We see a lot of bad ideas down at the legislature.  A lot.  But every once in a while, one comes along that is so awful even we are mildly surprised by it.

Behold HB2492.

Special property tax giveaways for some business but not others? Payroll tax handouts for large employers to subsidize new hires? Refundable tax credits that allow businesses to claim a refund even though they have no tax liability?

Wrap all these into one big monstrous giveaway and you have HB2492.

For starters, some of the large corporations that will benefit from this bill already do not pay Arizona corporate income taxes. A decade ago the legislature removed the cap on the Research & Development tax credit, which resulted in some companies to claim an unlimited amount of tax credits to offset their corporate tax liability.

But unlimited R&D credits are only part of the benefit. If these credits exceed the companies’ actual income liability in a given year, they are able to carry-forward their credits for up to 15 taxable years.  Essentially, it is quite possible that these companies will never again have to pay corporate income taxes in Arizona.

Now HB2492 takes these subsidies to a new level. HB2492 would allow corporations to take their unused R&D credits and convert them into refundable credits to offset any sales tax incurred for infrastructure and other capital expenditures they make in the state.  If it seems strange to link two completely unrelated activities (R&D and private infrastructure spending), you’d be right.  Perhaps muddying the waters is what it takes to hide a subsidy of this magnitude.

Since the current R&D tax credit program has been so popular, several corporations have accumulated an astronomical amount of unused credits to cash in on this deal.  The latest report from the Joint Legislative Budget Committee shows that companies currently hold $1 Billion in carry-forward R&D tax credits.  If HB 2492 passes, taxpayers will be writing subsidy checks to corporations for a long, long time.

Just as the Arizona legislature has been wise to reject risky public finance schemes such as Tax Increment Financing (TIF), they have also successfully never crossed the threshold of allowing refundable tax credits of this magnitude.  The best tax system for economic growth is one in which taxes are as low as possible, but shared among the broadest base.  Carving some taxpayers out of the pie, not only makes the pie smaller, but raises taxes for everyone left in the pie.

The legislation passed out of House Ways & Means last week by a vote of 5-4, for the sake of Arizona taxpayers let’s hope it doesn’t proceed any further.

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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.