By Howard Fischer
Capitol Media Services
PHOENIX -- The president of the Arizona Senate is trying to undo tax incentives designed to lure Hollywood producers to Arizona -- incentives backed by half of the senators of his own party.
In a new legal brief, Warren Petersen contends the 2022 law that sets aside up to $125 million a year in "refundable tax credits'' runs afoul of the Arizona Constitution. He says the way the law is structured makes those credits effectively a gift of public funds.
In fact, the Gilbert Republican even is telling Maricopa County Superior Court Judge Michael Herrod that despite the broad authority of the Legislature to set tax policy, he has the power to overrule that when he decides that lawmakers have gone too far.
He's not the first to make that argument. In fact, the filing by the Petersen is in line with a lawsuit filed earlier this year by the Goldwater Institute asking a judge to overturn the law.
But it is unusual because it amounts to the Senate president, acting in his official capacity, trying to void legislation sponsored by fellow Republican David Gowan. And the Sierra Vista Republican convinced half of his GOP senate colleagues to support the measure -- and even got Gov. Doug Ducey to allow it to become law, albeit without his signature.
Petersen did not respond to a request for comment on the filing. Nor did he or his press aide answer questions of whether the filing, made on his behalf by a private law firm, was done with public money.
What's behind all this is the 2022 law that proponents said was designed to breathe new life into what was once a more thriving film industry in Arizona. It dates back at least as far the 1930s when John Ford saw Monument Valley and decided to film Stagecoach here with John Wayne.
And the studios at Old Tucson were for a long time the site for various westerns, ranging from The Lone Ranger to Three Amigos, before much of the facility were destroyed in a 1994 fire.
But what's happened more recently is that productions that are supposed to be portraying events in Arizona actually were being filmed elsewhere. Even Only The Brave, the 2017 film about the deaths of the Granite Mountain Hotshots from Prescott was filmed primarily in New Mexico.
To provide a financial lure, lawmakers approved tax credits that apply against what a production company otherwise owes the state.
That's not the problem.
What is, according to the lawsuit filed earlier this year, is that these are "refundable'' credits. Put another way, if the amount of credits exceeds the tax owed, the production company actually gets a check from the state.
The bottom line, the challengers claim, is that this violates a provision in the Arizona Constitution that makes it illegal to provide a gift of state funds unless taxpayers get something of equal benefit in return.
Proponents of the 2022 law contend that these are not gifts or grants, arguing that the state will get benefits in the form of sales taxes spent by production companies and their employees as well as income taxes from the workers who are hired. But the lawsuit contends that Arizona courts have ruled that only direct benefits count, not anticipated future tax collections.
And Arizona Commerce Authority also is telling
Herrod that it is up to the Legislature -- and not the courts -- to determine tax policy.
Petersen, filing a legal brief through his attorneys in his capacity as Senate president, told the judge to ignore those arguments.
It is true, he said, that the Legislature can "enact any law its discretion may dictate.''
"But even that expansive authority is modulated by the Constitution's structural constrains on the elected branches,'' Petersen said. "If a legislative enactment veers outside one of those guardrails, it is the courts' core constitutional authority and duty to ensure that the Arizona Constitution is given full force and effect.''
And that, he said, is true with the Gift Clause which spells out that the state cannot provide any donation, grant or subsidy to any individual, association or corporation.
He said it's one thing to forgive taxes owed. But he said what's at issue here is a credit that is independent of a company's actual liability.'
"It is, as a matter of law and common sense, a 'subsidy' within the meaning of the Gift Clause,'' Petersen said.
He also took a slap at those who crafted this bill and others like it for being a bit too cute with how they describe what really is going on here.
"Because the lexicon of 'tax credits' is more mellifluous to many voters' ears than the terminology of 'handouts,' interest groups and their allies devising new subsidies often are tempted to seek the cloak of the tax code in the hope that opponents of a generous social welfare state will not find out what we are doing,'' Petersen said.
"But cosmetic political nomenclature cannot alter the inescapable fiscal and practical reality that refundable credits represent direct, redistributive expenditures of government funds, (i.e., revenues collected from other citizens) to the claimant taxpayer.''
This isn't the first time the issue of the merits -- if not the legality -- of these tax credits has come up.
The state enacted a similar program in 2005 and expanded it in 2007.
A report said that the credits generated 317 full-time jobs in the industry in 2008. And another 413 were created indirectly from spending by filmmakers in the state.
All totaled, according to the report, that generated about $2.3 million in additional state and local taxes.
But it turned out that Arizona actually gave out more than $8.6 million in credits to get that gain. And a similar report for 2007 showed a $1.7 million loss to the state.
Lawmakers repealed the program in 2015.
Gowan, however, insisted that the new credits are different than the prior program. He said it requires those seeking the credits to actually show, subject to a state audit, that they have spent the money in Arizona.
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