As usual, bad ideas at the legislature just don’t seem to die. For the third year in a row, lawmakers have introduced legislation to bring back the Angel Investment Tax Credit Program (a.k.a. Shark Tank Bill), a scheme designed to subsidize risky venture capital investments in Arizona.

As was detailed in our opposition to the program last year, the Angel Investment program is very similar to the TV hit show Shark Tank, whereby wealthy investors listen to business proposals by aspiring entrepreneurs and then decide whether or not to invest in the venture.  The major difference is that under Senate Bill 1139, government employees at the Arizona Commerce Authority get to decide which ventures to support and then dole out tax credits to “qualified” wealthy investors.

In defending the program, supporters claim that tax credits are needed to lure venture capital to Arizona. This simply is not true. If a good idea exists, it will attract venture capital regardless of any tax credits offered. In fact, last spring the Phoenix Business Journal held a roundtable discussion and wrote a lengthy story on venture capital opportunities and discovered (not surprisingly) that the availability of equity is not the problem, but rather a lack of good investment options.

And even if it were true that there is a lack of venture capital available in the marketplace, it still would not justify having state employees deciding which investments deserve special treatment.

In the realm of risky venture capital investing, the experts (experienced investors) make mistakes all of the time—why would we think the Arizona Commerce Authority could do a better job? Either they will pick ventures that would have received funding irrespective of the tax credits offered, or they will subsidize bad ideas that should have never made it out of the starting block.

Simply put, taxpayers should not be in the business of subsidizing risky venture capital investments by wealthy investors. It’s a program that picks winners and losers among taxpayers, among venture capital investors, and among aspiring entrepreneurs.

Lawmakers should continue to stay out of the venture capital business and reject SB 1139.

The Free Enterprise Club is often at the helm of highlighting instances of corporate welfare which often coalesce around developer sweeteners and tax carve outs.  However, another form of this has gone on for far too long without the traditional public scrutiny.  This is perhaps because of whom the beneficiary is as well as whom is doing the subsidizing.

Currently the law in Arizona requires new start-up corporations and LLCs to file Articles of Incorporation or Articles of Organization, respectively, in a newspaper within their county for three consecutive publications.  Traditionally, this practice has been in place as a way to notify the public if a bad actor has set up shop, peddling his latest snake oil.  This is about as outdated as the reference to snake oil itself.  A policy meant for a different time and place.

That would explain why so few states still require this step.  Arizona is only one of four states that require corporations to publish a legal notice of their formation in a newspaper, and only one of three that require it of new LLCs.  The most westward state, aside from Arizona, is Nebraska.  Texas eliminated this requirement on their new businesses in 2008.

newspaper pubThis requirement is just one more cost and barrier to new businesses.  In New York, this unnecessary filing will cost new business startups anywhere from $800 – $2,000.  This can represent a significant percentage of a start-ups capital.   In Arizona, not only is it a cost to business that does not provide a return to the business, but the process is cumbersome and wastes valuable time and energy.

It is no secret the newspaper industry has struggled for years, trying to adapt to more digital revenue streams as readership rapidly declines.   And for years different legislators have run bills that would allow businesses the option to file their public notices online with the Corporation Commission, the entity that already reviews, approves and maintains a database for new and ongoing businesses.  According to a 2000 report by the National Newspaper Association, an estimated 5 – 10 percent of revenues for newspapers are made up by public notices.   That would explain why newspapers invest so heavily each year into hiring an army of lobbyists to maintain the status quo.

As the debate over notices has worn on, the newspaper lobby doesn’t even conceal the fact that this is solely a financial issue. They brazenly cite the impact to their bottom line as a reason for lawmakers to toe the line on requiring notices.  This is usually accompanied by veiled reminders that they buy ink by the barrel and will write nasty op-eds about lawmakers who oppose them.

Lawmakers shouldn’t be bullied or intimidated to protect a special interest carve-out, especially when the money comes from the pockets of those who can least afford it. It’s time Arizona moves into the 21st Century and stops subsidizing the newspaper industry on the backs of small businesses and entrepreneurs.

Last month the Club shared how Tax Increment Financing (TIF) is a tool used by local governments and city planners to subsidize projects that benefit politically connected developers and landowners.

That is not the only problem with this financing scheme: TIFs are also a creative way for governments to steal money from other governments and taxpayers and thwart spending limitations.

TIFs Rob Peter to Pay Paul

In other states that have TIFs, Cities constantly compete with other districts and taxing jurisdictions for the revenues levied on the same tax payers.  Local taxing districts in Chicago lost $3.6 million in revenues to a single TIF district in just six years.  Another Chicago TIF, the North Loop, actually generated less property revenue in 2006 than it did in 1984 when it was originally created.  Multnomah County, in Oregon, was forced to cut budgets for health, public safety, libraries, and other programs for nine straight years because TIF districts in Portland.  As a result, taxpayers outside of these specialized districts are forced to pick up the tab.

TIFs are Void of Transparency

Since TIFs are complicated and rely on future revenue growth to fund their existence, property owners are typically unaware that their tax dollars are being siphoned off.  Unlike other districts and jurisdictions which show up on the property tax bill, in most states TIFs do not.  In 2007, residents of Cook County were oblivious to the fact that $892 million of their property tax dollars (10 cents of every dollar) had been sucked out and diverted to their 402 TIF districts.  Aggregate property tax bills showed the county was assessing $720 million, however the reality was actually $1.2 billion, a figure absent from the Cook County Annual Budget as well.  Hidden inflation and lack of transparency make TIF the invisible tax.

TIFs Lead to Run-Away Debt

Another clever gimmick commonly used by local governments to expand their borrowing capacity is to avoid calling TIF a debt.  This has been held up by many courts, as debt is generally understood to require the full faith and credit of the tax payers.  Absent of that, TIF has sneakily been the culprit of billions of dollars of indebtedness, without the accountability of debt limitation statutes.  The cities love being able to run up the credit cards and dodge spending accountability.  But calling a TIF a spending earmark does not change the terms and reality of repayment.  Although it might not meet the legal definition, if it looks, talks, and walks like a debt – it’s a debt.

TIFs everywhere are failing

In 2011, Governor Brown of California announced his intention to close the state’s $25 billion budget gap by dissolving the more than 400 TIF districts.  TIFs were sucking $5.5 billion a year from schools and other services that the state was left having to backfill.  Estes Park citizens in Colorado in 2010 voted by over 60% to rid their community of TIF.  The mask is slipping.  Taxpayers are starting to see that under the complicated formulas and explanations behind TIF are bad policies that hurt the general population.

TIFs are like that bad penny, they just keep turning up.  Each year the TIF peddlers try to pass another version of the financing scheme in Arizona, and they will likely be at it again next year.  The Club will be watching to see which lawmakers side with the TIF lobby over hardworking taxpayers.

 



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The Arizona Free Enterprise Club is a free market policy and lobbying group dedicated to promoting a strong and vibrant Arizona economy.