For years, Democrats in the Legislature have been calling for a review of the tax credits and the other tax giveaways. The goal of the review process is to recommend continuation, amendment or repeal of tax credits.
Decades of “business friendly” bipartisan votes in the Legislature to reduce income taxes and boost the economy have left us with $661 million in income tax credits claimed (AKA lost revenue) and more than $1.6 billion in unclaimed tax credits, ready to be cashed in, according to David Lujan, executive director of the Center for Economic Progress. This is not sustainable.
For the first time since 2014, the Joint Legislative Committee to Review Income Tax Credits met on Dec. 19, 2019. This was an historic day, and I was proud to be part of it.
According to statute, this committee is supposed to meet before the end of each calendar year and review tax credits that were passed in designated years. For this meeting, we reviewed tax credits that were passed in years ending in four and nine. We reviewed three tax credits that were recommended for elimination in 2014 (motion made by then Rep. J.D. Mesnard), but no action was taken by the Legislature to actually repeal them. Two of those– Healthy Forest Tax Credit and the Agriculture Pollution Control Tax Credit– were again recommended for elimination at 2019 meeting because they have been mostly unused for years. Income tax credits that are not used for more than four fiscal years are supposed to disappear, but somehow they hang around in the code, even Senator and Committee Chair J.D. Mesnard complained about this at the meeting. The majority voted to continue the other tax credits with additional performance measures attached in some cases. (For the recorded, I voted to repeal all of them. Read on and learn why.)
We had quite a rousing debate and Q&A session around three of the tax credits: Renewable Energy Investment and Production for Self-Consumption by International Operations Centers (tax credit carve-out for Apple), Water Conservation System Tax Credit (tax credits for conversion to lower water use irrigation systems for farming), and Student Tuition Organization (STOs) Tax Credit for Displaced/Disabled Pupil Scholarships (corporate tax credits to fund private school scholarships for children who are in foster care or disabled).
It was an interesting twist of the status quo to have Mesnard, Reps. Regina Cobb and Andres Cano, and me on the same side of the debate. In our own way, we argued for more accountability and challenged the Arizona Commerce Authority (ACA) and the Department of Revenue (DOR) over the lack of performance measures and analysis of the tax credits. On the tax credit defenders debate team were Senator David Livingston and Rep. Ben Toma. Completely silent except to vote were Senators Sean Bowie, Lela Alston, and Rep. Shawnna Bolick. Senator Vice Leach was absent.
We asked a lot of questions of the Joint Legislative Budget Committee (JLBC) staff, who did the background presentations on the six tax credits and who offered new or revised performance measures for the old tax credits that were passed by the Legislature, without any measurable goals.
What was shocking to me was how little we know about the tax credits, who claims them, and what the actual economic impact is for the state, besides lost revenue.
The Apple Carve-Out
For example, on the Apple carve-out tax credit, according to multiple news stories, Governor Doug Ducey and his cadre worked hard to convince Apple to move to Mesa, Arizona. The tax credit designed for them by the Legislature was part of the deal. It allowed up to $5 million a year income tax credit for five years ($25 million maximum) to build a global command center with renewable energy for self-consumption built in. Data centers suck a lot of electricity, so powering the data center with solar panels — and getting the state to help you do it– is a wise choice to power this massive building. Apple also got a break on their electric and gas bills. In exchange, Apple agreed to invest $2 billion over 10 years and to hire 150 workers. News stories from the 2016 era report 500-1000 Apple employees would be working at the Mesa facility. Reality hit when a 2018 news story reported that Apple’s “‘global command center’ is staffed by a handful of people who work in 10-hour shifts.”
At the tax credit review hearing, Legislators wanted answers. When I asked if 150 people worked at the Apple global command center now– or ever– the ACA said that information was confidential. They flat out refused to say how many people were ever hired. Mesnard and Cobb weren’t any happier with that answer than Cano and I were.
Mesnard said the ACA was putting Legislators in a tough spot. “What should I tell my constituents when they ask about the tax credits? ‘Trust the Commerce Authority ‘?”
Basically, the ACA said they have plenty of safeguard and that the Legislature should just trust that they are doing their jobs. The ACA spokesman then repeated Ducey’s PR message about how amazing the Arizona economy is.
To which, Senator David Livingston said, Yes, we should just point to Arizona’s awesome economy when voters ask about tax giveaways!
To which, Cobb said, “Trust but verify.” (Woot! I was going to say that line.)
Even if Apple did hire 150 full time people, that would generate less $750,000 a year in revenue, according to Lujan. That means it would take 35 years to recoup the $25 million tax credit. That’s not a good deal for the citizens of Arizona. (Luckily, Apple never claimed the full $25 million.)
What about Accountability?
We also had rousing debates about the Water Conservation System Tax Credit and the STO Tax Credit for Displaced/Disabled Pupil Scholarship Credit.
The water conservation tax credit has been around since 1994, and hundreds of individual farmers and corporations have claimed the tax credit to convert irrigation systems to more efficient, lower water use equipment (a good cause). An LD13 constituent spoke against this and other tax credits. He said that only wealthy people and big corporations make enough money to claim tax credits, and that these credits don’t help family farms. He urged the Legislature to help the little guy– instead of the corporations.
I asked the JLBC and others about his claims: Do you know who takes these tax credits? Is the state primarily helping corporate agribusinesses with these tax credits or are we helping family farms and entrepreneurs? Are the same businesses taking these tax credits year after year, or is there a wide usage? Basically, nobody knows. In the bowels of the DOR database, they know which taxpayers claimed the tax credit, but that’s it. The rest of us are left to wonder.
The story was the same for the displaced/disabled pupil STO tax credit, which is capped at $5 million per year. JLBC reported 1103 scholarships were awarded in 2017, but they don’t know how many children that represents because parents apply for multiple scholarships– which surprised the Legislators. A $5000 scholarship pays for approximately one quarter of the cost of private school tuition for one year. JLBC reported that it is common for parents to apply for more than one scholarship for the same child, and they often apply for four scholarships per year per child to cover the annual cost of $20,000 for private and religious schools. It makes me wonder exactly how many students are being served and how many families are taking multiple scholarships per year per child– since there are several types of STOs. I don’t think that was the intent of the original legislation.
JLBC also reported that in addition to the $5 million for this STO program, another $175 million in STO tax credits were given out in 2017 to pay for private and religious school education. JLBC didn’t know how many of the students were displaced students (foster care) and how many were disabled or what the geographic distribution of the scholarships was. (During the school voucher expansion fight in 2018, we learned that 70-80 percent of the private schools are in Maricopa County.)
More Transparency Is Needed
As I mentioned earlier, it was shocking how little the Arizona government knows about the tax credits we reviewed this week. Confidentiality was given far too many times as a reason why government officials couldn’t answer Legislators’ questions. Besides not being allowed to tell us if Apple ever hired the promised number of employees, if a tax credit is claimed by only a handful of individuals or corporations, their identities are also confidential. (If only one person or corporation is getting a tax break year after year, I think the rest of us have a right to know who that is, why the law was crafted to help only one entity, and how this happened.) The Qualified Facilities Tax Credit (also reviewed in 2019) doles out tax credits to build buildings for corporations. Unfortunately, taxpayers aren’t allow to know who got millions to build a new headquarters or other “qualified facilities.” Committee members got that list in a confidential packet but were not allowed to discuss specifics in committee. Why the secrecy? Because Arizona government is picking winners and losers.
I have been advocating for review of all tax giveaways (not just the income tax credits) and elimination of the tax giveaways that aren’t meeting stated economic development goals (like job creation). The 2019 meeting was a good first step. Too bad the tax review committee didn’t meet in 2018. The corporate research and development tax credit– one of the largest tax credits– was up for review last year. Did the corporations who claimed that tax credit meet their employment goals? Do they have job creation goals? What about the tax giveaways that the City of Tucson gives out? Are those corporations meeting their employment goals? Who reviews and evaluates those deals?
The bottom line is: there is too much secrecy in the tax giveaway land. I guess “picking winners and losers” is best done behind closed doors.
The December 2019 tax review meeting was a good first step. Let’s do this every year, as the statute dictates. The people have a right to know what is being done with their money, and we have the right to say, Basta! to corporate tax breaks.
P.S. Just think of how many budget cuts and sales tax hikes the rest of us have suffered through while the Arizona Legislature was busy giving away billions of dollars.
[Here’s a link to the archived meeting on Dec. 19.]