a colossal tax advantage.

Omni Hotel

Brnovich’s latest suit filed in January of this year centers around a project called Omni Hotel (located on Mill Ave and University) and predominantly argues the deal included a massive violation of the state constitution’s gift clause.

In typical ABOR fashion, the Omni Hotel transaction is a sweet deal for developers and less so for taxpayers as a whole.  ASU will spend $19.5 Million to construct a conference center and parking garage and pay $8 Million to the hotel for use of that parking garage to the profit of the hotel.  ASU will only be allowed use of the conference center 7 days out of the year.

It is a 60-year lease with an express provision of evading taxes by requiring a “in lieu of taxes” payment of $1 Million a year.  The hotel is only on the hook for $85 per square foot for rent even though within two blocks there are other hotels that sold for a market rate of $212 – 216 per square foot – a seemingly $9 Million subsidy.

This major injection of corporate welfare does not even account for the $21 Million in tax incentives being given by the City of Tempe.

Justice for Taxpayers

Given the explicit intentions of the state constitution to protect the property tax base from chicanery of the system; ABOR’s long-standing history of using their tax-exempt status to shield corporate entities should not be ignored.  AG Brnovich is doing a service to every taxpayer in the state by calling for an end to this blatant illegal practice. 

Afterall, ASU is also constitutionally bound to make tuition “as nearly free as possible.”  Year after year of tuition hikes on Arizona students are certainly hard to square with hundreds of millions of dollars in corporate giveaways.