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Lawmakers in New Mexico are in a self-imposed quandary. They’ve adopted a lucrative tax credit program for the film industry they simply can’t afford yet can’t walk away from.

The Enchantment State dolls out 25-30 percent rebates for production related expenses up to $50 Million a year. This spending cap is one of the only mechanisms of restrain in the program which is financed straight out of the state’s general fund.

Pressure to uncap the program has mounted due to New Mexico owing $380 Million in backlogged credits. If these trends continue – this debt will grow to $700 Million by 2023 – and a film claiming a credit, then wouldn’t be reimbursed for up to 14 years.

Now Governor Lujan Grisham and lawmakers want to make a one-time payment to clear this backlog as well as remove the annual spending cap so they can have the ability to throw unlimited chum in the water to lure Hollywood sharks.

Only two other states in the country have uncapped their film subsidy programs: Illinois and Georgia. The irony of Georgia’s unconditional love for Hollywood is manifold. The state’s program is rife with abuse. Warner Brothers defrauded the state by charging them $600,000 for an airplane never used in the movie “Sully.” And yet this didn’t stop an award-winning display of hypocrisy when Hollywood stars called for a boycott of Georgia when a Republican Governor was elected. For a state that calls themselves “Y’allywood,” they were harshly reminded that despite spending $200 Million a year on extra caviar money for film stars, when it comes to the real insider VIP party, they’re not on the list.

States are tripping over themselves to throw money at the rich and famous for an industry whose loyalty cannot be bought. They will happily continue to jet-set around the world anywhere the highest-bidding government will pay them for honor of their appearance. The political ridicule they throw in for free.
New Mexico lawmakers are doing their best to pretend they aren’t completely owned by their starlet masters. Their bill also includes razzle dazzle “reforms” including tightening up for what expenditures can be reimbursed (a notoriously abused standard.) And what one would think is a laugh line, requirement for better acknowledgments of New Mexico in the film credits… A little more “limelight” is what New Mexico taxpayers are getting for the promise to dole out hundreds of millions to entitled movie makers.

Despite the flop of film tax credit programs around the nation, states continue to fall for this fool’s errand. Just this year a bill was introduced by Representative Bob Thorpe at the Arizona legislature to divvy out some of the state’s business tax credits to film production. Luckily the bill didn’t get traction.

However, if there is any lesson to be learned by lawmakers in Arizona from New Mexico – it is once you start feeding the lions – they become more voracious – it becomes harder and harder to stop. And for states that think that will keep the lions from biting – think again.

Every legislative session, lawmakers are duped by rosy tax credit programs, sold as either robust jobs programs or silver bullets to our social woes.

This year HB2365, sponsored by Representative Ben Toma, is being sold as both.  The Low-Income Housing Tax Credit (LIHTC) program is a federal program by which qualified investors are incentivized to build housing projects for low-income persons with generous income tax subsidies.

How it works.

It is a sweetheart deal for banks, insurance companies and investors.  The Arizona program allows for $12 Million a year of tax credits that can be matched with the subsidies offered through the federal program.  The bills mirror the federal LIHTC percentages and can be carried over for 10 years.

To illustrate the business model, a $10 Million project qualifies for 9 percent tax credits.  That is $900,000 a year and $9 Million over the course of the 10 year carry forward period.  Banks sell these credits to other investors who make up a pool to finance the project.  Some projects are even able to bridge financing gaps with other government programs. But not only are almost the entire project costs subsidized by the taxpayer, another $2.2 Million is generated through tax write offs from real estate losses, depreciation and interest expenses.

This mechanism is supported by many layers of middlemen who add to the cost of building these projects.  As a result, the program is lucrative for investors, and very costly for the taxpayers.

How it actually doesn’t work.

For several years now, this program has been sharply scrutinized by various parties including the Office of Government Accountability (OGA), think tanks, and the media.

The overarching theme: this is a costly and inefficient program, susceptible to fraud and dubious in its impacts to shelter low-income Americans.

Much of the gamesmanship of the program revolves around the submittal of construction costs which the OGA determined varied drastically from state to state and project to project.

The average LIHTC project cost $218,000, yet only $9,400 of it was the cost of the land; a ratio observably out of whack. This is par for the course for a program which in the past has been scandalized by construction kick-back schemes.  The program has been gamed in other ways.  Just last Fall, Wells Fargo made an over $2 Billion settlement with the Department of Justice for nation-wide collusion to devalue the tax credits.  Hundreds of millions of dollars have been siphoned from the program in these ways resulting in far fewer units being built for the poor at a great cost to taxpayers.

Neither at the state nor federal level, did necessary oversight exist to ferret out inflated budget projections and fraud.  In fact, only seven of the 56 agencies around the country awarding these credits has been audited in the program’s 30-year history.

And yet the feds continue to soak increasing dollars into the program each year, though the actual number of units being constructed dwindles.  According to an investigation conducted by NPR, the $9 Billion LIHTC program is producing fewer units than it did 20 years ago yet taxpayers are paying 66 percent more in tax credits.  Aside from the fraud, another factor likely being the many syndicators, consultants, and financiers that work in their margins into the complicated process.

What else this reveals.

The OGA’s report on the vast cost variations in building state to state, reveal another critically important truth.  Jurisdictions with onerous and restrictive land use regulations drive the high costs to build there.  These incentive programs in fact reward states that cause their own affordable housing crises and fleece taxpayers all at the same time.  A report issued by the National Association of Homebuilders and the National Multifamily Housing Council estimated that 32 percent of multifamily costs were attributable to regulation.

In fact, studies of housing prices have shown costs have directly increased with land use regulations.  As a result, federal housing affordability spending is almost two times higher in the most regulated states than the least regulated states.

 

There are better ways.

It is long-time policymakers address affordable housing for American families by addressing the root of the problem and tailoring assistance programs that serve those in poverty, not only those seeking a profit.

Under the new federal administration, director of Housing and Urban Development (HUD) Ben Carson, has looked to do just that.  Instead of continuing to reward bad behavior by local governments, his agency has discussed attaching HUD grants to regulatory reforms proven to lower housing costs.  HUD’s position that they won’t continue to aid in the affordable housing problem by subsidizing it – is also a signal to states that they should look to curb their own contributions to the problem instead of simply seeking more federal handouts.  In Arizona, one of those factors is the residential rental tax – which disproportionately impacts low-income individuals.

Reforming land regs is a long-term endeavor and won’t solve the immediate need for low-income people in unaffordable housing markets.

But there are better ways to structure programs than the convoluted LIHTC program.  One such proposal with bipartisan support are “Housing Choice Vouchers (HCV).”  Instead of incentivizing profiteers to supply housing – HCVs empower individuals and families to access housing in places they desire to live.

This approach allows low-income families to move to higher income places which often gives them access to better jobs and school districts and affords children of low-income families’ greater opportunities to succeed.  Because the LIHTC programs provide greater incentives for building in designated areas of greater poverty, it has the direct effect of actually concentrating poverty and segregating poor people.

Arizona lawmakers should help poor people and protect taxpayers.

The expansion of this 30-year-old failed federal program in Arizona would be a big mistake. The bill being pedaled this year is not being backed by advocates for the poor; but by those who stand to gain the most – insurance companies, investors and banks.  If lawmakers truly care about the poor – and the taxpayer – they will resoundingly reject HB2365.

 

Today the Free Enterprise Club released our Judicial Retention recommendations for the 2018 ballot. Under Arizona’s merit selection system, judges periodically appear on the ballot for voters to determine if they should be retained. A ‘YES’ vote retains the judge, a ‘NO’ vote removes the judge from the bench. All of the judges that the Club recommends for retention have met Judicial Performance standards to remain on the bench.

Arizona Supreme Court

Justice Clint Bolick—YES

Justice John Pelander—YES

Arizona Court of Appeals

Peter Swann—NO

Peter Eckerstrom—NO

Philip Espinosa—YES

Christopher Staring—YES

Maricopa Superior Court

Bradley Astrowsky—YES

Alison Bachus—YES

Cynthia Bailey—YES

Janet Barton—NO

Mark Brain—NO

Gregory Como—YES

David Cunanan—NO

Sally Duncan—NO

George Foster—NO

Warren Granville—NO

Jennifer Green—YES

Michael Herrod—YES

Samuel Myers—NO

Erin Otis—YES

Susanna Pineda—YES

Laura Reckart—YES

Howard Sukenic—YES

Danielle Viola—YES

Joseph Welty—NO



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