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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.]

Two major downtown Phoenix developments get go-ahead from city council

[Source: Lynn Ducey and Jan Buchholz, Phoenix Business Journal] — Two new hotel brands now call Downtown Phoenix home, after Phoenix City Council approved separate development deals paving the way for the properties. Council members OK’d one deal One Central Park East that includes plans for a 280-room Westin hotel and corporate headquarters for Freeport-McMoRan Copper and Gold Inc., and another that rebrands the existing 520-room Wyndham hotel as a Marriott Renaissance.   “We are very happy. Christmas has come early,” said Steve Moore, president and CEO of the Greater Phoenix Convention and Visitors Bureau.  “We now will have the power of the Marriott brand in downtown Phoenix and the Westin gives our downtown Sheraton guests an opportunity to upgrade.”

Council members unanimously approved a development agreement known as a Government Property Lease Excise Tax, or GPLET, incentive program for the One Central Park East project.  The Westin hotel would be a tenant inside the newly constructed building, which also would house Freeport’s headquarters.  They also voted 6-2 in favor of a development deal with Phoenix Hotel Ventures LLC, which would result in the rebranding of the Wyndham into a Marriott Renaissance.  Vice Mayor Tom Simplot and Councilman Michael Nowakowski voted against the proposal.

Simplot said the difference for him was that the Westin project was a modification of an existing GPLET that led to the construction of One Central Park East, which is built out, yet unoccupied.  In contrast, the Wyndham is an existing property.   “Councilman Nowakowski and I agree philosophically.  Personally, I believe GPLETS should be used sparingly for projects that simply aren’t viable without them,” Simplot said after the meeting Wednesday.

Council members voted unanimously in favor of the One Central Park East Project.  Proponents said the projects would create and retain additional jobs, create a future revenue stream for bed and sales taxes across the city, county and state levels and keep Phoenix on a competitive par for group meeting and bookings at the Phoenix Convention Center with similar-sized cities, such as Denver and San Diego.

In addition, the Wyndham project will result in $10 million in property upgrades and access to Marriott’s branding power while the Westin is an upscale business class hotel.  The Wyndham rebranding is expected to take place within the first part of next year. Construction of the Westin build-out is expected to begin shortly, with the first guests expected to begin checking into the property in 2011. [Note: To read the full article, visit Two major downtown Phoenix developments get go-ahead from city council.]

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.]

Downtown developers fight to roll back property tax breaks

Arizona Center[Source: Mike Sunnucks, Business Journal of Phoenix] — Real estate developers, city governments, and heavyweight business interests have come out in force against a state measure that would restrict special property tax breaks for development projects and certain businesses.  State Sen. Ken Cheuvront, D-Phoenix, wants to restrict cities from doling out Government Property Lease Excise Tax deals.  GPLETs involve cities leasing their land to developers and businesses, allowing the latter to pay lower property taxes than if they owned the land.

Several downtown Phoenix office projects (including the Colliers Center and Arizona Center), Cabela’s sporting good store in Glendale, a planned private hospital in Goodyear, and Arizona State University’s SkySong tech center in Scottsdale are GPLETs.

Cheuvront contends GPLETs are “corporate welfare” and wants the state to impose new rules restricting their use under Senate Bill 1360.  But the idea faces a host of business, real estate, and local government critics who say the tax breaks help economic development.  They prefer a less strident bill put forward by state Rep. John Nelson, R-Glendale, which would establish standard procedures for handing out GPLETs.  Backers of the Nelson measure, House Bill 2803, include several Arizona cities, a number of chambers of commerce, and a host of real estate interests, including the International Council of Shopping Centers, Westcor, DMB Associates, Valley Partnership, Suncor Development Co., and RED Development.  Cheuvront said city governments and real estate developers are trying to stall his bill in the Legislature.

[Note: Click here to read related Arizona Republic column by Laurie Roberts.]