Key Points:

• Arizona defends $125 million annual film tax credits as constitutional

• Critics argue the credits violate the Gift Clause, lack revenue return

• State claims tax credits aren’t “gifts” under constitutional definition

The Arizona Commerce Authority wants a judge to rule there’s nothing unconstitutional about giving away up to $125 million in state tax credits a year to lure filmmakers to Arizona.

In new court filings, attorney Andrew Pappas acknowledges that the authority is using the credits to boost the production of films and commercials here. 

Of note, those credits are refundable. A company can get a check from the state if the amount of credits it earns exceeds the taxes it owes.

But Pappas wants Maricopa County Superior Court Judge Michael Herrod to throw out a lawsuit by the Goldwater Institute that argues the credits run afoul of the Gift Clause of the Arizona Constitution. That provision makes it illegal for the state to pay more for something than the benefit it gets in return.

Pappas, however, said that doesn’t apply here.

In essence, he is telling Herrod that the constitutional prohibition applies only when the state gives away something it has in grants or subsidies.

“But before the state can give funds, it must first own them,” Pappas wrote. “And because the state does not own the future taxable income of its citizenry, the state cannot give those funds away.”

To find otherwise, he said, would require a finding that all future taxable income belongs to the state, meaning that, in foregoing any future tax revenues, the state has provided someone with a gift.

“That conclusion would be legally, practically and conceptually untenable,” Pappas said.

The fight is more than academic.

It could determine whether Arizona gets to compete with other states like New Mexico and Georgia, which have been aggressive in convincing producers to film there. The credits and other special offers they provide bring in not just outside money but also help support those who own and operate studios here.

Central to the fight is a 2022 law championed by Sen. David Gowan. The Sierra Vista Republican said he wanted to revive what had once been a thriving film industry here.

It dates back at least as far as the 1930s when John Ford saw Monument Valley and decided to film Stagecoach here with John Wayne. The studios at Old Tucson were, for a long time, the site for various Westerns, ranging from The Lone Ranger to Three Amigos, before much of the facility was destroyed in a 1994 fire.

What has happened since is that producers are going elsewhere to film. Even movies about events in Arizona such as “Only the Brave,” a film about the death of 19 Granite Mountain Hotshots fighting the 2013 Yarnell Hill Fire, was shot in New Mexico.

Supporters of the credits say they will bring more production to Arizona by making it more financially attractive to make their movies, TV shows and commercials here.

But that still leaves the issue of the Gift Clause. The Arizona Supreme Court has ruled that constitutional provision requires that payments of state funds cannot exceed the benefit the state gets.

Here, challengers say, there is no way the state generates that much in direct revenues.

In defending the law — and the credits — Pappas does not seek to do the math of whether the state gets back as much as it is giving up. Instead, he is arguing that there’s no legal basis for the lawsuit in the first place.

It starts, he said, with the wording of the Gift Clause, which says no state or local government “shall ever give or loan its credit in the aid of, or make a donation by grant, by subsidy or otherwise, to any individual, association or corporation.”

“It does not mention tax credits,” Pappas is telling the judge.

If Herrod isn’t buying that argument, he has others. One is his claim that all of this is none of the court’s business.

“The constitution assigns tax policymaking to the Legislature, not the courts,” Pappas said. “And the same framers who adopted the Gift Clause also provided the Legislature broad discretion in enacting tax exemptions, including those for private corporations.”

He also warned Herrod of the chaos that would result if he were to decide that the tax credits for film producers were overturned, saying it would open the door to challenges to all sorts of other tax credits as well as deductions and exemptions in state law.

Consider, he said, tax credits now available for donations to organizations that provide scholarships for students to attend private and parochial schools.

And that’s just the beginning. He said it could bring into question the decisions by lawmakers of what to tax and what to exempt.

For example, individuals pay sales taxes on most retail purchases, but the Legislature has decided there’s no such levy on legal services. Individuals can deduct medical expenses when computing their state income tax liability but not personal travel.

No date has been set for a hearing.

This isn’t the first time the state has approved such credits. Lawmakers enacted a similar program in 2005 and expanded it in 2007.

A report on that program said the credits generated 317 full-time jobs in the industry in 2008. And another 413 were created indirectly from spending by filmmakers in the state.

All totaled, according to the report, that generated about $2.3 million in additional state and local taxes.

But Arizona actually gave out more than $8.6 million in credits to get that gain. A similar report for 2007 showed a $1.7 million loss to the state.

Lawmakers repealed the program in 2015.

Gowan, however, has insisted that the new credits are different from the prior program. He said it requires those seeking the credits to actually show, subject to a state audit, that they have spent the money in Arizona.