Arizona

Rating: Trailing

While Arizona’s evaluation law is one of the longest-standing in the country, it is not well-designed to ensure that economic development policymaking is informed by high-quality analysis.^a In 2002, Arizona created the Joint Legislative Income Tax Credit Review Committee. Since then, however, the evaluation process has changed little. The committee typically meets once a year, in November or December, to recommend whether to continue, modify, or end each tax credit up for consideration that year. Each credit is reviewed every five years.

The limitations of the formal analysis provided to the committee are one weakness of Arizona’s process. To inform the committee’s work, nonpartisan legislative staff compiles a report on each credit. These reports include descriptive information, such as how much a program costs, how many taxpayers use it, and the program’s history and purpose.^b The staff, however, is limited in what it can say about possible improvements; in Arizona, legislative staff is not generally authorized to make policy recommendations.^c While the evaluations have a brief section on the benefits of the credits, they have not included original, detailed economic analysis.

Other states have identified ways to improve the effectiveness of incentives through rigorous economic analysis and thorough examinations of the design and administration of the programs. In contrast, the Arizona committee has generally recommended simply to continue incentives or to eliminate them. Eliminating incentives is challenging in Arizona because the state constitution requires a two-thirds legislative supermajority for measures that increase revenue.^d

Arizona lawmakers could strengthen the evaluation process by creating a clear mandate for evaluations with detailed economic analysis and policy-relevant conclusions. If lawmakers do not want legislative staff to make policy recommendations, there are other options. For example, Oklahoma has contracted with consulting firms to conduct evaluations.^e

This type of more detailed information would be especially valuable for Arizona’s largest incentives. For example, the state’s R&D credit cost the state around $100 million in 2014, the most recent year for which data are available.^f In addition, companies are holding hundreds of millions of dollars in R&D credits that they could use in the future, since businesses are allowed to carry forward the credits for up to 15 years.^g Rigorous evaluations would help lawmakers know whether the program is worth the investment and how it can be improved.

Endnotes

1. Arizona Rev. Stat. § 43-221 to 224, http://www.azleg.gov/viewdocument/?docName=http://www.azleg.gov/ars/43/00221.htm.
2. Hans Olofsson, Joint Legislative Budget Committee,  to Joint Legislative Income Tax Credit Review Committee, memorandum, Dec. 14, 2016, http://www.azleg.gov/jlbc/jlitcrcrpt121516.pdf.
3. Hans Olofsson (chief economist, Joint Legislative Budget Committee, Arizona State Legislature), interview with The Pew Charitable Trusts, June 3, 2016.
4. Arizona Rev. Stat. Const. § 9-22, http://www.azleg.gov/viewDocument/?docName=http://www.azleg.gov/const/9/22.htm.
5. Oklahoma Stat. § 62-7005, http://webserver1.lsb.state.ok.us/OK_Statutes/ CompleteTitles/os62.rtf.
6. Arizona Department of Revenue, Office of Economic Research and Analysis, “The Revenue Impact of Arizona’s Tax Expenditures: Fiscal Year 2015/2016” (Nov. 15, 2016), 13, 29, https://www.azdor.gov/Portals/0/TaxExpenditures/ FY16_PreliminaryTaxExpenditureReport.pdf.
7. Hans Olofsson, chief economist, Joint Legislative Budget Committee, Arizona State Legislature, Memorandum on 2013 Income Tax Credit Review, Open Session, to Joint Legislative Income Tax Credit Review Committee, Dec. 2, 2013, 7, http://www.azleg.gov/jlbc/jlitcrcrpt121013.pdf.