Is this the end for Arizona Commerce Authority incentives?

The death blow may come from Kris Mayes, not MAGA legislators.

This column has been sharply critical of MAGA Republicans in the Arizona Legislature. However, with respect to continuation of the Arizona Commerce Authority, I think they are headed in the right direction.

The ACA is under sunset review. It requires a reauthorization vote from the Legislature to continue. A House committee has recommended a continuation of just two years. A Senate committee has recommended that it not be continued in its present form, but be revamped in some unspecified way.

The business community is lobbying furiously for a long-term continuation of the ACA as it is, claiming that it is an immaculate conception that has single-handedly transformed the Arizona economy.

However, it looks likely that the ACA won’t continue with its current scope of programs, irrespective of what legislators might be persuaded to do. It’s death sentence was probably delivered by an overlooked footnote in a letter Attorney General Kris Mayes sent to the ACA.

The ACA has been spending millions of tax dollars feting corporate bigwigs at the Phoenix Open golf tournament and the Super Bowl when it’s in town. The Auditor General, as part of its sunset review report, referred these expenditures to the Attorney General’s Office as a possible violation of the state Constitution’s anti-subsidy clause – more commonly, but less accurately, referred to as the gift clause.

The anti-subsidy clause is clear and categorical: No governmental entity “shall ever give or loan its credit in the aid of, or make any donation or grant, by subsidy or otherwise, to any individual, association, or corporation….”

Despite its clarity and comprehensiveness, the courts rendered it a dead letter for decades. Recently, the Arizona Supreme Court has breathed some life back into it. 

Basically, the court has said that governments cannot offer selective financial assistance to corporations to just conduct ordinary business operations, irrespective of whether that creates jobs or tax revenue. The ACA grants hundreds of millions of dollars in incentives, in the form of direct payments and special tax breaks, to selective companies just to conduct their ordinary business operations. 

Mayes’s letter said that the bigwig entertainment violated the anti-subsidy clause, since the state received nothing except the possibility that some of the companies being feted might locate or expand a business and engage in ordinary operations in the state. 

The overlooked footnote was at the tail end of the letter. It read: “Schires (one of the court cases) also raises questions about the propriety of the ACA’s grantmaking under the Gift Clause ….That issue is beyond the scope of this investigation. The Attorney General’s Office will open a separate investigation into that issue.”

My guess is that once it dawns on the corporate welfare advocates that ACA’s entire incentives edifice is under investigation, Mayes will come under intense pressure to drop the investigation or engage in intellectual contortions to wish away the obvious constitutional violation. Any detached, objective review would have to conclude that offering grants and special tax breaks to selective companies just to set up shop or expand here is an unconstitutional subsidy under current case law.

One of the justifications for the peculiar structure of the ACA was the doling out of these subsidies. The ACA is a creature of state statute, but it is not a traditional state agency. It was fashioned as a trendy public-private partnership.  

The governor is chairman of the ACA, but a private sector business executive is supposed to be named as co-chairman. The board consists of other business executives appointed by the governor and the leaders of the respective chambers of the Legislature. The chief executive officer supposedly reports to the board, not the governor. This degree of independence was supposed to insulate the granting of the subsidies from political influence.

The fiction of an independent agency was exposed when Gov. Doug Ducey decided to do some cultural warrior strutting. Nike was opening up a manufacturing facility in the West Valley and was approved to receive an ACA subsidy. Then Nike decided not to bring to market a sneaker featuring a Betsy Ross American flag, reportedly because Colin Kaepernick, of kneeling during the national anthem fame, objected. Ducey denounced the decision and tweeted that he had “ordered” the ACA to rescind the subsidy. Which was done.

During Ducey’s tenure, the ACA was a state entity reporting to the governor, in practice if not in law, but without the usual restrictions, requirements, and accountability of a traditional state agency, such as the Department of Commerce that preceded the ACA.

There’s another way in which the ACA has not lived up to its original billing. As a public-private partnership, the private sector was supposed to cough up some dough for its operations. Instead, the ACA is almost entirely funded with tax dollars. If the bigwig entertainment had been financed through private donations, there wouldn’t have been a legal or political issue with it. 

The proclamation that the ACA has transformed the Arizona economy is based upon a false economic history about what preceded it and exaggerated claims about its role in the economic growth the state has experienced since its formation in 2011.

In reality, it is misleading to talk of a statewide economy. The Phoenix metro economy has been booming for some time; the Tucson metro economy has done OK; and the rural economies have largely stagnated, except recently in parts of Pinal County. 

The Phoenix metro area had a robust high-tech manufacturing industry as far back as the 1970s. In the 1990s, the Valley was one of the nation’s top performers as measured by employment and personal income growth. 

The Valley rode the housing bubble high and was hit hard by the bust. But recovery had already commenced before the ACA and its incentives regimen was adopted.

Supposedly the pre-ACA economy was driven by construction. But that’s a self-evident fallacy. Construction does not create its own demand. Something else has to be creating the demand for new houses, apartments, and commercial space. Construction is inherently a responsive industry.

The decline in construction as a percentage of overall economic activity is cited as progress in creating a more diverse economy. But, given the rise in housing prices, would the Valley really be worse off if construction were a larger percentage of today’s economic activity?

In reality, in the pre-ACA economy, the Valley was a leader in employment growth in practically any sector chosen for examination. Our oversized construction sector was a response to this, not a driver of it.

The state’s economic basics have improved since. Our corporate income tax rate is modest and for manufacturers extremely low. Our personal income tax rate, much more closely correlated with economic growth than incentive give-away programs, is now a flat 2.5%. Under Ducey, the regulatory environment was very business friendly. Thus far, Gov. Katie Hobbs does not seem to be moving in a different direction. 

These are the things, not incentives, that drive economic growth. There may be businesses that won’t come here without a handout. But there are plenty that will.

There needs to be a state agency that provides one-stop assistance to businesses looking to locate or expand here. By all accounts, the current ACA staff does that very well. In the state agencies that preceded the ACA, that wasn’t always the case. 

The state should get out of the incentives business. The Mayes investigation could, and should, force that move. 

After making the policy, or legal, decision to discontinue the incentives regimen, the state could use a thoughtful, deliberative discussion about how best to provide the one-stop assistance, minus incentives, to businesses looking to locate or expand. Should it be a state agency function, or are there residual advantages to the current public-private partnership structure? If a state agency, a stand-alone entity or folded into an existing or amalgamated agency? There’s nothing about this discussion that needs to be, or should be, partisan or even particularly political. 

I don’t know whether the MAGA Republicans leading the way on this are capable of conducting such a nonpartisan, technocratic legislative deliberation. Demonizing the current ACA staff, which has been done, is unwarranted. They have generally done a good job with the tasks state law has given them. Blaming Hobbs, which has also been done, is idiotic. She’s only been in the saddle for a year and has effectuated no meaningful changes in ACA operations. And the ACA isn’t supposed to report to her anyway.

Despite my reservations and concerns about what comes next, not rubber-stamping the status quo was the place to begin.   

Reach Robb at robtrobb@gmail.com.