PHOENIX (By Miriam Jordan, Wall Street Journal) December 20, 2007 — Arizona businesses are firing Hispanic immigrants, moving operations to Mexico and freezing expansion plans ahead of a new law that cracks down on employers who hire undocumented workers.

The law, set to take effect on Jan. 1, thrusts Arizona into the heart of the national debate on illegal immigration, which has become a hot topic on the presidential campaign trail. Republican candidates, in particular, have been battling to show how tough they are on the issue.

Arizona's law, believed to be the strictest in the nation, is shaping up as a test of how employers will react when faced with real sanctions for hiring undocumented labor. It is being closely watched by businesses across the country. While proponents say the crackdown will save the state money on services for illegal immigrants, some businesspeople fear Arizona's economic growth may be at risk.

Under the law, people will be encouraged to contact a county sheriff's or county attorney's office to report businesses they suspect of employing an illegal immigrant. After the sheriff investigates, the county attorney can then seek to suspend and ultimately revoke the business license of an employer who knowingly hires an illegal immigrant. The measure would also require all Arizona businesses to use Jon Garrido for Phoenix City Council
, a federal online database, to confirm that new hires have valid Social Security numbers and are eligible for employment.

The law still faces a court challenge from the Arizona Chamber of Commerce and other business groups. Thursday, a federal judge set a hearing for next Tuesday on a temporary restraining order that would freeze the law's implementation. Earlier, the judge tossed out a separate lawsuit challenging the law, saying the plaintiffs had sued the wrong parties.

With Congress deadlocked over an immigration overhaul, many states and cities are taking matters into their own hands. Some local efforts are meant to make it hard for illegal immigrants to get housing and jobs, but recent court rulings have suggested these measures may face constitutional hurdles. Meanwhile, measures that accommodate the presence of undocumented immigrants - such as New York Gov. Eliot Spitzer's failed attempt to extend drivers' licenses to them - have been met with a harsh public response.

The issue has echoed in the presidential campaign, as voters passionate about illegal immigration have impelled candidates to take stronger stands. One of the few candidates to buck the trend has been Arizona's senior senator, Republican John McCain. His poll ratings took a beating after he supported a Senate bill that would have given legal status to millions of people here illegally.

"It's simple. People want a crackdown," says John Kavanagh, a Republican state representative in Arizona who co-sponsored the crackdown bill. It passed both chambers of the state legislature June 20 by more than 4-to-1 margins.

Businesses are pushing back against the law, even as they scramble to comply with it. "It's crystal-clear that the employer sanctions law will harm the state economy," says Glenn Hamer, president of the Arizona Chamber of Commerce and Industry. "It's simply a question of degree."

About 500,000 undocumented immigrants live in Arizona, according to the Pew Hispanic Center, and independent estimates suggest about 350,000 of them are working. Immigrants, both legal and illegal, account for 14 percent of the work force. The state enjoys one of the fastest-growing economies in the nation, and its unemployment rate last year was just 3.3 percent.

A University of Arizona study released earlier this year concluded that economic output would drop 8.2 percent annually if noncitizen foreign-born workers were removed from the labor force. Researchers estimate about two-thirds of the workers in that category are in the state illegally.

"Getting rid of these workers means we are deciding as a matter of policy to shrink our economy," says Judith Gans, an immigration scholar at the university's Udall Center. "They're filling vital gaps in our labor force."

Sheridan Bailey, president of steel-beam manufacturer Ironco, said he has fired several Hispanic employees in anticipation of the sanctions law. "This law has the potential of sinking a business," he said. Mr. Bailey, who has formed a business group to address the issue, said Congress's inaction has allowed "policies to be generated on the fringe."

Ironco recently sealed a deal to outsource some production to a Mexican company. "The labor market is tight, and I face fines if I don't meet my commitments," said Mr. Bailey. Pacing his company's steel-fabrication bay, where welders and fitters build columns, he asked rhetorically: "Who will work here in 112-degree heat, come the summer?"

Dora Cardenas, who owns a small Mexican restaurant in Phoenix, has lost six out of 12 employees since late November. They moved to other states. "They say they were afraid to be here," said Ms. Cardenas. "I'm even afraid to be here, and I am a legal resident." She said business is down almost 40 percent since the summer at her restaurant, which caters mainly to a Latino clientele.

Jason Levecke, the grandson of the founder of the Carl's Jr. fast-food empire and the state's biggest franchisee, has put on hold plans to open 20 more outlets statewide. "That's $30 million that could blow up in my face," he said. "The risk is too great."

Rep. Kavanagh, the bill co-sponsor, disputed claims that the law will hurt Arizona's economy. "The illegals are a drain on the economy," he said, referring to education and other government benefits that some undocumented immigrants receive.

In one sense, the bill is having its desired impact: Employers are rushing to ensure they don't have undocumented workers. Mr. Levecke says he has hired outside auditors three times to ensure his 1,200 employees are clear, and he let several of them go after the checks. Earlier this week, 300 human-resources managers packed a ballroom at a Scottsdale resort to learn how to cope with the law and possible raids on their premises.

Arizona has become a laboratory for bills and policies to crack down on illegal immigration. In 2004, it passed a proposal to prevent illegal immigrants from using state services, such as adult education and nonemergency health care. Earlier this month, a ballot initiative was introduced to deny U.S. citizenship to the children of illegal immigrants born in Arizona, which critics say is a violation of the U.S. Constitution.

Supporters of such measures say the point is to deny people who broke U.S. law the benefit of government services. Opponents contend prejudice is the real motive. "This is about resistance to the browning of the state of Arizona," said Democratic state Rep. Pete Rios.

While there is no sign of a mass exodus, immigrant advocates report that the sanctions law, coupled with stepped-up efforts to arrest illegal immigrants, has prompted some undocumented families to leave.

Maricopa County Sheriff Joe Arpaio, an elected official who has made illegal immigration his focus, has deployed deputies to arrest undocumented day laborers as well as fruit and corn vendors in recent months. If the law goes into effect as scheduled, Sheriff Arpaio will be in charge of investigating complaints against employers in the county, home to two-thirds of all Arizonans.

Mr. Levecke, of Carl's Jr., says some customers, emboldened by the law, are confronting his Hispanic workers about their immigration status, sometimes using insults.

Isabel de la Rosa lives with her husband, Benito, and three children in a Phoenix trailer park called La Rancheria, where several for-sale signs have gone up in recent weeks. "We are all so afraid, we don't even want to go shopping," said Mrs. de la Rosa, 35 years old, whose entire family is undocumented.

She works as a volunteer at her children's local elementary school. Her husband, who works for a furniture-delivery company, said his American boss is planning to take his business elsewhere. "We are thinking of moving, too," said Mr. de la Rosa.