State budget proposal eliminates Tucson's Rio Nuevo economic development

Gone would be the $19 million of diverted state sales taxes now used by Rio Nuevo to spur business and residential growth in Tucson. 

In all, nearly $100 million for state economic development projects would be eliminated.

The proposed budget — $800 million less than proposed by Democratic Gov. Katie Hobbs — would do away with the Arizona Commerce Authority Compete Fund, which provides grants to attract, retain and support new business. According to Republican lawmakers, that would not only save $4 million going forward but would also siphon off approximately $63 million already in the fund's account and use it to balance the state budget.

GOP legislative leaders, in a statement explaining the cuts to Rio Nuevo, the Commerce Authority, and another $8 million reduction in aid for the Office of Tourism, dubbed those "crony capitalism.''

But Edmund Marquez, vice chair of the Rio Nuevo board of directors, said this would undermine the whole purpose of creating more business opportunities, the reason the Rio Nuevo district was created in 1999.

"And what's surprising is the Republican Party is traditionally pro-business,'' he said.

"Rio Nuevo is business,'' Marquez said. "We are helping develop an area that needed to be reactivated in Tucson.''

Senate Majority Leader John Kavanagh acknowledged that, in any other year, programs like these might have gone untouched. But not now.

"It's subsidies we can't afford right now,'' said the Fountain Hills Republican.

Not true, at least according to the state budget proposal prepared in January by Hobbs. She left those programs untouched.

But the way the governor did that was to propose narrower tax cuts than are in the GOP plan; her budget would give no breaks for businesses and what she calls the wealthiest Arizonans. Plus, she proposed some new taxes and fees, all of which Republicans are rejecting. 

Strictly speaking, what is being proposed for Rio Nuevo is not a reduction in state aid. It gets no direct cash. Instead, the law that created Rio Nuevo allows it to keep half of the state sales tax revenues generated within its district, a figure that now totals about $19 million a year.

Of that, $9 million goes each year to pay off the $80 million in bonds for projects. The balance, Marquez said, is being used for current projects, including new hotels, restaurants and a Trader Joe's.

"Those projects would stall or die,'' Marquez said. "The private capital flowing into Tucson, that would slow down.''

Marquez said Rio Nuevo has had a good rate of return, and that each $1 spent by the district generates $10 in private capital.

As for why Tucson should have special treatment of being able to keep half of the state sales taxes, a plan that doesn't exist elsewhere in the state, Marquez said one reason is simply historical, as the district was created as a state agency in 1999.

But he said another reason is that Tucson is different.

"We lack the competitive stance against the other cities, whether it's Scottsdale, Glendale, Mesa, Gilbert, you name it,'' Marquez said.

"Tucson needs all the help we can get from the economic standpoint,'' he said. "And Rio Nuevo is the shining beacon on the hill in regards to economic development.''

According to its website, Rio Nuevo has driven more than $2 billion in economic impact and more than $1.2 billion in private investment for downtown Tucson over the last five years.

There are two other issues that could affect a final decision by lawmakers.

One is that if the state kills Rio Nuevo, it could be left on the financial hook for the $80 million in outstanding bonds. Kavanagh conceded that may be the case. But even if it is, he said, the state still would save $10 million a year.  

Rio Nuevo Board Chairman Fletcher McCusker said what's also lost in the discussion is that Rio Nuevo has been a net gain for the state.

He said the projects funded by the program generate about $60 million a year in new sales taxes. About a third of that goes to the state, more than making up any lost revenues, McCusker said.

"Green new deal" also targeted

In addition to cutting economic development spending, the GOP unveiled Monday also slices other programs.

Also eliminated would be things lawmakers are calling part of the "green new deal,'' the state and national policies to convert to renewable energy, reduce greenhouse gas emissions and create what proponents say would be high-wage jobs.

That includes getting rid of tax credits — an actual reduction in what is owed — when individuals and businesses purchase items such as solar energy devices and pollution-control equipment. That is predicted to save $32 million a year.

Another $44 million would be saved by repealing the exemption from state sales taxes when people buy certain other energy-saving devices.

This would ensure that Arizona tax policy is aligned with what the Republican-controlled Congress approved last year as part of its "Big Beautiful Bill.''

The governor's budget includes some of the tax cuts in that federal law, including increasing the standard deduction, eliminating income taxes on tips and overtime, and providing an additional $6,000 income tax deduction for seniors.

But the new Republican plan includes other things that Hobbs questions whether the state can afford, including new tax breaks for businesses as well as a new state income tax deduction for payments of state and local taxes — a measure designed to benefit those whose income or wealth is high enough so they itemize and don't take the standard deduction.

That's important because the GOP plan estimates its tax savings — meaning cuts to state revenue — at $1.45 billion over the next four years. By contrast, Hobbs' proposal has a price tag closer to $1 billion.

Vouchers wouldn't be linked to parental income

There are other differences, as well.

One way the governor came up with her $18.7 billion spending plan was to identify new sources of revenue. For example, she wants a $3.50-a-night tax on short-term rentals. Hobbs also proposes increasing the fees that some sports gaming operations would have to pay the state.

Neither is in the GOP plan.

Also missing in the Republican proposal is Hobbs' plan to link eligibility for education vouchers — tax dollars to send children to private and parochial schools and for home schooling — to parental income. That would have freed up nearly $90 million.

Republicans also won't ask voters — at least not this year — to renew a program that provides an extra $300 million for K-12 schools by increasing withdrawals from a special state land trust account.

Another big difference: Hobbs built her spending plan based on what she said is a promise by the federal government to reimburse the state $760 million for border security costs.

Kavanagh acknowledged that Republicans also at one time considered that a potential revenue source. But he said that was dropped when they concluded it was "only wishful thinking.''

Medicaid, food stamps savings

Now, with Republicans refusing to find new revenues — and insisting on larger tax cuts than the governor — they built their budget on the premise that the state can save money.

And that's not just from cuts in things like tax credits.

GOP lawmakers say they believe they can save $42 million a year by requiring those in the Arizona Health Care Cost Containment System, the state's Medicaid program, to prove more frequently that they remain eligible.

And there's another $139 million in predicted savings from not just more frequent eligibility screening but also new work requirements for food stamp recipients.

The Republican plan also calls for a 5% reduction in agency operating budgets — about $99 million — excluding corrections, public safety and child safety, none of which is in the governor's proposal.

Tuition tax credit

Another provision of the GOP plan has no financial cost, at least for the state.

Last year's federal budget allows individuals to claim a dollar-for-dollar tax credit of up to $1,700 for donations to approved organizations that provide scholarships or tuition assistance for children to go to private schools. Scholarships could also be provided to eligible public school students for programs such as tutoring and after-school programs.

Because those credits only reduce a taxpayer's federal income taxes, there is no cost to the state. But federal law requires states to opt in for their residents to get the credit.

Hobbs vetoed a freestanding bill to have the state join, saying she wanted to first see what kind of accountability, transparency and oversight are included — which she says are missing from the state's own voucher plan.

Now, however, this opt-in is part of the legislative majority's budget, meaning Hobbs could get rid of it only by vetoing the entire plan.

Gubernatorial press aide Christian Slater said Hobbs is disappointed by some of what is in the GOP plan, including the refusal to consider renewal of the program to put another $300 million into K-12 education.

But Slater sidestepped a question of whether Hobbs will veto the bill if it gets to her in this form, saying only that she "looks forward to working across the aisle'' to deliver a "bipartisan, balanced budget that addresses the big challenges Arizonans face.''