By Howard Fischer
Capitol Media Services
PHOENIX -- There's nothing illegal about the state giving tax credits to companies that make their movies and even their commercials in Arizona, a judge has concluded.
In a new ruling, Maricopa County Superior Court Judge Adele Ponce said the Arizona Constitution bars the state from providing grants or subsidies to any individual or corporation. And Ponce acknowledged that lawmakers approved a statute to allow the Arizona Commerce Authority to give out up to $125 million a year in credits that producers can use to offset any tax liability they owe.
But she said there's no Gift Clause violation here because the state isn't giving away anything.
Instead, the judge ruled, the program simply allows people and corporations to pay less of their own money to the state if they qualify.
And Ponce said that is not changed by the fact that the credits are "refundable,'' meaning someone whose credits exceed the taxes owed actually can get a check from the state.
Her ruling is a defeat not only for the Goldwater Institute which filed the lawsuit but also for Senate President Warren Petersen. The Gilbert Republican actually filed a legal brief in the case urging the judge to undo the program that was enacted by lawmakers -- including half of the senators from his own party.
The Goldwater Institute has vowed to appeal. Jon Riches, vice president for litigation, said his organization still believes the credits are an illegal subsidy.
The idea behind the credits according to proponents has been to breathe new life into what was once a more thriving film industry in Arizona that 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.
During debate on the 2022 legislation, Rep. Sen. Stephanie Stahl Hamilton, D-Tucson, cited said "Only the Brave,'' the 2017 movie about the deaths of the 19 Granite Mountain Hotshots who died while fighting the 2013 Yarnell Hill Fire. As it turns out, she said, the movie, which had a budget of $38 million, was not shot here.
"That is our story and that is our history,'' she said. "It had to be filmed in New Mexico because it's not economically feasible for them to shoot that film in our own state.''
And adding insult to injury was the 2008 film "Hamlet 2'' starring Steve Coogan, Catherine Keener, Amy Poehler and Elisabeth Shue about a failed actor teaching high school drama.
It opens with the main character asking "Where does one go for dreams to die?'' -- only to pan to a sign that says "Welcome to Tucson Arizona.'' Yet the whole thing was filmed in Albuquerque.
The credits can be generous.
Companies that spend up to $10 million in production costs can receive up to $1.5 million. And there's a sliding scale for more expensive films, with credits going up to $7 million for a $35 million production.
What's wrong with that, the Goldwater Institute argued, is there's no evidence of actual benefit to the state. In fact, an audit of a prior version of the credits showed the credits awarded actually exceeded the state and local taxes generated from the movies that got them.
And the lawsuit questioned whether there was any real value to the requirement that the film acknowledge it was produced in Arizona.
All that, Ponce said, is legally irrelevant.
She said the Gift Clause deals only with "public money.'' And that, she said, is not the case with a credit.
The judge cited a 1999 ruling by the Arizona Supreme Court in a case where the Arizona Education Association challenged a state law which provided a dollar-for-dollar tax credit to individuals who donated to organizations that provided scholarships for students to attend private and parochial schools. Here, too, the allegation was that the credits violated the Gift Clause.
But Ponce pointed out that the justices said that in order for something to be a gift, it had to be money appropriated from the state treasury.
In that case, the high court said, there was no actual appropriation of state funds to a scholarship organization. Instead, the justices said, it simply was the Legislature telling people that if they gave to these organizations they then could reduce their taxes by the same amount.
Put another way, Ponce said, there was no gift because the state never had the money in the first place to give away.
The same is true with the film tax credits, she said, because the state isn't giving money to the companies to produce films in Arizona but simply allowing those firms that qualify to pay less money to the state.
Riches, however, contends there's a difference.
In the case of the scholarships, he said, the taxpayers still were paying the money. The only difference is it went to the organizations rather than the state.
By contrast, Riches said, the companies taking the credits here have not given an equivalent amount to anyone else. Instead, he said, they are simply pocketing the dollars.
And Riches said it's even more true when companies get refundable credits, getting an actual check from the state if their earned credits exceed their tax liability.
Ponce disagreed, saying that even credits that result in a refund are not gifts.
This isn't the fist time the state has approved such credits. Lawmakers enacted a similar program in 2005 and expanded it in 2007.
A report on that program 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.
Sen. David Gowan, R-Sierra Vista, who championed the new credits, has insisted these are different than the prior program. He said it requires those seeking the credits to actually show, subject to a state audit, that they actually have spent the money in Arizona.
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