How Arizona Is Getting Innovation Culture Right

Broad-based regulatory reforms have made the state more forward-looking and prosperous

Innovation takes flight. Arizona has adopted regulatory reforms to allow more widespread use of drones. Image Credit: Colin Anderson Productions pty ltd/Getty Images

State leaders regularly express a desire to create more jobs and economic opportunities, but they often fail to prioritize reforms to make those goals a reality. Arizona lawmakers have made it happen in recent years, however, and the state has become a model for others to follow in the process.

For the past several years, Arizona has been a leader in economic freedom and performance. Since 2015, it has been a top 10 state in the Cato Institute’s “Freedom in the 50 States” index. “On regulatory policy, Arizona is one of the best in the country with regard to anti-cronyism. In most industries, business entry and prices are quite liberalized,” the report notes. In the latest American Legislative Exchange Council “Rich States, Poor States” report, Arizona ranks first in the U.S. for its economic performance and third for economic outlook. In the 2022 state rankings of “drone commerce readiness” shortly to be published by the Mercatus Center, Arizona ranks No. 4.

What is the secret of the state’s success? Over the past eight years, Gov. Doug Ducey and the Arizona Legislature have advanced several reforms that have helped the state get its “innovation culture” right. Innovation culture refers to the various social and political attitudes, policies and entrepreneurial activities that, taken together, influence the innovative capacity of a particular region.

Getting innovation culture right requires that governments do more than pay lip service to these ideas. Concrete reforms are essential. Arizona has advanced several pro-innovation reforms that have created new services, provided entrepreneurial opportunities and improved public health. On a recent Federalist Society podcast, we had a chance to talk about these reforms with Gov. Ducey. We discussed how Arizona adopted a mix of broad-based and targeted reforms that helped the state improve its innovation culture. This, in turn, has helped the state prosper, and its success can be duplicated by other states if they implement similar reforms.

Regulatory and Licensing Reforms

A less regulated, more open economy allows greater freedom to innovate and more opportunities for workers. Stressing the need to create a “streamlined regulatory environment,” in January Ducey extended his annual “one in, three out” moratorium on regulatory rulemaking that he had first implemented in 2015—his first action as governor. “In 2021, for every one new necessary, non-emergency rule added, 25 were repealed or improved,” Ducey noted. “This rate of elimination in 2021 removed 231 burdensome regulations and saved job creators nearly $11.6 million in operating costs.” This “one in, three out” approach to regulatory reform builds on research that highlights the costs of regulatory accumulation and the need to streamline legacy rules that hold back entrepreneurs and economic growth.

Arizona has also been a leader in establishing sandboxes, a type of experimental governance arrangement that sets liberal rules for new technologies or services, typically for a limited duration. Such arrangements can help governments and entrepreneurs gain experience with a new technology before its full commercial roll-out to the public.

In 2018 Arizona became the first state in the nation to adopt a regulatory “sandbox” for the financial technology sector. In 2019 it adopted a similar sandbox for property technology to allow more innovation in the real estate marketplace. Finally, in April of this year, Arizona passed House Bill 2731, expanding the existing sandbox language to adopt a universal (or industry-agnostic) sandbox. This means that entrepreneurs in many other sectors will now be able to seek greater operational flexibility when launching new services.

Gov. Doug Ducey (center) speaks with Brent Skorup (left) and Adam Thierer (right) about Arizona’s recent regulatory reforms. Image courtesy of the authors.

Further, Arizona has eliminated costly and unnecessary occupational licensing mandates and promoted the “right to earn a living.” Ducey advanced bipartisan legislation to recognize occupational licenses that new residents had acquired elsewhere. Commenting on this universal licensing-recognition reform, Colorado Gov. Jared Polis called it “a great national model that we can learn from.” Luckily, these and other occupational licensing reforms continue to advance in the states and offer other reform-minded lawmakers a chance to open up more innovation opportunities for firms and workers, just as Arizona did.

Finally, Ducey has signed two separate “right to try” initiatives into law, which allow terminally ill patients to access treatments that otherwise would have been restricted by traditional regulation. This idea, inspired by scholars at the Goldwater Institute, has now been adopted in many other states and has given patients access to potentially life-saving treatments.

Broadband Policy

Access to broadband internet is a necessity in today’s economy, so states must work to ensure all their residents have access. In May 2021, Ducey signed House Bill 2596 to expand broadband in Arizona. In much of the U.S., transportation departments own or manage valuable rights-of-way along roadways, but there is no easy way for private broadband providers to construct networks on that public property. The Arizona law liberalizes Transportation Department rules to allow private broadband providers to install their networks directly on state-owned real estate. The law also permits the competitive leasing of unused, state-owned fiber optic conduit to private providers.

The state is already building about 200 miles of fiber optic conduit and networks for use by the Transportation Department, with plans to lease excess conduit to private broadband companies. Private providers can offer services in rural areas where broadband coverage is poor, thus ensuring that more people have reliable internet access. Officials estimate that about 20% of the state’s unserved and underserved households are located within a five-mile radius of the selected interstate highways and state routes, so the conduit network significantly reduces the cost private providers would otherwise face.

Also in May 2021, the Arizona state government enacted House Bill 2711, which makes it easier to deploy 5G and other types of wireless broadband. “Fixed wireless” broadband—from companies such as T-Mobile, Verizon and Rise—is an increasingly popular type of home broadband, especially in rural areas. But fixed wireless providers and their customers often face extensive permitting processes to install an outdoor antenna. While local permits and reviews might be necessary for, say, 200-foot cellphone towers, they rarely make sense for a 2- or 3-foot antenna installed on a homeowner’s roof.

The Arizona law prohibits local governments from unreasonably delaying or preventing the installation of certain types of antennas on private property. This statute complements and extends the 2021 federal rules on small antennas and makes small antenna installations easier in rural and exurban areas.

Driverless Cars and Drones

Another way states can encourage innovation culture is by embracing new technologies such as driverless cars and drones. In 2015, Ducey signed an executive order allowing driverless cars to be tested on Arizona roads, subject to some public safety requirements. The governor and the legislature subsequently extended this permissive approach to self-driving technology in the years following the executive order. The policies have borne fruit in terms of both job creation and the expansion of self-driving services. Today it is possible to hail a self-driving Waymo vehicle in the suburbs of Phoenix, using perhaps the largest self-driving pilot program in the world.

Further, Arizona is one of only a handful of states that is exploring the regulatory issues surrounding new types of aviation—electric aircraft and passenger drones. House Bill 2485 establishes a 26-member statewide committee to study drone issues, review state laws that could affect urban air mobility, and identify potential laws that would create consistency for urban air mobility operations throughout the state. The committee’s recommendations could lead to more pro-innovation laws and the expansion of new industries, which could generate both jobs and profits within the state.

Leading by Example

Other states can follow the Arizona model and unlock the economic potential of their companies and citizens. Lawmakers can expect resistance from defenders of the status quo, but as Arizona’s successful reforms prove, persistent leadership backed by sound empirical analysis can win the day. As Gov. Ducey summed it up well in our recent interview:

When I came into office, I wanted to do everything I could, knowing that governors and legislators have nothing to do with creating jobs…. It’s the private sector—the innovators and the risk takers—that create the jobs, but the governor can create the environment in which jobs are created.

State lawmakers and researchers around the nation should pay attention to what’s occurring in Arizona, where forward-thinking lawmakers and entrepreneurs are trailblazing when it comes to governance of new tech and services.

The authors are grateful to Michael Hogg and Joshua Ferdelman for their assistance in the preparation of this essay.




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