Transparency and accountability are of critical importance for promoting economic development. Anytime our elected officials consider any proposal that provides taxpayer money to incentivize the private sector, strong safeguards must be in place.
Unfortunately HB2646 — tax credit legislation that would create a venture capital fund for the state through the Arizona Commerce Authority — lacks even minimum safeguards and exposes taxpayers to a tremendous amount of unnecessary risk.
No one disputes that venture capital is a good thing that can help boost Arizona’s economy. With private-sector venture capital funds, private investors bet on particular business plans and startups.
Investors know that most ventures will fail, but they balance those risks with the knowledge that they stand first in line to reap the large rewards of successful investments.
Unfortunately, that is not how HB2646 works. Under this proposal, taxpayers are required to absorb all of the risk by funding the creation of the program, but won’t stand to receive any of the profits associated with the investments.
Conversely, the insurance companies and other special interest groups pushing this legislation will experience little risk and will reap all of the gains. Not only will they receive tax credits for their investment into the fund, but profits from the fund will go back to the same insurance companies that received the tax credits.
Essentially, taxpayers will subsidize all of risk while a few select industries will enjoy all of the rewards.
Other problems exist with this tax credit legislation as well. Special spending directed through the tax code merits particular attention because it is not subject to the normal public scrutiny of ordinary line-item spending in the state budget. If placed into law, this tax credit, which would cost Arizona’s budget $50 million over the next three years, won’t have to face another legislative vote or review.
Since these venture capital expenditures won’t go through the appropriations process and won’t give lawmakers the ability to annually assess the effectiveness of the program, you’d think that there would be strong reporting requirements and performance standards built into the legislation.
But this bill lacks real accountability measures. It merely calls on the Arizona Commerce Authority to “annually assess the success and effects of the high technology business investment.” This is a far cry from stringent reporting requirements and will provide nothing meaningful in measuring the effectiveness of the program. It does not even require its meager reporting to be made public in an easily accessible online format, which is a key component of true transparency.
Reporting works best when recipients of public largesse are held accountable to advancing clear public goals. For example, there are no requirements in HB2646 as to what kind of business will receive these tax credits beyond the general guidance of “high technology businesses.” There is no guarantee that this money won’t end up going to businesses that otherwise would have lacked capital investment.
Likewise, there are no job creation requirements in this bill, no limitations on how much can go toward commissions and fees to manage and operate the venture capital fund, and no protections to ensure that after an investment is made that the company will even remain in Arizona.
Arizona taxpayers deserve better than what is being offered in HB2646.
Regardless of political affiliation or ideology, everyone should be able to agree that accountability and transparency are critical when it comes to how our tax dollars are used.
HB2646 fails on both of these fronts and enters Arizona into a venture capital game that it should not play. We urge lawmakers — and Gov. Jan Brewer should this bill reach her desk — to reject HB2646.
— Scot Mussi is executive director of the Arizona Free Enterprise Club, which works to advance policies that promote a strong free- market Arizona economy. Serena Unrein is the public interest advocate for Arizona PIRG, a statewide public interest advocacy organization.