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Viewpoint: Arizona’s economic development incentives game doesn’t really work

Another downtown Phoenix GPLET beneficiary?

[Source: Robert Robb, Arizona Republic] — Speaker Kirk Adams and state House Republicans want Arizona to get into the economic development incentives game big time.  There are several problems with this.

  • The first is that it doesn’t work.  States that play the incentives game big time don’t retain more manufacturing jobs or increase wages faster than states that don’t.
  • Second, there are considerable doubts that such special breaks pass muster under Arizona’s Constitution.
  • But the biggest worry about the incentives game is that once a government starts to subsidize a particular economic activity, it cannot stop or draw lines.  Once subsidies are available, everyone wants one and pretty much everyone gets one.  They end up inhibiting economic growth rather than facilitating it.  This is well illustrated by a recent report by the Goldwater Institute’s Mark Flatten on the Government Property Lease Excise Tax, or GPLET.

With GPLET, a city government becomes the nominal owner of a development, although it remains under the complete control of the developer.  This gets the development off the property-tax rolls, while the developer pays the city only a minor excise tax.

GPLETs have become big business in Arizona.  According to Flatten’s report, more than $2 billion in property value has been taken off the tax rolls.  As a result, about $31 million in property taxes are being shifted annually to other taxpayers.  Most striking is that virtually all the new downtown Phoenix office towers have been subsidized.  Now the city is even offering a GPLET for a renovation of a downtown hotel that already exists.  [Note: Read the full op-ed at Viewpoint: Arizona’s economic development incentives game doesn’t really work.]

Property tax exemptions may be next battle in Arizona subsidy war

Collier Center, downtown Phoenix (Photo: HooverDam, Skyscraper Forum)

[Source: Mike Sunnucks, Phoenix Business Journal] — The next shoe to drop in the legal fight over special tax breaks and subsidies for developers could be over the 100 percent tax exemptions ponied up for high-profile projects such as ASU SkySong in Scottsdale and enjoyed by professional sports teams.  That action could come after the Arizona Supreme Court decides whether a $97 million tax break for the CityNorth mixed-use development in northeast Phoenix is constitutional under state law.  A judgment in that case isn’t expected before the end of the year, but those opposed to developer subsidies already are strategizing for future battles.

The first is a lawsuit expected to be filed over government property lease excise taxes, or GPLETs.  These funding mechanisms allow government entities that own land to lease it back to private developers and businesses, which then pay lower-than-normal property taxes.  The Goldwater Institute and Arizona Sen. Ken Cheuvront, D-Phoenix, said they plan to file suit to do away with GPLETs.

Cheuvront wants to sue to try to stop the tax breaks.  Clint Bolick, attorney for the Goldwater Institute, said the conservative think tank also is looking at other tax arrangements to determine whether they are legal.  “We’re just beginning to burrow deeply into GPLETs,” Bolick said.  “To the extent that lease rates are below market after tax benefits are taken into consideration, it may represent an illegal subsidy, and also may violate equal protection of the law if similarly situated tenants are paying more in private buildings.”

As that case works its way through the courts, the same skeptics want to go after entities including SkySong, the Arizona Cardinals, the Phoenix Suns, and the Arizona Diamondbacks, which pay no property taxes because they lease their facilities from city or county governments.  None of those arrangements are considered GPLETs, though that mechanism has been used extensively for downtown Phoenix developments including the Colliers Center, Arizona Center, and Renaissance office towers.  The new Cancer Treatment Centers of America hospital in Goodyear also is a GPLET.

Real estate developers and business interests say striking down the CityNorth subsidy, GPLETs or other tax incentives would discourage investments and economic development.  [Note: Read the full article at Property tax exemptions may be next battle in Arizona subsidy war.]

In Phoenix, weekend users make light rail a success


Valley Metro train on Washington St. in Phoenix, where ridership exceeds expectations. (Photo credlt: Joshua Lott, New York Times)

[Source: Jennifer Steinhauer, New York Times] — Among the many detractors — and they were multitudinous — who thought a light rail line in this sprawling city would be a riderless $1 billion failure was Starlee Rhoades, the spokeswoman for the Goldwater Institute, a vocal critic of the rail’s expense. “I’ve taken it,” Ms. Rhoades said, slightly sheepishly.  “It’s useful.”

She and her colleagues still think the rail is oversubsidized, but in terms of predictions of failure, she said, “We don’t dwell.”

The light rail here, which opened in December, has been a greater success than its proponents thought it would be, but not quite the way they envisioned.  Unlike the rest of the country’s public transportation systems, which are used principally by commuters, the 20 miles of light rail here stretching from central Phoenix to Mesa and Tempe is used largely by people going to restaurants, bars, ball games and cultural events downtown.  The rail was projected to attract 26,000 riders per day, but the number is closer to 33,000, boosted in large part by weekend riders.  Only 27 percent use the train for work, according to its operator, compared with 60 percent of other public transit users on average nationwide.

In some part thanks to the new system, downtown Phoenix appears to be one of the few bright spots in an otherwise economically pummeled city, which like the rest of Arizona has suffered under the crushing slide of the state’s economy.  The state, for years almost totally dependent on growth, has one of the deepest budget deficits in the country.   [Note: To read the full article, visit In Phoenix, weekend users make light rail a success.]

Conflict of interest with $347 million downtown Phoenix court tower?

Story.jpg[Source: Josh Bernstein, ABC News 15] — It’s the largest construction project in Maricopa County history, but the new-state-of- the-art court tower is shrouded in secrecy.  “And why is any of this secret? What does the county have to hide?” said Clint Bolick, an attorney with the Goldwater Institute. “This is not a matter of national security. It is not some sort of tense lawsuit that the county has.  This is a run of the mill project.”

The $347 million dollar taxpayer-funded project is already under criminal investigation by the Maricopa County Sheriff’s Office.  But it’s the secrecy and the apparent conflict of interest that has Bolick outraged.  “This is a flagrant abuse of public trust,” said Bolick, a former attorney with the United States Department of Justice.

Documents obtained exclusively by the ABC15 Investigators reveal attorney Thomas K. Irvine and his firm are representing both the Maricopa County Board of Supervisors, who are funding the project, and the Maricopa County Superior Court, that will occupy the building. “It is a blatant conflict of interest, one of the first kinds of conflicts you learn about in law school,” Bolick said.  “It’s a matter of the fox guarding the hen house.”  [Note: To read the full article, click here.]

Nordstrom opts out of northeast Phoenix CityNorth project

[Source: Michael Clancy, Arizona Republic] — Nordstrom has pulled out of the CityNorth project, leaving the next phase of development at the new northeast Phoenix center up in the air.  The Seattle-based luxury retailer was the first business announced for the mixed-use project.  Now, it has become the first to walk away.  Nordstrom spokeswoman Julee Kraus said the development failed to meet milestone dates, but she declined to elaborate.

Najla Kayyem, vice president of marketing for Related Urban Development, one of CityNorth’s two developers, said the decision was based on deadlines to begin work on the project’s second phase.  “We are disappointed that this has not moved forward,” she said, “but we don’t control the capital and financial markets.”

CityNorth has been plagued by bad timing.  Phase 1 opened on schedule in November 2008 in the midst of the recession.  Phase 2, originally scheduled for a November 2009 debut, was pushed back a year when the economy turned south.  Since then, it has been put on hold as the developers have continued to seek financing.

When the Nordstrom deal was announced in August 2006, developer John Klutznick of the Klutznick Co. said Nordstrom likely would attract other high-end retailers.   On Thursday, he said retailers are cutting back everywhere.  “We are operating in a global economic downturn,” Klutznick said.  “Developers cannot move forward on projects until the credit markets recover and financing is available.”  He added that Nordstrom, which has cut back expansion plans elsewhere, as well, will reconsider CityNorth when the economy rebounds.

David Krietor, a deputy city manager who oversees economic development in Phoenix, said the city was notified two weeks ago.  “They said they had run out of time to complete the transaction with Nordstrom,” he said.  “We were hopeful we could aggregate several high-end, big-box stores at CityNorth.  We are disappointed.”

Krietor suggested that an ongoing lawsuit over a development agreement between CityNorth and Phoenix may have played a role in delaying further progress…  [Note: To read the full article, click here.]

Goldwater Institute supports Arts, Culture, & Small Business Overlay

The conservative Goldwater Institute has come out in favor of the proposed City of Phoenix “Arts, Culture, and Small Business Overlay.”  In his March 17 Daily Email entitled, “An Artful Approach to Revitalization: Freedom is the key to economic growth,” Clint Bolick, director of the Institute’s Scharf-Norton Center for Constitutional Litigation, writes:

The City of Phoenix decided a vibrant arts district would be a nifty idea to revitalize its downtown core.  Too often, cities are tempted to achieve such a goal by taxpayer subsidies, eminent domain, tax hikes, or draconian zoning requirements.  Instead, Phoenix decided to try a different approach — deregulation.  The City is proposing an “arts, culture, and small business overlay” that eases zoning restrictions and increases the number of activities that no longer need a special permit in a small area near downtown.  New businesses such as art galleries, bookstores, and restaurants will be allowed to operate without special permission.  Restrictions on alcohol sales, musical entertainment, and outdoor dining will be relaxed.  The City also will make it easier to rehabilitate existing structures.

The City’s action is a rare win-win.  A shaky neighborhood will be revitalized. Small businesses will flourish.  Phoenix will have its own version of SoHo.  City tax revenues, depleted by recession and tax giveaways, will grow.  And less regulation, not more, will be the reason for progress.  The plan is not perfect.  Here as elsewhere, the City is ratcheting up restrictions on street vendors, thereby limiting an important avenue of entrepreneurship.  The expanded list of permissible enterprises is still too limited.  Worst of all, the relaxed rules apply only to a single neighborhood.

But expansion of private enterprise and property rights is always good news, even if it occurs in baby steps.  And when the new arts district succeeds, it will provide an important lesson to local planners throughout Arizona: the best way to create growth and opportunity is freedom.