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ARIZONA STATE LEGISLATURE
Fiftieth Legislature – First Regular Session
JOINT LEGISLATIVE INCOME TAX CREDIT REVIEW COMMITTEE
Minutes of Interim Meeting
Senate Hearing Room 1 -- 1:00 p.m.
CoChairman Yarbrough called the meeting to order at 1:10 p.m. and attendance was noted by the secretary.
Members Present
Senator Steve Yarbrough, CoChairman Representative Javan Mesnard, CoChairman
Senator Ron Gould Representative Tom Chabin
Senator Jack Jackson Jr. Representative Rick Gray
Senator Lori Klein Representative Ted Vogt
Members Absent
Senator Aboud Representative Farley
Consideration of Income Tax Credits on the 2011 Review Schedule
Hans Olofsson, Joint
Legislative Budget Committee (JLBC), advised that the purpose of the
Committee is to annually review tax credits. This involves determining the
purpose of the tax credits, establishing standards for evaluating and measuring
the success or failure and recommending changes upon conclusion of review of
the tax credits (Attachments 1 and 2
[pages 1-5]). He noted that issues affecting the evaluation of income tax
credits include timeliness of data, lack of performance measures in statute to
gauge whether a tax credit has been successful or not and the fact that certain
costs and benefits can be difficult to quantify because data is not available.
A.R.S. §43-1183 - Credit for Contributions to School Tuition Organizations
Breanne Bushu, Joint Legislative Budget Committee, reviewed the Credit for Corporate Contributions to School Tuition Organizations (STO) (Attachments 2 [pages 18-23] and 3). In response to a question, she clarified that the number of students who receive scholarships is not known, but acknowledged that could be a potential performance measure.
Representative Chabin surmised that it is not possible to know if a student receives a $20,000 scholarship, for example. CoChairman Yarbrough disagreed, noting that the scholarship amount is capped. The number of scholarships is known, but the number of students is not known because an individual student could receive two or more scholarships but even then, the amount must be under the cap. The probability is high that more than 4,000 students receive scholarships. He estimated that possibly a few hundred students receive scholarships from two sources. He clarified that Lexie’s Law only applies to disabled students, but a student could receive a scholarship under the existing individual tax credit, in addition to a scholarship under the corporate tax credit.
Representative Chabin questioned whether
the Committee should request that information.
CoChairman Yarbrough said Representative Chabin could pursue that if he wishes,
but he suspects there would be many challenges in cross-referencing the two populations
since one has to be means tested and the other does not; although with modern
computer technology, it probably could be done.
Senator Jackson said members of
the public are concerned about transparency in the scholarship award process, so
he would like to add another performance measure requiring random audits on
some STOs to see what is happening and to make sure the income threshold is met.
CoChairman Yarbrough pointed out that 2010 legislation requires that large STOs
undergo a full scale audit and smaller STOs undergo an independent review by a
certified public accountant to ensure that 90 percent of STO revenues is used
for scholarships.
A.R.S. §43-1074.02 - Credit for Investment in Qualified Small Businesses (“Angel Tax Credit”)
Hans Olofsson, Joint Legislative Budget Committee, reviewed the Credit for Investment in Qualified Small Businesses (“Angel Tax Credit”) (Attachments 1 [pages 6-11] and 4).
In response to questions, he noted that $20 billion in Angel investments was made in 2010 nationwide. A study by the Center for Venture Research at the University of New Hampshire indicates that 370,000 jobs were created as a result. The average investment of $325,000 equates to six jobs per investment. He acknowledged that there is no data to indicate whether the jobs would have been created otherwise.
Representative Chabin noted that a potential performance measure relates to allocation of Angel investments by industry and questioned if there should be some indication whether the investments were made in a rural community since the tax credit would increase in that case. Mr. Olofsson responded that could be included as a possible recommendation. He noted that there is some information on the Arizona Commerce Authority’s website, such as location of the businesses.
CoChairman Mesnard asked if data indicates how long the created jobs lasted. Mr. Olofsson said he had the same question, but the author of the study is on sabbatical; he will contact him when he returns in January 2012.
A.R.S. §43-1083 - Credit for Residential Solar Energy Devices
Jon Stall, Joint Legislative Budget Committee, reviewed the Residential Solar Energy Device Credit (Attachments 2 [pages 12-17] and 5). He added that this tax credit was reviewed in 2004 at which time there were no recommended changes.
In response to a question, Mr. Stall explained that the potential performance measure relating to total megawatt hours of electricity conserved from non-renewable energy sources could include, for example, daylighting systems that save on energy but are not measurable in terms of electricity generated.
Representative Chabin asked if the intent of the potential performance measure relating to number of persons employed in businesses that manufacture, install or service residential energy solar devices is to quantify Arizona jobs. Mr. Stall agreed that it is an indirect measure of all solar-related jobs in Arizona and could entail reference to a study such as the solar census begun in the last few years by the Solar Foundation.
CoChairman Mesnard surmised that would be difficult to measure because it would be necessary to extrapolate how much inspiration the tax credit provided as opposed to federal regulations at the same time. Mr. Stall agreed, noting that the federal incentive currently has no cap, whereas the cap for this tax credit is $1,000; in comparison, more generous and influential tax credits are available.
Elaine Smith, Arizona Department of Revenue (DOR), stated that she helped compile the information for the tax credits. On page 21 (Attachment 2) the numbers are preliminary for 2007, 2008 and 2009, and there is a data gap in 2007 that may not be recovered, so it is not an indicator of what happened that year. She said 2008 is a good indicator of the amount of tax credits taken. She said she anticipates that in 2009, the amount will be the same or even higher.
In response to a question, Mr. Stall related that there was a last-minute rush by people to take advantage of the tax credit and Salt River Project attempted to phase it out. Arizona Public Service Company did the same in 2010 and 2011.
Representative Vogt said the potential performance measure regarding the number of persons employed in businesses involving residential energy solar devices has a tangential connection to the tax credit. CoChairman Yarbrough said those are possible performance measures that the Members are under no obligation to pursue, but his point is well taken.
Representative Chabin questioned
which agency would measure the factors in the proposed performance measures. CoChairman
Yarbrough responded that any recommendation by the Committee would require
someone to offer legislation to accomplish. Based on
Representative Vogt’s comment, he suspects that no one will offer a bill for
that specific performance measure, but it could happen. He acknowledged that
any related bills will be heard in the appropriate Standing Committees.
CoChairman Yarbrough complimented Joint Legislative Budget Committee and DOR staff on the information provided regarding the tax credits.
Recommendations by the Committee
CoChairman Mesnard moved that the Joint Legislative Income Tax Credit Review Committee continue and place the Credit for Contributions to School Tuition Organizations on the Income Tax Credit Review Schedule for 2016.
CoChairman Yarbrough clarified that the potential performance measures are not included in the motion, but pointed out that the measure relating to the percentage of STO revenues retained for administrative costs is already governed by existing statute, although the number may be slightly different. Determining the percentage of private school tuition paid for with award funding would be challenging. He added that legislation from 2010 and prior required reporting in great detail, so substantially more information is available on this tax credit than any others; however, he is amenable to further motions.
Senator Jackson moved that the motion be amended to include random audits of selected STOs to ensure that scholarships are being awarded only to students in families that qualify under the family income limitation of up to 185 percent of the free and reduced lunch qualifying income level. Audit costs shall be borne by the STO being audited.
Senator Klein noted that audits are already required of the STOs. CoChairman Yarbrough responded that all STOs undergo audits, but the audits may not be to the precise point that people who do not qualify under the financial means test are obtaining scholarships.
Representative Vogt asked if there is evidence that this is occurring. Mr. Jackson replied that he does not know, but the issue of transparency has been raised, as well as concern about the scholarship award process. He understands that audits are taking place at some large STOs, but he does not know if it is done across the board with the smaller STOs.
Representative Chabin pointed out that a series of articles was written about some smaller STOs not following the statutes, so he would to see the law on all STOs tightened to reflect some best practices of the larger organizations. Representative Vogt stated that he would like to read those articles, but noted that placing the onus on STOs when there is no evidence available will take dollars from classrooms.
CoChairman Yarbrough stated that this is a new assertion. He spoke against applying another test to the STOs when the smaller ones are already struggling with the significant additional burden applied by legislation in 2010. Representative Chabin stated that any organization taking advantage of this law should be more than willing to have an audit conducted.
Senator Klein submitted that this will add more government regulation that is not needed, as well as additional costs to a program in which the money should go to the children.
Question was called on the motion that the motion be amended to include random audits of selected STOs to ensure that scholarships are being awarded only to students in families that qualify under the family income limitation of up to 185 percent of the free and reduced lunch qualifying income level. Audit costs shall be borne by the STO being audited. The motion failed.
Question was called on the motion that that the Joint Legislative Income Tax Credit Review Committee continue and place the Credit for Contributions to School Tuition Organizations on the Income Tax Credit Review Schedule for 2016. The motion carried.
CoChairman Mesnard moved that the Joint Legislative Income Tax Credit Review Committee continue and place the Credit for Investment in Qualified Small Businesses on the Income Tax Credit Review Schedule for 2016.
CoChairman Yarbrough clarified that the motion does not include the potential performance measures. Representative Chabin submitted that if tax credits are implemented to create jobs and benefit the economy, it seems reasonable to ask for performance measures.
Representative Gray opined that it would be difficult to differentiate between new jobs created and retention of existing jobs. CoChairman Mesnard said he is very interested in the type of jobs that are created because that is the purpose of the tax credit, but he also has no idea how the information would be obtained.
Representative Chabin asked if the Arizona Commerce Authority would be the appropriate agency to address the performance measures. Mr. Olofsson replied that he cannot speak for the agency. Their website provides some details on the companies, but he does not believe it includes job creation. He added that the National Governors Association conducted an extensive study and found that no state has been able to quantify the impact in terms of job creation because it is difficult to find data and determine if the jobs would have been created absent the tax credit.
Representative Vogt said another way to look at this is return on investments and asked if that is something the DOR or another agency could measure.
Georganna Meyer, Arizona Department of Revenue, stated that DOR does not have the records to quantify the return on investments. It may be possible to see what kind of tax liability is paid by each business that is identified by the Arizona Commerce Authority as qualifying for the Angel tax credit, but it could only be released in aggregate and not business-by-business.
CoChairman Yarbrough indicated that if he was running the show, he would want to report how successful the tax credit has been. Representative Vogt pointed out that venture capital firms that invest in multiple firms keep a portfolio and report every year on whether or not the portfolio is doing well.
Representative Chabin commented that he will vote for the motion because investment is needed in Arizona, but he believes that some form of quantification for the tax credit should be requested. CoChairman Yarbrough said that is the reason the law was passed requiring that henceforth standards shall be spelled out in original legislation.
Question was called on the motion that the Joint Legislative Income Tax Credit Review Committee continue and place the Credit for Investment in Qualified Small Businesses on the Income Tax Credit Review Schedule for 2016. The motion carried.
CoChairman Mesnard moved that the Joint Legislative Income Tax Credit Review Committee eliminate the Credit for Residential Solar Energy Devices.
CoChairman Yarbrough conveyed that adoption of this motion will not eliminate the tax credit; a Member will have to sponsor legislation to accomplish that objective. Also, because such a bill will increase state revenue, a two-thirds vote of both houses would be required.
Question was called on the motion that the Joint Legislative Income Tax Credit Review Committee eliminate the Credit for Residential Solar Energy Devices. Division was called and the motion carried by a hand vote of 4 ayes and 3 nays.
Without objection, the meeting adjourned at 2:30 p.m.
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Linda Taylor, Committee Secretary
December 9, 2011
(Original minutes, attachments and audio on file in the Chief Clerk’s Office; video archives available at http://www.azleg.gov)
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JL INCOME TAX CREDIT
REVIEW COMMITTEE
December 7, 2011
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