BILL #    HB 2321	TITLE: DOR; administrative rulings; procedures                   NOW: qualified facilities
SPONSOR:    Toma	STATUS: As Enacted
PREPARED BY:    Hans Olofsson

Description

Under current law, a business that expands or locates a qualified facility in the state may receive a credit for qualifying investment and employment.  The qualified facility credit is the lesser of: (1) 10% of the total capital investment in the qualified facility by the taxpayer or (2) $20,000 for each net new employee at the qualified facility.  The credit is refundable, but no single taxpayer can claim more than $30 million in credits per calendar year.  The credit must be taken in equal installments over 5 taxable years.  The qualified facility credit program is administered by the Arizona Commerce Authority (ACA) and they are authorized to pre-approve credits of up to $70 million each calendar year.

The Senate Engrossed version of HB 2321 would make the following changes to the qualified facility credit:

· Increasing the credit from $20,000 to $30,000 per net new employee for businesses making qualifying investments in excess of $2 billion.

· Increasing ACA's annual pre-approved credit authorization cap from $70 million to $125 million.

· Expanding the statutory definition of "qualified manufacturing" to include products sold to other qualified facilities regardless whether such facilities have been pre-approved by ACA.

In addition to the changes noted above, the bill would also provide a 10-year extension to the existing state Transaction Privilege Tax (TPT) Public Infrastructure Improvement program, from September 30, 2023 to September 30, 2033.

Estimated Impact

The increase in the credit per employee and the expanded definition of qualified manufacturing would allow greater use of the credit and would result in a General Fund revenue loss.  We do not have a means, however, of determining the magnitude of the increased usage.

The impact of increasing the credit cap from $70 million to $125 million will depend on actual use of the credit.  Qualified facilities must seek pre-approval prior to qualifying for the credit.  ACA typically provides aggregate pre-approvals at a level close to the current $70 million cap.  Up to this time, many facilities have received pre-approvals, but few have received post-approval and actually taken the credit.

There is significant unused post-approval credit capacity under the current $70 million aggregate cap.  Since the credit must be taken in equal installments over 5 years, the maximum amount of new credits is $14 million per year. The Department of Revenue (DOR) reported that only $3.4 million in credits were used in FY 2020.

If the increase in the credit cap only results in additional pre-approvals, the bill would not result in a revenue loss.  If the increased cap were to facilitate more post-approvals, then the bill would have an impact.  As with the other provisions in the bill, we do not have a means of determining the impact of the bill upon actual credit usage.

Local Government Impact

Incorporated cities and towns receive 15% of state income tax collections from 2 years prior from the Urban Revenue Sharing Fund (URSF) established by A.R.S. § 43-206.  Any individual income tax reductions implemented by the bill would therefore reduce URSF distributions to cities and towns.  However, as noted in the Estimated Impact section, we cannot determine if any increase in credit use would be attributable to the bill itself.

3/23/21