Fiscal Note
BILL # SB 1643 TITLE: technical correction; public records NOW:
research; development; tax credits
SPONSOR: Fann STATUS: Senate Engrossed
PREPARED BY: Benjamin Newcomb
Description
The bill would make several changes to both the refundable and nonrefundable portions of the Research and
Development (R&D) income tax credit. The yearly cap on the refundable portion of the credit, which can only be claimed
by small businesses with fewer than 150 employees, is raised from $5 million to $10 million. For the nonrefundable credit,
taxpayers with a carryforward balance may reinvest their unused credits at $0.60 per dollar for approved purposes
outlined in statute. Statutorily approved purposes include:
- Sustainability or water capital projects
- Building/updating a taxpayer's R&D facilities
- Capital expenditure or workforce development projects with an institution of higher learning or a career and
technical education district (CTED)
- Capital expenditure programs supported by matching funds from a federal or national grant program.
Authority to receive applications for and approve the reinvestment of funds is granted to the Arizona Commerce
Authority (ACA). The aggregate amount that may be reinvested each year is $50 million and the most any single taxpayer
may reinvest is $10 million per year. The bill provides a $50 million appropriation for the reinvested tax credits and a
$75,000 appropriation for ACA administrative expenses. The bill would take effect July 1, 2022.
Estimated Impact
We estimate that the bill would have an ongoing General Fund cost of $(55.1) million. Raising the aggregate annual cap on
the refundable portion of the R&D tax credit is projected to reduce General Fund revenue by $(5.0) million annually,
beginning in FY 2023. The reinvestment program is forecast to have an ongoing cost of $(50.0) million per year, beginning
in FY 2023. The administrative costs would add another $75,000.
As of publication, the Department of Revenue (DOR) has not yet provided an estimate of SB 1643.
Analysis
The refundable portion of the R&D credit is only available to taxpayers that employ fewer than 150 people. The ACA is
responsible for pre-approving taxpayers for the credit, which is limited to 75% of the amount of nonrefundable R&D
credit that exceeds the taxpayer's tax liability during the taxable year. The current aggregate cap of $5 million has been
met each year since the credit's creation in 2010. Given the high demand for these refunds, we estimate that if the
aggregate cap is raised to $10 million per year, the amount of refunds approved each year will rise to meet this new cap.
This would constitute a $(5.0) million ongoing General Fund cost.
For the nonrefundable portion of the credit, if the amount of credit a taxpayer is owed exceeds their tax liability, then the
taxpayer may carry forward the unused amount for up to 15 years. Laws 2021, Chapter 196 reduces the carryforward
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period from 15 years to 10 years for credits claimed beginning in TY 2022. Currently, there is a total of $1.93 billion in R&D
credit carryforward between individual and corporate taxpayers. Nearly all of this is from the corporate income tax credit,
which has $1.91 billion in unused credit.
The reinvestment program under the bill would allow taxpayers with an unused credit balance to receive up to $10
million in additional credits for qualified investments at a rate of $0.60 per dollar of unused credit. For example, if a
corporation was approved for the maximum amount of $10 million in credits for reinvestment, its carryforward amount
would be reduced by $16.7 million ($10 million is 60% of $16.7 million). The taxpayer would forfeit the $6.7 million in
unused credit in exchange for receiving funds designated for reinvestment. The reinvestment program is set for repeal on
July 1, 2032.
Given the high level of unused credit that would otherwise expire if not used, we estimate that the full $50 million in
reinvestment will be applied for each year. Along with the administrative expenses, this would result in a General Fund
cost of $(50.1) million each year, beginning in FY 2023.
Local Government Impact
Beginning in FY 2024 and continuing each year thereafter, incorporated cities and towns will receive 18% of income tax
collections from 2 years prior from the Urban Revenue Sharing Fund (URSF) established by A.R.S. ยง 43-206. Therefore,
since the proposal would reduce individual income tax collections by $(5.0) million annually, beginning in FY 2023, URSF
distributions to cities and towns would decrease by $(0.9) million per year, starting in FY 2025.
4/5/22