Glendale: Goldwater Institute Challenges Arizona’s $125 Million Film Tax Credit as Unconstitutional Gift

A constitutional fight over who gets Arizona tax dollars

The Goldwater Institute is asking the Arizona Court of Appeals to strike down the state's film tax credit program. The group says the annual $125 million in credits for movie and television producers violates the Arizona Constitution's Gift Clause.

The challenge is the latest round in a legal battle that began in Maricopa County Superior Court last year. Judge Adele Ponce ruled against the Goldwater Institute at that level. The institute is now appealing.

The Gift Clause question

The Arizona Constitution bars the state from providing grants or subsidies to individuals or corporations. The Goldwater Institute argues the film tax credit program is exactly that.

Attorney Parker Jackson filed court documents telling the appellate court that the credits are not genuine tax reductions. They are direct payments from the state treasury to private companies.

"Arizona's Gift Clause prohibits the depletion of the public treasury by allocating public resources for private enterprises, and/or the conferring of special advantages on private, special interests by subsidy or otherwise," Jackson wrote in his filing. "The payments provided under the program do both of those things."

The key issue is that the credits are refundable. A company whose credits exceed its tax liability receives a check from the state.

Jackson explained the distinction with a simple example. If a taxpayer owes the state $500 and holds a $1,000 credit, the state writes the company a $500 check. That is not a tax reduction. It is a payment.

How the credits work

Lawmakers approved the current program in 2022. It allows the Arizona Commerce Authority to issue credits to production companies that film in the state.

• Companies spending up to $10 million in production costs can receive up to $1.5 million in credits
• Credits scale up to $7 million for a $35 million production
• Any single company can receive up to $35 million in credits
• The total program cap is $125 million per year

Producers must either use a qualified production facility of at least 10,000 square feet or film primarily at practical locations in Arizona.

The state's defense

The state argues the program generates tax revenue through jobs and spending created by film productions. The program also requires companies to acknowledge that their work was produced in Arizona.

Judge Ponce agreed with the state at trial. She ruled the credits are not gifts because they reduce what companies owe the state. She said the refundable nature of the credits did not change that conclusion.

The Goldwater Institute disagrees. Jackson said the only tangible benefit the state receives is a "filmed in Arizona" acknowledgment in the final product. He called that insufficient to satisfy the Gift Clause requirement that the state receive comparable value for any expenditure.

A history of losses

This is not the first time Arizona has tried film tax credits. Lawmakers enacted a similar program in 2005 and expanded it in 2007.

A report on the original program found it generated 317 full-time jobs in 2008 and an additional 413 indirect jobs. Those activities generated about $2.3 million in additional state and local taxes.

But Arizona paid out more than $8.6 million in credits to achieve that gain. A 2007 report showed a $1.7 million net loss to the state. Lawmakers repealed the program in 2015.

Sen. David Gowan, R-Sierra Vista, who championed the 2022 credits, said the new program is different. He noted it requires companies to demonstrate their spending in Arizona through state audits.

What happens next

No hearing date has been set at the Arizona Court of Appeals. The outcome could determine whether Arizona can continue spending up to $125 million annually to attract film productions to the state.

The Goldwater Institute's challenge traces back to a core question in Arizona constitutional law. How much can the state pay private companies in the name of economic development before it crosses into an unconstitutional gift?