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Report: Arizona a leader in reviewing business tax credits, can do better

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Tuesday, April 24, 2012
By Sara Smith
Cronkite News

PHOENIX – Arizona is one of 13 states that lead the nation in evaluating the effectiveness of state tax credits intended to boost business, according to a recent study.

The Pew Center on the States singled out Arizona for praise because of the scope of its review: A state legislative committee examines tax credits annually and recommends continuing, changing or eliminating them.

However, the report said Arizona lags in measuring the economic impact of tax credits and determining whether they are achieving the state’s goals.

“States are spending billions of dollars on tax incentives,” Jeff Chapman, one of the study’s authors, said in a telephone interview. “If they’re not using effective incentives, they could miss opportunities to create jobs, and with states trying to rebuild their economies and their budgets right now, those are mistakes they can’t afford to make.”

In Arizona, the Joint Legislative Income Tax Credit Review Committee has reviewed tax credits every year since 2002 and made formal recommendations to the Legislature. It’s up to lawmakers to decide whether to sponsor legislation to change or remove the tax credits.

The committee reviews individual and corporate income tax credits, which include credits for employing National Guard members placed on active duty, installing residential solar energy devices or constructing an environmental technology facility. Each credit reduces the total amount a person or business pays in income taxes and is often used to attract specific industries to the state.

Individuals and corporations claimed approximately $254 million of Arizona income tax credits in 2009, according to a 2011 state report.

Dennis Hoffman, economics professor at Arizona State University’s W.P. Carey School of Business, said policymakers need to consider tax incentives alongside current tax policies to avoid overdoing the cuts.

“You’re going to be challenged budget-wise if you give massive credits and tax incentives to businesses without having a tax code in place that allows employees of those businesses to pay for public service needs,” he said.

More than half of states don’t have any systems in place to assess whether their tax incentives are financially worthwhile.

The Pew report said states such as Connecticut and Oregon do a better job than Arizona of assessing the effectiveness of tax credits.

“What we didn’t see was an effort in those reports to say how many jobs were created or moreover how many jobs wouldn’t have been created were those tax credits not in place,” said Chapman, the study’s co-author.

Georganna Meyer, chief economist for the the Arizona Department of Revenue’s Office of Economic Research and Analysis, said the state reviews tax credits at least once a year and lets the legislative committee know how much each type of credit is used.

“Whether that’s a gauge of their effectiveness or not is probably a point for debate,” she said.

Rep. J.D. Mesnard, R-Chandler, co-chairman of the Joint Legislative Income Tax Credit Review Committee, said members assess the data but mostly view each tax credit from a public policy standpoint.

“I think it’s an exercise in making a statement, and statements can be the beginning of discussions that need to occur on tax credits,” he said.

Lawmakers don’t always follow the committee’s advice.

In 2010, the committee recommended halting a tax credit for multimedia productions that come to Arizona, including movies, television series and commercials. The credit expired that year.

An attempt to bring back the credit stalled this session but was revived as a strike-everything amendment to HB 2127. The Senate approved it last week, sending it back to the House for a final vote.

Serena Unrein, a public interest advocate for Arizona Public Interest Research Group, said taxpayers deserve more information on tax credits than state law currently allows. To avoid identifying companies claiming credits, the number of recipients and the dollars involved are kept confidential when few companies receive a particular credit.

“Right now until Arizona actually has all of the information on the table I think it’s really tough to know if these tax credits are a good thing for our buck,” she said.