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Goldwater Institute challenging Arizona film tax credits law

Posted 1/16/25

PHOENIX — The Goldwater Institute is challenging a 2022 law that has the goal of bringing Hollywood to Arizona.

A new lawsuit charges that allowing the state to give away $125 million a …

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Legal

Goldwater Institute challenging Arizona film tax credits law

Posted

PHOENIX — The Goldwater Institute is challenging a 2022 law that has the goal of bringing Hollywood to Arizona.

A new lawsuit charges that allowing the state to give away $125 million a year in tax credits is an unconstitutional gift to private companies that agree to produce their films and commercials in Arizona. Attorney Parker Jackson argues that reducing what someone otherwise would have to pay the state in taxes is no more legal than if the treasurer wrote out a check to the company.

It will now be up to Maricopa County Superior Court Michael Herrod to decide whether to block the Arizona Commerce Authority from issuing more than $1.6 million in credits that were earned on two already-produced films.

Jackson wants Herrod to bar the state from issuing any more. And there could be a lot: The law allows the state to provide $125 million in credits every year in the future.

Sen. David Gowan, R-Sierra Vista, who championed the 2022 law, said he believes the credits are legal and if Goldwater wins the lawsuit it could have ripple effects.

“If they get a victory here, any of our tax credits that we have that have helped beef up our state and our economy here are at peril,” he said.

The idea behind the credits according to proponents was to breathe new life into what was once a 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.

What’s happened more recently is productions that are supposed to be portraying events in Arizona were being filmed elsewhere.

During debate on the 2022 legislation, Rep. Sen. Stephanie Stahl Hamilton, then a Democratic representative from Tucson, cited “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.”

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.

During debate, Gowan argued that sometimes Arizona needs to put a little money on the table to generate economic development. He said that’s how the state managed to land investments by Apple, Intel and Amazon.

“We needed to help those businesses think about Arizona,” Gowan said.

Without the incentives and tax credits for those kind of corporations, Gowan said “they would have flown right over us, gone into Texas or some other state.”

The lawsuit does not mention any of that. Instead, Jackson asks Herrod to look at the question of whether the credits for the film industry are legal in the first place.

Over the years, Arizona lawmakers have approved a host of tax credits. Some are geared for private individuals, like giving them a dollar-for-dollar offset to state taxes they owe for money given to organizations that provide tuition for students to attend private and parochial schools. There is a similar credit for donations to extracurricular activities at public schools.

Most, however, are aimed at business, with companies getting to deduct from their state income taxes what they spend in research and development, buying certain pollution control equipment, and even employing members of the National Guard.

At least part of what makes the film credit different — and he contends a violation of the Gift Clause of the Arizona Constitution — is it is a refundable credit. A company can get a check from the state if the amount of credits it earns exceeds the taxes it owes.

Jackson also called the $125 million in available credits “a massive burden on current and future taxpayers.”

Then there’s the question of whether the benefits the state is supposed to receive from attracting film and commercial producers here actually exceeds what it is costing taxpayers.

When the bill was being debated in 2022, Kevin McCarthy, president of the Arizona Tax Research Association, warned lawmakers the Supreme Court has ruled any tax credit or payment of state funds that exceeds the benefit clearly violates the Gift Clause. And the purpose of that provision, he said, was to protect taxpayers from special interests who can hire high-powered lobbyists to get special treatment — something he said was happening in this legislation.

Proponents of the 2022 law argued 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 Jackson said courts have ruled only direct benefits count, not anticipated future tax collections.

Even if that were not the case, the record on tax credits Arizona previously granted for the film industry has not been good.

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 Arizona actually gave out more than $8.6 million in credits to get that gain. A similar report for 2007 showed a $1.7 million loss to the state.

Lawmakers repealed the program in 2015.

Gowan, however, insisted 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, they have spent the money in Arizona.
The Arizona Commerce Authority, whose members also are being sued, did not comment. But the agency was not the one pushing for the law and is involved only because lawmakers tasked it with implementing the credits.

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