On May 15th, the Center for the Study of Economic Liberty at Arizona State University and the Arizona Free Enterprise Club organized a highly informative breakfast forum, led by two brilliant economists: Stephen Moore and Stephen Slivinski.  The topic was one you will be hearing a lot more about in the coming months as Gov. Doug Ducey considers ways to reform government and drive the economy:  Reducing and potentially eliminating the state income tax.

As numerous studies and books have shown, the income tax stifles economic growth and disproportionately hurts small businesses – particularly “pass-through” entities like sole proprietorships, partnerships or LLCs.   Moreover, the tax code has become a lobbyist and special interest feeding frenzy, as special carve-outs and tax credits for everything from Hollywood studios to rooftop solar have become the norm.

Yet reforming our tax system to eliminate the income tax has always been derided by the left and the media as too radical, or worse.   They ignore the competitive advantage Arizona would gain over states like California, vying for companies and jobs to relocate.   Not to mention the economic boom that would result in lifting a heavy burden from the small businesses that provide jobs for 97% of the workforce.

But now that Gov. Ducey has shown real leadership in not only calling attention to the need for tax reform, but also publicly considering eliminating the income tax as an option, the issue has newfound importance and is getting a second look.

Towards this end, Mr. Slivinski has published a terrific policy report on exactly how Arizona can transition away from the income tax, towards a more economic friendly tax model – one that doesn’t subject the General Fund to huge swings in projected revenue.   He lists five options, from eliminating it immediately to an 8-year phase down – that discusses all the benefits, drawbacks and challenges in doing so.

I not only highly recommend it, I hope you forward it on to your representatives in the Legislature, and onto the Ducey Administration as well.

The full report can be found here.

The Arizona Free Enterprise Club has fought for years against crony capitalism and corporate welfare in Arizona. In our fight against special deals, one of our main targets has been the creation of a tax credit program for Hollywood filmmakers to make movies.  In his My Turn column in the AZ Republic (“New Mexico keeps taking our movies. Let’s fix that“), Alberto Guitier III of the Arizona Film and Media Coalition contends that Arizona needs House Bill 2621 to compete with other states, and without the movie production credits we are missing out on the jobs and revenue that come along with it.

If this idea sounds familiar, it’s because Arizona already tried doing a film subsidy program back in 2005.The program lasted five years, and ended up costing taxpayers millions while providing little benefit. In just the last year of the program, the Arizona Department of Commerce calculated that taxpayers shelled out over $2.6 million in tax credits to moviemakers, while only generating $600,000 in tax revenue for the state.

It created no real permanent jobs, and the temporary jobs it did create were low paying. Fortunately, when the credits were up for renewal in 2010, the Arizona Legislature took a pass on extending the program.

Arizona is not alone in getting ripped off by the movie tax credit gambit. Multiple nonpartisan studies and independent reports that have reviewed similar programs have found that movie tax credits cost states revenue and only shift jobs to different locations throughout the country.

That is why several states, including North Carolina, Massachusetts and Michigan are currently revisiting or have scaled back their tax credit programs. Even Louisiana, which has one of the largest incentive programs in the nation and is referred to as ‘Hollywood South’, acknowledged in their performance audit that the program cost taxpayers $170 million in 2012.

The other claim made in favor of film incentives is that we are letting other states steal the movie business from Arizona.The inherent problem with this logic is when we try to “compete” with other states by giving away more taxpayer money to filmmakers the only winners end up being Hollywood studios. By pitting states against one another, film companies have been very successful in convincing lawmakers that they must increase the amount of their subsidy packages or otherwise risk losing the industry to another state.Even California has set up a very lucrative tax credit program, which should be a clue that this is an incentive game Arizona cannot win.

The reality is that this isn’t about jobs or competing with other states, but whether or not the government should be in the business of picking winners and losers through our tax code. Taking money from one taxpayer to provide special perks to another is costly, benefits a few well connected industries and only encourages other businesses to pursue the same sweetheart deals.  The best tax system for Arizona is one that treats all businesses and taxpayers the same, not one that plays favorites.

Last session, there was a vigorous debate at the Capitol regarding HB 2011, legislation that would have greatly expanded the venture capital tax credit program in Arizona. Proponents for the “Shark Tank” tax credit claimed that the credits were needed because of a lack of access to venture capital funds in Arizona.

The Club has argued for years that this is not true and that venture capital is available for good ideas. Now after some investigation into the subject, the Phoenix Business Journal has reached the same conclusion. Namely, the problem is not a lack of funding, but rather a perceived lack of good opportunities for investment. Providing tax credits doesn’t solve this problem, it only creates a new one by picking winners and losers among entrepreneurs and investors.

 



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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.