Legislature Fails to Fix Troubled Arizona Commerce Authority

Legislature Fails to Fix Troubled Arizona Commerce Authority

After months of debate surrounding the controversial reauthorization of the Arizona Commerce Authority (ACA), the tension finally broke on the last day of session when HB2210 was raced through the House and Senate and signed by Governor Hobbs.

Everyone at the capitol was aware of the problems surrounding the Commerce Authority. Our elected officials were briefed on the innumerable deficiencies, questionable activities, and likely illegal behavior of the agency. Yet when it came time to act, the legislature capitulated to the special interest benefactors of the agency, passing a reauthorization with no real reforms. The included changes were so inconsequential that an agency dealing with months of negative press about illegal CEO junkets had nothing but accolades for legislative leadership.

What did the final ACA package look like? In exchange for a five-year reauthorization (one of the longest reauthorizations ever granted to the ACA), the agency agreed to add to their board an attorney practiced in litigating Gift Clause violations, a requirement that their board meetings be videoed and hosted online for public review, a cap of “only” 100 state-paid full-time employees, and some reporting requirements for permitting and approval times by local cities and towns.

So, what started out as a hopeful and robust opportunity for reform quickly disintegrated into window dressing changes. No meaningful legislative oversight of the agency was included. It continues to exempt the ACA from having to use the Attorney General for legal counsel, instead allowing it to be one of the only departments to expend funds hiring silk stocking law firms on the taxpayer’s dime. And it still enjoys its exclusion from the prohibition on competing with private businesses, ironically, considering it claims to exist to promote the thriving of private businesses.

However, the most tragic concession was the jettisoning of the statutory gift clause test, which would have ensured the ACA conducts a constitutional analysis of every grant award and subsidy administered by the agency. The proposed gift clause language was taken straight from the landmark Arizona Supreme Court Schires decision, and given the agency’s track record of violating the Gift Clause, this was the most needed and defensible reform of them all.

Opponents to ACA reform absurdly argued that the “Schires Test” does not apply to the agency, so without its inclusion, it is quite obvious the ACA intends to continue handing out unconstitutional gifts to private business.

Litigation is likely to ensue, but the ACA doesn’t care. It has an unlimited taxpayer-backed war chest to defend these subsidy schemes. It knows it costs a fortune for private actors to sue, and if one of its deals is found to be unconstitutional, it will just modify the next deal, declare it “different,” then dare someone to sue it again. It’s a great scheme if you can figure out how to be part of the 1% that benefits from this racket.

The bottom line is that the absence of substantive reforms to the Arizona Commerce Authority was a missed opportunity for taxpayers. Following a dismal auditor general report and scrutiny by the Attorney General for constitutional violations, there was enough momentum to address many of the problems plaguing the ACA. Sadly, that momentum was squandered, and another government agency was allowed to continue with no oversight or accountability.

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Reforming the Arizona Commerce Authority: Lawmakers Should Resolve Constitutionality Problems First

Reforming the Arizona Commerce Authority: Lawmakers Should Resolve Constitutionality Problems First

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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Reforming the Arizona Commerce Authority: Lawmakers Should Resolve Constitutionality Problems First

A Complicated History, an Uncertain Future: The Arizona Commerce Authority, Part I

A contentious fight is brewing in the Arizona legislature, the possible reauthorization of the Arizona Commerce Authority (ACA). Governor Hobbs has made the reauthorization a top priority of her administration this session, mentioning it in her State of the State address. But the debate has an ironic element considering the history of its inception.

In 2011, the state was crawling out of a crippling recession, having lost literally hundreds of thousands of jobs and even selling off the state Capitol buildings to dig out of a deficit. The legislature, in collaboration with the Brewer Administration, introduced an omnibus bill sold as a “jobs package” which refashioned the bureaucratic Department of Commerce into the Arizona Commerce Authority, and incorporated both new targeted tax credit programs and incentives, as well as phased in corporate income and commercial property tax cuts.

Democrats a Decade Ago Opposed the ACA

The bill at the time was uniformly opposed by Democrats, including then Representative Katie Hobbs. Republicans mostly coalesced around the bill, with a handful of key conservatives voting in opposition of the legislation, largely in protest of the corporate welfare and multi-million-dollar “deal closing” fund with no legislative oversight. For those unfamiliar with the deal closing fund, it is a large pot of money appropriated to the Director of the Commerce Authority to throw at corporations to convince them to relocate to Arizona.

After the ACA was passed and signed into law, it would seem that only a few conservative voices and the Club itself would prove prophetic at the lack of oversight and inevitable gift clause violations, which is a constitutional protection from the government subsidizing private industry.

Predictions of Initial Critics Come to Pass

In 2016, the ACA received its first independent evaluation by the state auditor general in anticipation of its first agency sunset review. Unsurprisingly, their report flagged multiple problems at the ACA, with a couple being major gaps in reporting and a gross exaggeration of “created” jobs.

Our organization and a few others highlighted these issues at the legislature, but our concerns fell on deaf ears as the ACA received a cushy 8-year extension. Now the ACA is up for review again, and low and behold like Groundhog Day, the latest 2023 auditor general report includes the same problems as before plus additional ones, including junkets that use taxpayer money to schmooze CEOs with Super Bowl tickets, bottles of wine, and a lavish food budget as blatant Gift Clause violations.

Politics Makes Strange Bedfellows

This year’s fight over the ACA is more complicated than before. Minutes before the director was to take the podium to advocate before the House Commerce committee, Democrat Attorney General Kris Mayes released her own legal opinion of the Authority’s CEO forums and unequivocally determined they are in fact unconstitutional and warned the agency to cease all such expenditures or face litigation.

Though the Commerce Authority was able to duck direct challenges of Gift Clause violations in the past, not least in part because the jurisprudence surrounding the interpretation of the Gift Clause circa 2011 or 2016 was less clear, they no longer enjoy that benefit. The Arizona Supreme Court has recently made very clear what expenses are and aren’t subsidies with a two-prong test. First, the expenditure must provide a public benefit. If it does, then the public expense must be far exceeded by the benefit provided. Importantly, the court reiterated that anticipated economic development, job growth, and expected increased tax revenue are indirect benefits that are irrelevant to the analysis. Considering all these programs are justified by expected future economic development—regardless of the public benefit—they are subsidies, as Attorney General Mayes concluded.

The unlikely allyship between AG Mayes and Senate President Warren Petersen (leading the effort in the legislature to reform and consolidate the ACA) means the process will not be an exercise in rubberstamping. The Authority will not be able to rely on the muscle of the business community alone, sailing through a perfunctory review of its defects. And that’s good news for taxpayers and advocates of transparent and accountable government.

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SB1562 Redistributes Money From Taxpayers to the Pockets of Large Corporations

SB1562 Redistributes Money From Taxpayers to the Pockets of Large Corporations

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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SB1562 Redistributes Money From Taxpayers to the Pockets of Large Corporations

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!