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BILL # HB 2590 |
TITLE: rural growth investments; tax credits |
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SPONSOR: Cook |
STATUS: As Introduced |
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PREPARED BY: Sam Beres |
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Beginning in TY 2019, the bill creates a non-refundable insurance premium, individual income, and corporate income tax credit for capital contributions to Rural Growth Funds that make investments in small, rural businesses for a period of 6 years. In order for the contributions to be credit eligible, the fund is required to be certified by the Arizona Commerce Authority (ACA) for the amount of investment they intend to make with a maximum of 60% of the approved investment authority being eligible for credits. The bill caps the amount of investment authority that ACA can approve over the life of the program at $50 million and the amount of available credits at $30 million.
Estimated Impact
The bill would result in annual General Fund tax credit costs of $(7.5) million from FY 2022 – FY 2025 equating to a cumulative General Fund cost of up to $(30.0) million over the life of the program. The actual value of the credit will depend on the level of qualified investment, which is speculative. The tax credit may induce additional economic activity in the state. Insofar as such incentivized economic activity generates new tax revenue for the state, there would be some offsetting impact to the General Fund.
ACA reports that the administration of this program would cost approximately $580,000 over the life of the program. The bill allows ACA to collect an application fee which, pursuant to statute, would be set at 1% of the incentive amount. As a result, it is estimated that the ACA will collect a total of $500,000 over the course of the program to offset administrative costs.
The Department of Revenue did not have an estimate of the bill's impact at the time of this drafting.
Qualified Investments
Qualified investments made by a Rural Growth Fund must be made in rural businesses with less than 150 employees and not more than $10 million in net income for the preceding tax year that are engaged in manufacturing, agribusiness, technology or any other commercial activity, excluding real estate and marijuana enterprises, which the investor determines will be highly beneficial to the economic interests of Arizona. Additionally, at least 20% of total investments must be made in rural businesses with fewer than 50 employees. The rural businesses must have at least 60% of their full-time employees or aggregate payroll in areas outside the jurisdiction of the Maricopa County Association of Governments and the Pima County Association of Governments. The bill also allows qualified investments to be made in businesses that are relocating from out-of-state that are able to establish themselves within 180 days of receiving their investment and meet the aforementioned qualifications.
Rural Growth Funds Certification and Credit Allocation
In order to qualify for a credit, an investment company must first become certified as a Rural Growth Fund with the ACA and meet certain criteria including:
1. Being certified as either a Rural Business Investment Company (RBIC) or Small Business Investment Company (SBIC) under U.S. Code. As of September 1, 2017, there were 315 licensed funds under the SBIC program and 2 licensed funds under the RBIC program nationally.
2. Provide evidence on the application date of having invested at least $25.0 million in nonpublic companies in non-metropolitan counties.
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3. Provide a business plan outlining the number of full-time positions that will be created and a projection of state and local tax revenue to be generated as estimated by a third-party that shows tax revenues over a 10-year period in excess of the credits awarded.
4. Provide a signed affidavit from all investors stating the amount of credit-eligible capital contributions they intend to make. The credit-eligible capital contributions may not exceed 60% of the total amount of the investment authority sought.
If the applicant meets all of the aforementioned qualifications, ACA may approve the fund for investment authority in an amount not to exceed $20 million per fund and $50 million in aggregate for the program. Of the approved investment authority, only 60% would be credit-eligible and the amount would be capped at $12 million per fund or $30 million in aggregate. Once approved, the fund will have 60 days to sell the tax credits to investors and raise the other funds necessary to reach the approved investment authority amount. Of the monies raised, at least 5% must be derived from affiliates of the fund including employees, officers, and directors of the fund's affiliates.
Once the funding for the approved investment authority is raised and ACA is notified, the fund will have up to 2 years to invest all those monies in small, rural businesses. The fund is required to maintain a 100% investment level for 6 years beyond the date on which the investment authority was fully raised. To maintain the investment level, the fund is required to reinvest recouped funds in qualifying businesses.
Tax Credit Cost
The cost of the credit will depend on the total expenditure authority applied for and approved for eligible investment companies. The federal programs that enroll certified rural or small business investment companies under the statutes cited in the bill are the SBIC and RBIC programs, which offer grants, debt guarantees, and loans to qualified funds for investment in small and rural businesses. While investment figures are not available for the RBIC program, a total of $168.5 million of investment was made to 18 businesses through the SBIC program in Arizona in FY 2017 for an average investment of $9.4 million per business.
Since qualifying small businesses under the SBIC program must have an average net income of less than $6.5 million over the previous 2 tax years compared to the bill's requirement of less than $10 million in the preceding tax year, it is assumed that the level of qualifying investment made by SBIC firms would increase proportionally by 50% to $252.7 million per year. However, the SBIC program is statewide and the bill would only apply to rural areas of the state that account for 11.9% of the state's economic activity. As a result, a projected $30.1 million in annual investment would be made in qualifying businesses. This does not include investment made by firms certified under the RBIC program.
The bill caps aggregate investment authority at $50 million over two years. Given the speculative estimate of $30.1 in annual investment, it is possible that investment firms would apply for the maximum $50 million expenditure authority. This scenario would result in ACA's delivery to fund investors of the full $30 million in tax credits. However, this outcome is not certain.
Tax credits can be redeemed by investors in the 3rd through sixth year following their credit-eligible investment in the Rural Growth Fund. The total amount of credit-eligible contributions is capped at $30.0 million. As a result, the credit is estimated to have an annual cost of $7.5 million in tax years 2021-2024, which would be reflected in FY 2022 through FY 2025. If less than $50 million in expenditure authority was approved by ACA, then the total cost of the credits would be less than $30 million. The credits are non-refundable. However, the bill allows the credits to be transferred once to an affiliate of the taxpayer and permits any unused credit amount to be carried forward for up to 10 consecutive years.
Administration
ACA reported that the administration of this program will cost approximately $580,000 over the life of the program. To offset these costs, the bill allows ACA to collect a fee from each applicant to the program. Statute permits ACA to collect an application fee, but indicates that it is legislative intent that the fee be no more than 1% of the amount of the incentive. As a result, it is assumed that the ACA will collect a total of $500,000, although this amount may be higher to the extent that applicants are unsuccessful in their application. Any administrative costs incurred beyond the amount of fee revenue collected would need to be covered by ACA's existing operating budget.
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Local Government Impact
Each year, incorporated cities and towns receive 15% of income tax collections from 2 years prior. To the extent that the credits are applied against individual income and corporate income taxes, the bill would reduce the distributions to cities and towns. If all the available credits were applied against such taxes, the impact on local governments would equal a reduction of $(1.1) million annually in FY 2024 – FY 2027.
2/23/18