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

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.

Help Protect Freedom in Arizona by Joining Our Grassroots Network

Arizona needs to have a unified voice promoting economic freedom and prosperity, and the Free Enterprise Club is committed to making that happen. But we can’t do it alone. We need YOU!

Join our FREE Grassroots Action List to stay up to date on the latest battles against big government and how YOU can help influence crucial bills at the Arizona State Legislature.

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.

Help Protect Freedom in Arizona by Joining Our Grassroots Network

Arizona needs to have a unified voice promoting economic freedom and prosperity, and the Free Enterprise Club is committed to making that happen. But we can’t do it alone. We need YOU!

Join our FREE Grassroots Action List to stay up to date on the latest battles against big government and how YOU can help influence crucial bills at the Arizona State Legislature.

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! 

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.