The Arizona Free Enterprise Club

One of the most underreported problems with local government in Arizona is how cities use their almost unfettered permitting, licensing and land use approval powers to exact goodies from businesses and private citizens.

Most of the time the person asking for city approval plays along, and it’s difficult to blame them. If your business or project is dependent on council or staff approval (or future approvals), you have little choice but to meet their demands.

That is what makes it very surprising/refreshing when businesses decide to fight back. That is what happened with SB 1140, which significantly rolled back the video service provider (VSP) franchise licensing scheme deployed by cities throughout the state.

The original purpose of VSP franchise licenses was to make sure companies such as Cox Communications and CenturyLink were meeting certain standards when expanding or improving their video service.  For example, VSPs must access public rights of ways in order to cut into streets to lay cables and serve customers, and the VSP license is designed to make sure it is done properly.

Unfortunately, many cities discovered how much fun it was to demand “sweeteners” in exchange for these licenses.  Some of the demands included free cable boxes for city employees, requirements that certain channels or cable packages be provided, that roadway improvements and beautification be performed that had no connection to the installation of cable lines, and even that these companies provide sponsorships for local community events.

One particularly egregious example well documented in the public testimony of the bill, was in Yuma City.  The major cable provider in Yuma City, Charter Common, took over the license franchise of Time Warner after they acquired the company.  The City of Yuma required in this agreement that Charter Common provide the city with both internet and intranet services for free, as a condition of their license.  This was particularly baffling considering internet has nothing to do with video and cable service.  Despite the questionable legality of this arrangement, businesses find themselves between a rock and a hard place as to how hard they will push back.

Luckily, SB 1140 ended the VSP extortion racket by making the process of granting a franchise license to a VSP non-negotiable.  Instead, cities will be allowed to require all the same assurances such as posting bonds and insurance to ensure proper repair of streets, but they will not be able to use their coercive regulatory power to hold licenses hostage for free stuff.

It is almost absurd that legislation was needed to end a practice that would be illegal if attempted in the private sector. Yet that is the double standard that exists in Arizona and must be confronted at every turn.

Ron Elwood,  chairman of the small business committee opposed to the radical ‘Invest in Ed’ income tax increase, recently penned an oped explaining his opposition to the measure.  Ron Elwood, a Certified Public Accountant and small business owner warns voters about the inevitable damage such a ballot initiative would inflict upon small businesses in Arizona.  Read his op-ed below:

“Invest in Ed” Initiative Will Devastate Small Business
By Ronald S. Elwood, CPA

I’m a small business owner: I offer accounting, CFO, and CPA services to my clients, many of whom are other small businesses.  I provide strategic and financial expertise to avoid risk, leverage opportunity, and maximize returns.  In other words, I know good investments from bad ones.

The proponents of the “Invest in Education” initiative may have a laudable goal – improving our education system through providing additional revenues – however, I believe they have made several dire miscalculations.  Arizonans should beware: this is a bad investment.  The costs will far outweigh any potential gains.

Currently, Arizona has five income tax brackets ranging from 2.59 percent and topping off at 4.54 percent.  With less than two percent separating the bottom from the top brackets, our state does not disincentivize individuals from working hard to make more money.  This is especially true for the thousands of small businesses in our state.

The majority of small businesses in Arizona are S Corps and LLCs.  One main difference between their organizational structure compared to large businesses (mostly formed as “C-Corps”) is how they are taxed.  Small businesses’ income is “passed through” to the individual side.  Meaning they pay personal income taxes on their small business profits.

The “Invest in Education” initiative proposes a complicated and confusing new income tax system in our state.  It increases our five brackets to seven and instead of each bracket applying one tax rate, each bracket is taxed two separate rates – a minimum tax liability based upon the upper threshold of the previous bracket plus a higher rate on the excess income over that threshold.  Based upon this added complexity alone, it will cost people more to do their taxes as well as cost them more in taxes.

This proposal isn’t well thought-out.  The people most damaged by this initiative will be small business owners.  Doubling the top two rates is incredibly unfair to the little business that pays personal income taxes on business profits.  It will severely limit their ability to reinvest in their operations, hire people, and expand.  It also puts them at a competitive disadvantage to larger corporations that are taxed at a flat 4.9 percent.

Ultimately, if passed, this proposition will drive start-ups, small businesses, and entrepreneurs to other states with a more competitive, less burdensome tax system that doesn’t punish their success.  States such as Nevada and Texas will more than take advantage of Arizona’s short-sightedness.

Voters should also be aware that Arizona has what is called the Voter Protection Act.  This locks in any initiative passed at the ballot box and precludes the elected Legislature from making any changes to the law unless they have a ¾ majority vote and they further the intent of the proposition.  Effectively, this will make this new income tax system permanent and make it impossible to tweak in the future.  Arguably, the legislature will only have the ability to increase income taxes in the future.  The primary reason we have a representative government and we elect a legislature at all is to determine a budget and relevant tax policy.  I know the complexity of taxes, and I know the best way to debate and craft a modern, simple and effective tax system is not at the ballot box.

It would seem the intention of the backers of this initiative is to “soak the rich” by dramatically increasing the percentage of their wealth that they pay over in taxes.  But Arizonans shouldn’t be fooled.  As has occurred in California, other high-tax states, and at the federal level, those who choose to stay in Arizona and who have the most resources and influence will find ways to shelter their hard-earned income.  The main way this will be achieved is through working the political process to instate protections and limitations to their tax liabilities.

My clients, the small business owner, will have no such advantage.  We are not politically-connected, and we don’t have the power to hire lobbyists to work the Legislature.  Because the legislature will be unable to make requisite fixes to the brackets and rates, tax credit programs and carve-outs will be the go-to mechanism; this will only further complicate our tax code as well as create greater inequities.

Today the Arizona Free Enterprise Club filed an elections complaint with the Attorney General’s office against the ‘Outlaw Dirty Money’ political committee for potential criminal misconduct. Evidence from multiple independent sources indicate that the committee is paying circulators on a per-signature bases, in direct violation of Arizona law.

The Outlaw Dirty Money committee is sponsoring C-03-2018, a proposed ballot measure that would eliminate donor privacy by requiring the full disclosure of contributors to non-profit organizations that engage in ballot measure or candidate campaigns.

The prohibition against paying circulators per-signature is to protect the integrity of the ballot initiative process and reduce petition fraud. “It is ironic that the same group claiming to want to reduce corruption in politics has decided to employ circulator firms and paid circulators that break the law,” said Scot Mussi, President of the Arizona Free Enterprise Club. “They can’t be that concerned about electoral integrity if they are unwilling to follow the laws governing ballot measures.”

The formal complaint identifies two instances of the Outlaw Dirty Money committee ignoring the prohibition on per-signature payments. Both violations involve registered paid circulators employed by the circulator firm Advanced Micro Targeting, Inc. The penalty for violating the per-signature ban is a class 1 misdemeanor and a disqualification of all affected petition signatures.

The full complaint can be viewed at https://www.azfree.org/wp-content/uploads/2018/06/Complaint-dmi.pdf

The exhibits can be viewed at https://www.azfree.org/wp-content/uploads/2018/06/Exhibit-A1-1.pdf

The Arizona Free Enterprise Club is dedicated to promoting economic freedom and a strong and vibrant Arizona economy. For more information visit www.azfree.org

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