year HB2732, sponsored by Representative Ben Weninger, is being
sold as both. The Low-Income Housing Tax
program is a federal program by which qualified investors are incentivized
to build housing projects for low-income persons with generous income tax
How it works.
It is a
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.
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.
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.
several years now, this program has been sharply scrutinized by various parties
including the Office of Government Accountability (OGA), think tanks, and the
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.
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.
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
land regs is a long-term endeavor and won’t solve the immediate need for
low-income people in unaffordable housing markets.
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.
Arizona lawmakers should help poor people and
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.
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
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
In Arizona, there is
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.
For years Democrats have
complained that virtually every government program in Arizona is underfunded
because of all the “draconian” tax cuts that have occurred. Given that most
national rankings show Arizona is middle of the pack among
states when it comes to overall tax burden on individuals and businesses, it is
difficult to see how they reach this conclusion.
Nevertheless, there has been a
lot of discussion in political circles and in the media about Democrats winning
majorities in the State House and Senate, meaning they might have a chance to
implement their tax hike agenda.
Just how much do Democrats plan
to increase taxes if they win control of the State Legislature?
The Answer: $5.73 BILLION
This three-year budget total includes a wide range of tax increases that have been actively supported by Democrat leadership and their caucus. Through votes taken at the legislature, bills introduced by the caucus and tax increases proposed in their own budget plan, the entire Democrat tax hike agenda has been put on display for the public to see. And it would mean billions in new taxes that would cripple the state’s economy and send businesses and families fleeing to other states. Tax Increases the Dems would LOVE to implement include:
VLT Registration Fee
Last year Democrats unanimously voted against ending the VLT registration fee, a widely despised fee that has generated fury among the vehicle owning public. If it were up to the Democrats, the fee would still be in place, and likely would be increased since the amount of the fee wasn’t capped (the Arizona Department of Transportation director had sole authority to annually set the amount of the fee). Taxpayers are lucky Democrats didn’t get their way on this one.
Online Sales Tax
Last year Republicans approved a
plan to allow for the taxing of remote online sellers, with the intention of
providing an offset to prevent a net tax increase. Democrats fiercely opposed
the plan, speaking out against the proposal and made the bizarre argument that
somehow providing offsets was a “tax cut.” They even presented an alternative
budget proposal that included keeping all of the money from the
tax increase, which totals at least $900 million dollars over three years.
Conformity Income Tax Increase
Similar to taxing online sales,
Democrats were fierce in their opposition to any plan that didn’t include the
government keeping the $300 Million in annual revenue generated from the
Conformity Tax hike. They introduced their own conformity legislation and
proposed in their own budget
keeping the money generated from the tax increase. Even the media, which is
normally sympathetic toward government keeping more of our money, didn’t bite
on the Democrat spin and consistently reported this as a significant tax increase.
Income Tax Hikes on
Individuals, Businesses and Entrepreneurs
This is a mind blowing portfolio
of record breaking tax hikes, and it doesn’t even include Democrat leadership’s
support for increasing
the gas tax, increasing the insurance
premium tax and imposing a minimum
on every corporation regardless of size or if they are even profitable.
Democrats will attempt to run
away from this record, hoping voters won’t take a closer look at their plan to
enact California-level tax rates that will turn Arizona permanently blue. Republicans
shouldn’t let them—taxpayers need to know about the radical left turn Democrats
have in store for the state if they are in charge.
As the Club highlighted last week, through a combination of economic growth and tax and fee increases, Arizona is likely to have a budget surplus this year approaching $1 Billion dollars. Adding to this figure was news announced on Friday that the state expects to collect an additional $95 Million from the VLT registration fee increase that went into effect in 2019.
Knowledge that Arizona is collecting around $1.3 Billion from VLT fees, online sales and income tax hikes over the next 3 years is likely an irritating fact to lawmakers looking to spend the surplus, but it is a reality that cannot be ignored.
A plan needs to be crafted to start rolling back these tax increases, one that is designed to maximize growth, create jobs, prioritize families and build on the success of the Tax Cuts and Jobs Act that has been an undeniable success during President Trump’s first term.
Given the details of the plan,
the Free Enterprise Club currently is in support of Senator Mesnard’s Arizona
Tax Cuts and Jobs Act, which intends to return $400M to taxpayers over 3 Years.
Some of the key provisions in his
Full Repeal of VLT Registration
Fee on Dec. 31, 2020
were successful last year in convincing Governor Ducey to repeal the VLT
registration fee in the budget, it came with an expiration date
of July 2021. That means an additional $373M is being paid by taxpayers to pad
the surplus and create capacity for more spending. Ending the fee at the end of
this year would return nearly $100M back to taxpayers and also address the
fairness issue of penalizing vehicle owners that need to register their
vehicles in the first 6 months of 2021 (while not assessing the same fee to
people over the last 6 months of the year).
Property Tax Relief
Included in Senator Mesnard’s
plan is a proposal to cut the state equalization property tax rate and reduce
Arizona’s uncompetitive business property assessment ratio rate to 17 percent. This is a sensible idea that addresses two
most of the surplus money being taken from taxpayers is from the VLT fee and Online
Sales Tax increases, giving it back through a property tax cut is a
fair approach that is broad-based and equitable. Additionally, housing
affordability has been a major issue raised over the last year. Cutting property taxes is a much more
intelligent way to reduce the cost of housing than the myriad of tax
credit/subsidy programs being floated at the capitol by politically
connected developers mainly interested in enriching themselves.
business property taxes are uncompetitive compared to other states. Due to the state’s high Class 1 business assessment
ratio of 18 percent (residential is at 10 percent), there is consistent
pressure on small and medium sized employers that pay nearly double the amount as
everyone else when property taxes (or valuations) increase. Reducing the assessment ratio without shifting
the cost onto other taxpayers is a smart policy that should be embraced.
Capital Gains Tax Reduction
the goal is to encourage both investors and investment to relocate to Arizona,
there is no better approach than a broad-based cut in the capital gains tax
rate. Senator Mesnard’s plan would reduce the state rate to 50 percent of the
personal income tax rate, a similar formula used by the Federal Government to
tax capital gains. The cost of this reduction is small, yet the benefits will
be substantial. Additionally, supporting a cap gains tax cut would hopefully
end the parade of millions being given away in targeted
tax credits and subsidies to wealthy investors and
politically connected businesses to encourage them to invest in our state.
168K Full Expensing for
expensing is not a tax cut, it is one of the most
important tax reforms that the legislature can pass to incentivize
investment and manufacturing in the state.
This tax change would allow companies that purchase machinery and other
large assets to fully expense the equipment in the first year, rather than
depreciating the asset over several years.
The result is a reduced initial
cost for purchasing equipment, making it easier for businesses to expand
operations. And since these businesses
will no longer receive the tax depreciation on the equipment, what looks like a
cost to the state in the first year is revenue positive by year four. It’s not often that policymakers have an
opportunity to pass pro-growth tax policy that is revenue neutral. Full expensing provides that opportunity.
Here is an under-reported education fact: K-12 schools in Arizona have received over $1 Billion in new funding from the state over the last two years. This infusion of cash is the largest education spending increase in state history, boosting per pupil funding by 20 percent. Even adjusting for inflation, we are now back to the pre-recession funding levels for education last reached in 2008, which was the previous high water mark for K-12 spending by the state.
would hope that our policymakers are keeping close tabs on this massive
expansion of funding and scrutinizing how our tax dollars are being spent. Instead,
it appears that state lawmakers are preparing to skip this step and commit more
dollars to K-12, no questions asked.
this attitude will change with news that the largest school district in the
state decided to use their K-12 funding boost to go on an administration spending spree:
as teachers were canvassing neighborhoods, fighting to pass a budget override
in the state’s largest school district, new documents reveal Mesa Public
Schools Governing Board members were handing out hefty bonuses and spending
record amounts on administration in the district’s front office.
documents and memoranda obtained by ABC15 show the district’s administrative
spending soared more than 42 percent from 2018 to 2019, exceeding its own
budget by more than three-quarters of a million dollars.
large chunk of the payouts went toward bonuses to employees close to embattled
Superintendent Ember Conley. Twelve members of her executive team received
$22,500 bonuses, while several others had large amounts put into tax sheltered
insult to injury is all of this largesse occurred behind the scenes while the
district actively pushed for more funding through a budget override. Voters in the East Valley are outraged
and one ex-school board member has filed a criminal complaint with the Attorney General’s office to
investigate the matter.
deserve answers, but it’s unclear if they will ever get any. At last week’s district meeting, the Mesa
school board refused to discuss why Superintend Conley was placed on
leave, and provided no explanation as to why the district spending spree was
hidden from the public. They did, however, attempt to defend the payouts and
declared that exceeding the approved administration budget wasn’t really an
lack of candor isn’t surprising given the current political environment
surrounding K-12 funding. There is tremendous hubris among the education establishment,
based on the belief that policymakers are afraid to hold them accountable.
is how you end up with several education groups openly bickering on what tax hikes (sales, property,
income, all of the above?) to send to the ballot in 2020. It appears they have concluded
it is politically unnecessary to explain how the additional $20,000 per
classroom provided by the state has been spent or justify why a tax increase is
required given the news that Arizona has amassed a $500 Million (and growing)
budget surplus for next year.
only way this cycle ends is if Governor Ducey and the State Legislature send a
clear signal that future K-12 appropriations will be tied to results,
accountability and reform. If they don’t, then taxpayers should expect more
demands for additional education spending and higher taxes with no explanations
or expectations that it is being used wisely.
The Joint Budget Legislative
Committee released their October
Fiscal Update, and it was more good news for the state budget
coffers. September tax receipts were $120 Million above the adopted budget
forecast, an 8.7% increase over the prior year. The explosion in tax revenue
has led JLBC to conclude that the state will finish with at least a $700
Million dollar budget surplus for FY 2020.
A large chunk of the surplus
revenue rolled in at the end of 2019 fiscal year, coinciding with a surge in
individual and corporate income tax filings that occurred in May and June after
the approval of the state budget.
The explosion in revenue didn’t
shock anyone following the income tax conformity debate at the legislature over
the last 18 months. Arizona was one of the last states to conform with the Federal
Tax Cuts and Jobs Act passed in 2017, leaving taxpayers in a
lurch on what tax laws to follow and forms to use. So, both individuals and
corporate entities waited until conformity legislation was passed to then file
with the state.
While JLBC stresses caution on
the current revenue projections, it is hard not to see that a chunk of this
surplus is the result of continued overcollection from the conformity tax
increase. During negotiations on a proposed conformity fix, the legislature and
Governor Ducey chose to adopt the low-end revenue estimate from the conformity
The agreed upon package settled
on an anticipated $220 million tax increase even though the Department of
Revenue estimated it could be well north of $300 million in FY 2020. Though no
one faults them for their cautious approach, it is now looking like the higher
figure was much closer to the mark.
This isn’t the only tax change
that will likely result in taxpayers paying more than expected to the state.
The budget also included a new sales
tax for online purchases, which went into effect over the summer. The
revenue estimate included in the budget for the implementation of the online
sales tax was $85 million annually, which was then offset by the legislature
with a corresponding reduction of the income tax.
At the time a lot of skepticism
surrounded the $85 million figure. Some groups, including the Arizona Tax
Research Association, analyzed the data and believe that the revenue from
taxing online sales could be
closer to $300 million. It is still early, but based on the fact
that every revenue projection is overperforming JLBC estimates, the higher figure
will likely prove more accurate.
What does this mean for
taxpayers? It means that they are still overpaying (and experiencing a tax
hike) even with the passage of a conformity package that attempted to hold
filers harmless last spring.
In order to address the
overcollection, the responsible solution is for lawmakers to work toward
returning a portion of the $700 million surplus back to hardworking taxpayers.
The spending lobby, media and political establishment won’t like this, but it
is the right thing to do. Plus, the gusher in new revenue is so large that
other priorities can be additionally funded while implementing rate reductions.
Interestingly, some Republicans
have expressed fear of political backlash if it appears that they are cutting
taxes. Setting aside the fact that
voters generally like having their money returned to them in years when there
is a large budget surplus, there is not a single politician in the state that
will be able to dodge the issue of tax cuts in 2020.
President Trump will be at the
top of ticket, and his signature achievement is the passage of the Tax Cuts and
Jobs Act in his first term. It is very likely that he will be running on a plan
for a second round of tax cuts if he is reelected. Unless every member of the
GOP intends to disassociate themselves from Trump and his 2nd term
agenda, this is the horse they will be riding with next November.
Republicans will have a choice:
run away from the idea of cutting taxes to address the overcollection of revenue
or try going on the offensive by promoting a low tax, pro-growth agenda. We
will see soon enough which path they choose.