Arizona’s $125 million film tax debated in appeals court

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(The Center Square) – Attorneys for the Arizona Commerce Authority and the Goldwater Institute debated the legal merits of the state’s $125 million-a-year film tax incentives program on Wednesday afternoon.

The hearing, held in District 2 of the Arizona Court of Appeals in Tucson, was the latest chapter in the libertarian public policy think tank’s fight against the Motion Picture Production Program, which was first implemented in 2023.

The incentives program allows commercial film and television industry companies to receive refundable income tax credits if they are filmed in the Grand Canyon State, with the percentages pinned to the show or movie’s total qualified production costs.

The program, which is overseen by the Arizona Commerce Authority, rewards companies that hire Arizonans for their labor needs, with tax credit boosts for doing so.

Under the program, companies can claim a 15% tax credit for projects that cost less than $10 million, with a 17.5% credit for those that range in cost from $10 million to $35 million and a 20% credit for those that spend $35 million. All the credits are paid out if a film or show is shot, produced and edited entirely within the state limits.

Wednesday’s hearing came a year after Maricopa County Superior Court Judge Adele Ponce ruled that the program did not violate the state’s Gift Clause, saying Arizona wasn’t giving anything away.

On Wednesday, Jon Riches, vice president for litigation at the Phoenix-based Goldwater Institute, told the three-judge panel that the program lacked constitutional merit. He cited a 2000 case, Klotterman v. Killian, where a group of Arizona taxpayers, represented by the American Civil Liberties Union, sued the state over its scholarship credit program.

“When a film company's credit exceeds what it owes, the state law at issue commands that the excess shall be paid to the taxpayer, and the state writes a check from revenue it has already collected from other taxpayers,” Riches said in court on Wednesday.

Gift Clause at issue

According to the National Conference of State Legislatures, 18 states have film or television tax incentives in place.

Those include the industry’s heavy hitters, like California’s refundable tax credit of 35% of qualified expenditures up to $20 million for independent film companies and 40% refundable credit for TV series that relocate to the Golden State, up to $120 million.

There’s also small-bit players, like Arkansas, which has a 25% base incentive for goods, services and labor costs, with another 10% incentive for using Arkansas residents as below-the-line employees.

According to Andrew Pappas, who represented the ACA in court on Wednesday, Arizona’s film incentives program falls in line with what’s offered in other states.

Further, Pappas told the three-judge panel that the program falls in line with a host of other tax-incentive programs on the books in Arizona, such as tax credit programs for lower-income seniors, which have been around for decades.

“Because of the way the broad range of tax credits and exemptions and deductions work under Arizona law, think about some of the other refundable tax credits, for instance, that would be jeopardized if the plaintiffs were prevailing in this case,” Pappas told the court. “There's a property tax credit for lower income individuals over 65, a refundable tax that would surely be on the chopping block."

Pappas cited the fact that the program in question has been applied over 13 million times since 2001, delivering $600 million in tax relief for Arizona seniors in his closing arguments on Tuesday.

“What consideration does the state receive from lower income individuals over 65 in exchange for a property tax credit?” Pappas said. “There are 30 tax credits in Arizona law. Some of them are refundable. Some of them are nonrefundable. I've mentioned some of them.

“Again, think about how radical their proposition is that nonrefundable tax credits implicate the Gift Clause, and each of them needs to be subjected to two-pronged scrutiny to determine whether there is a public purpose and whether there's adequate consideration,” he added.

On Wednesday afternoon, Riches told The Center Square during a phone interview that Pappas' argument didn't apply in this case, as Arizona's film tax credit program would directly subsidize private enterprise and not the public interest. 

"What makes this program different is that it's directly tied to the business activities of film companies," Riches said. "If the film company spends more money making movies, then the subsidy amount increases, and so it's directly targeted toward a private company's own private activities.

"So it's nothing like broadly based tax exemptions and things like that that are available to everybody," he said.

Looking forward, Riches said his and the Goldwater Institute's main worry is about what setting a precedent of supporting private companies with public money could do in other cases where it could pick and choose favorites, thereby squashing fair competition. 

While Riches and the Goldwater Institute wait the three-judge court's ruling, he hopes that the justices will see it the same way, striking down the program before it can spend more taxpayer dollars. 

"This is a really important question. If the government can pick winners and losers in the market, and attach a tax credit label to it, even though it's in reality a tax payment, then nothing would prevent the state from subsidizing some favored interests and not others," Riches said. "And I think our constitution protects against that. So we're hopeful and confident the Court of Appeals will see it the same way."