Arizona tax credits rising for business
Tuesday, November 22, 2011
Posted by: Rhette Baughman
For more than a decade, Arizona has been bulking up a tax break that is popular with big businesses: tax credits.
The credits claimed rose from about $5 million in 1994 to $86 million in 2008, the latest year for which state data are available. The credits also are used almost exclusively by the state's most profitable businesses, records show.
The credits can yield a big payoff. In 2008, more than half of the 412 corporations that claimed tax credits were able to use them to eliminate their tax bills.
Unlike deductions, which reduce a company's profits subject to taxes, credits provide a dollar-for-dollar reduction of the bill itself. They are a state subsidy of specific activities, such as research and development, new hires, energy efficiencies and defense contracting. The largest credit in Arizona is for R&D, and it's designed to persuade businesses to invest their profits in the state.
Some experts worry the credits can be overly generous, rewarding companies for investments they would have made anyway. Gauging the effectiveness of the tax credit is difficult. Arizona, unlike some other states, keeps most of its tax-credit recipients confidential.
Matthew Gardner, executive director of the Institute on Taxation and Economic Policy, a Washington, D.C., organization that advocates for tax fairness, points to tax credits that reward employers for creating jobs.
"You'll never ever know how many of the people who claim these job-creation credits were going to hire those people anyway," Gardner said. "You need some kind of yardstick to make sure you're not just throwing the money away."
Jim Rounds, a senior economist for Elliott D. Pollack and Co., which does economic real-estate analysis, wrote a 2009 report for the Legislature about wide-ranging corporate-tax changes similar to legislation passed this year.
He thinks this year's package will make Arizona far more competitive in attracting new businesses, though tax credits for new hires should eventually be limited to higher-wage jobs.
"It makes sense what they're doing, but there needs to be some commitment to tighten these up over time and be very frugal with the use of these incentives," Rounds said. "I would like to see us be the state that only incentivizes high quality."
The growing use of credits comes on top of other significant cuts in business taxes, including cuts to the income-tax rate and changes to a formula that companies use to calculate their taxable income. These moves have cut the state's corporate-tax receipts by tens of millions of dollars. The goal is to make Arizona a magnet for businesses, especially ones with high-wage jobs.
But as businesses pay less, pressure grows to make individual taxpayers pay a greater share of state costs or force the state to slow or curb its services, from schools to public safety.
More profits, more breaks
The benefits of corporate-tax credits are not distributed evenly among businesses.
The state's largest and most profitable companies increasingly are taking the biggest share and lopping off growing shares of their tax bills.
In the 1990s, companies that had $500 million or more a year in taxable income usually claimed less than 30 percent of all the business-tax credits. From 2004 to 2008, they claimed 62 percent of the credits. The companies constituted only 0.3 percent of Arizona businesses that filed corporate-tax returns.
On average, each business with income between $500,000 and $1 million in 2008 claimed tax credits that lowered its bill to the state by slightly more than $1,000. The same year, businesses with income between $500 million and $1 billion claimed credits worth $217,000 each.
Tax credits also have sliced greater shares of large companies' tax bills.
In 1998, firms with $1 billion or more in taxable income used credits to cut their bills by nearly 4 percent. Ten years later, tax credits cut their bills more than 20 percent, state data show. Of the 412 companies that claimed corporate- tax credits in 2008, at least 215 cut their bills to zero using credits, according to Arizona Department of Revenue data.
The emphasis on tax credits has happened as the state has grown more reliant on large, multistate corporations for its income-tax base. In the mid-1990s, multistate companies provided about 80 percent of the state's annual corporate-tax revenue. Since 2002, the number has generally been at least 90 percent.
Arizona has offered companies at least 33 different tax credits since 2000, but in practice, only two are widely used.
The research-and-development tax credit is the largest. In recent years, at least 200 companies claimed the credit annually. From 2000 to 2008, the total amount made up $310 million, or 65 percent, of all the corporate-tax credits used in Arizona.
The research credit builds on a popular federal tax credit. It rewards businesses that fund research conducted in Arizona either by the corporation or someone it hires, which can include the state's universities. It has been expanded in recent years to give some corporations payments even when they don't owe taxes. The amounts that can be claimed also were hiked.
The second-most-popular credit, for business activity in designated enterprise zones, accounted for an additional $70 million, or 14 percent, of all corporate-tax credits in those years. That credit rewarded businesses based mostly on meeting certain wage levels and for employees living in certain areas.
It expired this summer and is being replaced by a Quality Jobs Program credit, which offers a $9,000 credit spread over three years for each new worker hired by an employer in Maricopa or Pima counties. In rural areas, it applies to employers with five or more new workers. The credit also requires certain investment levels for the employers.
The state's remaining credits account for 20 percent of the credits used, but their cash value is significant: $96 million as a group from 2000 to 2008.
Small businesses generally get little help from such credits. Still, the Arizona Small Business Association, led by CEO Donna Davis, supported the corporate-tax changes passed earlier this year that included the credits.
"Basically, we wanted to make sure we had a seat at the table and be sure we got at least a piece of the pie," Davis said, adding that a business property-tax exemption and job training in the law help small businesses. Otherwise, "it's (the credits) usually limited in who it helps and it usually helps those who were going to be taking that action anyways."
Who gets credits
Arizona doesn't disclose the recipients of many credits, including the largest one, for research, though some states do.
Pennsylvania identifies the recipients of its research credits as well as dozens of other incentives. Oklahoma's "Open Books" website has a searchable database that allows the public to identify where money is spent, including corporate-tax incentives. Illinois and Washington also have relatively broad disclosures.
"My counterparts in other states find it strange that Arizona's statutes have confidentiality regarding tax credits," said Karen McLaughlin, director of budget and research for the Children's Action Alliance in Phoenix, which as an advocate for child well-being has a keen interest in the state's finances. "It seems to me if you're taking advantage of a tax credit that wipes out your tax liability, you ought to give up some confidentiality."
But such openness isn't embraced in all states. Last year, California's then-Gov. Arnold Schwarzenegger vetoed an effort to disclose tax-credit recipients in that state.
One of the rare glimpses Arizona allows at corporate credits involves enterprise zones.
The enterprise-zone credit allowed dozens of employers in certain areas to reduce their annual tax bills by part of the salaries they paid for certain new jobs. Businesses get a $3,000 credit for up to 200 workers a year spread over three years.
An Arizona Republic analysis of data in the 2010 report by the state's former Department of Commerce identified how much companies could claim for their new hires. It did not specify how much each company indeed did take, but only a small portion went unused, records indicate.
Raytheon Co., which makes missiles, was eligible for $728,000 in tax credits under the program. Apollo Group, which operates the University of Phoenix, could have received up to $600,000 in tax credits. Organizations affiliated with private-prison operator Corrections Corporation of America were eligible for a total of $589,000.
Although scores of companies were listed, about half of the nearly $11 million in enterprise-zone credits statewide went to 14 companies. All were eligible to cut their tax bill by $200,000 or more. These credits were tied to 5,100 jobs added over a three-year span.
There is no way to know whether the credits played a role in the companies' hiring decisions.
John Jenson, a vice president and corporate controller for Universal Technical Institute, a Phoenix-based automotive school, welcomes the state's tax changes. But he indicated that UTI, which recently used the credits for 31 new hires in one year, doesn't depend on them.
"We take advantage of what the tax code will allow us, but our decisions for adding and/or reducing people, it's all driven by the top line of the business," he said. "Like most businesses, the tax code doesn't drive the business decision as much as the business decision drives how we work within the tax code."
Plenty for a few
While the research-and-development and enterprise-zone credits are the most common, a host of other credits benefit particular businesses.
From 2006 to 2008, 25 or fewer companies claimed a total of more than $33 million from those tax credits.
Taxpayer confidentiality rules generally prevent the Arizona Department of Revenue from revealing the number of businesses claiming a specific tax credit when fewer than three used the credit. But it's still possible to determine the total number of companies claiming all lightly used credits and the total value.
In 2007, for example, 12 companies claimed eight types of tax credits totaling $13 million. A year later, four claimed three types of credits worth nearly $12 million.
One of the credits was for defense contracting. Limited data indicate how companies using the credit likely reduced their tax bills to a small amount.
The credit rewards businesses for bringing in new employees and offers property-tax relief, as well. Since 2001, too few businesses have used the credit to allow even summary details to be released.
But, in 2000, three companies claimed tax credits but used only a portion of the amount available.
They used a total of $1.9 million; $32 million was left over that they could use to cut their tax bills in future years as well, records show.
Tax experts say the sizable amount of unclaimed credits the companies carried forward suggest they paid little if any state income tax that year.
"That carry-forward is an indication that they zeroed out their tax liability," McLaughlin said.
Article by: Ronald J. Hansen, The Arizona Republic