This session has been rich with terrible tax policy ideas.  From tax increment financing to refundable tax credits – the legislature has considered several bills with proven track records of failure in other states.

One particular idea that has circulated this session and gained a level of undeserved traction is the Rural Tax Credit Program.   Proponents of the bill have sold the legislation as a way to jump-start the rural economy.

The legislation is complicated which aides in befuddling lawmakers into believing it must be brilliant.  Essentially the mechanism works as such: qualified Rural Investment Firms (of which there are only a few) are eligible for $30 million in salable tax credits upon raising $50 million in investible capital.  The tax credits may be utilized to offset corporate income, individual income, or premium insurance taxes.  Premium insurance taxes are paid by insurance companies on individual policies sold, and are assessed at 2 percent of total revenues.

 

The Rural Investment Firm then invests the capital into businesses located in rural Arizona, often as debt-financing, i.e. directs loans.  The money is essentially raised leveraging a tax payer-subsidized risk pool by the State foregoing future tax revenues.  Additionally, the insurance companies’ reward is also not directly tied to the investment in rural businesses; but in the purchase of the tax credits which reduce their liabilities.

 

This financing arrangement severely distorts the risk involved in traditional capital raising and investment.  And although the Investment Firm uses other people’s money, much like a bank does, they are not required to pay it back – not to the insurance companies, and not to the State.  In other words, state taxpayers are stuck subsidizing the risk under the plan while the investment firm gets to keep all of the reward.

 

Similar programs have been tried in other states over the past few decades, predominantly under the name CAPCO (Capital Companies,) with dismal results. CAPCO has been widely regarded as one of the most inefficient ways to raise capital, and ineffective ways to invest capital.    Because CAPCO has earned a terrible reputation for wasting tens and hundreds of millions of dollars, the program has been rebranded and repackaged several times. And while the Rural Tax Credit program does contain some modest improvements and is less lucrative compared to other failed CAPCO plans, it is still functionally the same deal.

Many states that have implemented similar programs have repealed them or let them sunset:

All of these CAPCO programs differ in detail.  Some allow their tax credits to be first collateralized into notes, before they are sold to insurance companies.  Some allow for a dollar-for-dollar tax credit.  Others allow for the tax credits to be used prior to the capital being invested.  And most allow Investment Firm to assess generous management and legal fees.  However, each of these variations are not very substantive.  The basic mechanism remains the same in all CAPCO programs, including in the Rural Tax Credit Program proposed in HB2530 and SB1212.

At the end of the day the Arizona Legislature should learn from other states’ that have bit on these investment models.  Given the information, analyses, and record of failure readily available to interested lawmakers, anything less than an emphatic rejection of HB 2530/SB 1212 is unacceptable.

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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.