Horizon, Host: Ted Simons

May 28, 2009


Host: Ted Simons

Tax Incentives


  • CityNorth, a mixed-use commercial development in north Phoenix, is at the center of a legal battle over the constitutionality of tax incentives that cities offer private developers for the purpose of economic development.
Category: Business/Economy

View Transcript
Ted Simons:
Welcome to "Horizon." I'm Ted Simons. A tax incentive agreement between the city of Phoenix and a private developer has land in Arizona's courts. I'll talk with both sides of the legal battle over sales tax rebates for the CityNorth project. But first David Majure has more on the story.

David Majure:
Ken Cheuvront is a state senator, general contractor, and owner of a downtown Phoenix restaurant that specializes in wine and cheese.

Ken Cheuvront:
We decided we would become the cheese mongers of Phoenix.

David Majure:
Pardon the slang, but he really got cheesed off when the city of Phoenix promised a tax break to the developer of CityNorth, a private retail and residential project in north Phoenix.

Ken Cheuvront:
It is completely a fairness issue. If you are somebody who is competing with a retailer or restaurant in CityNorth and getting a tax advantage and you're not, it's really hard to compete, especially in this market. And to me when the cities are picking the losers and winners, that's just not right. As someone who's invested a lot of my own money in my companies I want to make sure that I have a level playing field, and if my competitor is giving special tax treatment or giveaways, that's going to put me at a disadvantage and probably my income is going to be affected by that.

David Majure:
In the summer have you 2007 the city of Phoenix promised to cover the cost of 3,180 garage parking spaces at CityNorth. That includes 200 park-and-ride spaces for long-term use by the public free of charge. Phoenix agreed to make annual payments equal to half the amount of sales taxes it collects from stores at CityNorth. The payments would stop after 11 years or $97.4 million, whichever comes first. The city would start making those payments only after 1.2 million square feet of retail space is open for business. But that agreement is on hold. The Goldwater institute filed a lawsuit claiming it violates Arizona's constitution. Senator Ken Cheuvront signed on as a plaintiff. He says tax incentives make sense in some cases but not for retail development.

Ken Cheuvront:
If it is for the infrastructure, for building the roads, the sewers, you know, public amenities that would be built anyway, and going to be reimbursed for that, yes, I think that there is room for that. But if it's just to help that one business get a leg up at the expense of other businesses, no. I think that's unfair and it really is against the Arizona constitution.

David Majure:
A state appeals court agreed, saying the CityNorth tax rebate violates the constitution's gift clause, which generally prohibits a public subsidy for a private business. The city of Phoenix and CityNorth have appealed that decision to the Arizona Supreme Court which has not yet decided if it will take the case. Meanwhile, Phoenix city officials declined to comment while the case is being litigated, but in the past they've indicated that the agreement was necessary to make sure CityNorth located in Phoenix and they've said the project will generate jobs and tax revenues that far outweigh the taxpayers' initial investment.

Ted Simons:
Joining me now is Clint Bolick, director of the Goldwater institute's Scharf-Norton Center for constitutional litigation. The Goldwater institute filed a lawsuit challenging the CityNorth tax incentives. Also joining us Grady Gammage Jr. an attorney representing CityNorth. Good to have you both on the program.

Clint Bolick:
Great to be here.

Grady Gammage Jr.:
Nice to be here.

Ted Simons:
Why did the Goldwater institute decide to go after this particular agreement?

Clint Bolick:
Well, this state was awash in subsidies to retailers, and the notion that the taxpayers need to basically bribe people to sell things to them is just ludicrous. Our constitution has a gift clause, anti-gift clause that was the result of the framers saying that they didn't like railroad subsidies back at the founding of our state. That same clause prohibits taxpayer subsidies for in this case an ultra luxury Taj Mamall.

Ted Simons:
Why was the appeals court decision wrong in your mind?

Grady Gammage Jr.:
The appeals court decision was a shock to a lot of people this. Has been a standard of practice in Arizona for a long time and indeed throughout the United States, that sales tax is use to the rebate into projects to build infrastructure, to make those projects different, to incentivize the collection of more retail sales tax. There's been for about 25 years a test that's applied to those kind of things, we call it the Wiss-Duber test, it had these sort of two-part analysis to it, that this deal was crafted very carefully to fit within, you know, and that is does the federal government -- does the local government actually lose any money over the long term, and is -- are they getting enough to sort of make up for the benefits that they're giving. The court of appeals went way beyond that and said if the private party gets too much, that may in and of itself invalidate it, apart from the balance. And said that in analyzing this you can't consider indirect benefits like tax revenues and jobs and all the things the cities have used this kind of agreement to incentivize. They say you can't do that anymore. So the implications of that go way beyond this particular decision.

Ted Simons:
Back to the general view here of just what we're talking about, why is it bad for cities to give rebates and incentives for major projects that could help areas that might otherwise not get the projects and not get the revenue coming in?

Clint Bolick:
Well, Ken Cheuvront put his finger on it. Really, who is paying for this? Well, regular taxpayers and small businesses that are the backbone of our economy but never get subsidies, but beyond that, government is terrible at picking economic winners and losers, in fact, right her in CityNorth what started as a subsidy now looks like a bailout because this is a white elephant, a ghost town out there. The Glendale arena situation likewise. For every success story there's a failure story, you ought to leave these forces to the market and especially for retailers, there's an adage that retail follows rooftops, if people move to Arizona, we're going to have an abundance of people trying to sell us things.

Grady Gammage Jr.:
CityNorth's not a white elephant. It's actually no retail is doing very well in Arizona right now but about 80% of the stores built out there are occupied. About half of the rental units are occupied at this point. It's doing reasonably well. But it's important to realize none of the money's being paid so far. This none of the money gets paid until the next phase is built, and only paid out of revenues that come from CityNorth. So we're not forking out any money now to bail out CityNorth. If the next phase which includes department stores takes place, then the payment woes begin, and the decision that was made here which was made by the city council under the existing law was that they would get a markedly better and different project if they allowed these revenues to be used to build structure's parking and that by doing that they free up a lot of land for employment uses and office type uses. That's the kind of quintessential decision city councils make. City councils do pick winners and losers. They do it every time they put a road somewhere or pass a zoning ordinance. That's not what the gift clause is about. What the gift clause is about is cities giving away their money, and that's not what's happening here. It's not like the old railroad cases where cities would float bonds and give it to the railroad to build something. The city hasn’t risked a dime in this deal yet and they never do. They always get more money than is being paid to the developer.

Ted Simons:
Apples to apples as far as talking about history and what's happening with this particular development?

Clint Bolick:
No, the railroads actually were the life blood of the economy. You certainly can't say that about a luxury shopping mall. So if the railroad subsidies were wrong, this is even more wrong, and with due respect to my friend Grady, the parking garage situation was a sham. They were required to build structured parking in order to attract Nordstrom's, what this is about is keeping these retailers out of Scottsdale and in Phoenix, what the city should be doing is sharing their revenues instead of having a war over tax revenues. That way the tax money all ends up in the governor's coffers, not in some Chicago developer's pocket.

Grady Gammage Jr.:
Ted, we could go back and forth like this and never let you get a word in edgewise. Nordstrom didn't require the building and structured parking. That was a decision to make this something other than a conventional mall. And that is beneficial to my clients, beneficial to the city, and to everyone else. So that's really not the case as to what happened.

Ted Simons:
As far as though incentives, rebates, and these sorts of things, back to what we saw with Ken Cheuvront and the idea that if he opens an eatery at CityNorth that would be subsidized in a way in which the downtown eatery would not be. Is that fair?

Grady Gammage Jr.:
That may or may not be the case, by the way. That depends on whether or not the landlord passes that benefit on to the tenants which frankly I'm a tenant in a building that's had some subsidy and we don't see a lot of that. The rent is typically set by the market.

Ted Simons:
You have a better chance of seeing it in CityNorth though, wouldn't you?

Grady Gammage Jr.:
I'm not sure that's right. I think the market is what sets the rent. I don't think the issue is about picking winners and losers. I think the issue is about what is the gift clause intended to protect the public against, and I think it's intended to protect the public against spending money the public already has, taking risks with public credit, floating bonds with things and hoping they’ll be paid back. That by the way is the situation with the Coyotes. It’s a very different situation than this one. The public hasn’t risked anything at this point.

Ted Simons:
I want to get to the public good because we are talking legalese and were talking a particular product and a particular project. But in terms of the public good, if these kinds of subsidies and rebates, if it takes 3 dollars to earn 2, in this sort of business. If it helps business, helps development helps get things in society that people seem to want but can’t get developers to do without a little bit of a push, what’s wrong with that?

Clint Bolick:
Well the fact is that is not the case, especially with retail. Retail will come no matter whether you subsidize it or not. And when you look at the actual record in this case, what you saw was a frenzied effort on the part of Phoenix to keep this development out of Scottsdale because of sales tax revenues and as a result the taxpayers will spend $97.4 million to give to a developer. The city hired a consultant to advise the city on whether the subsidy was necessary the consultant said no and the city ignored his recommendation.

Grady Gammage Jr.:
That issue is no part of the court of appeals decision and so is really not relevant as we go to the Supreme Court. The issue I really think is relevant is who should decide. Who should decide when these deals are good deals or bad deals? And I think the answer is a legislative decision. It something our elected officials should decide. The Phoenix city council voted for it, the Scottsdale city council voted to subsidize the parking at Scottsdale Fashion Square. The Phoenix city council previously voted to subsidize the parking at Keerland. There are reasons why you do this and when you are on the city council, you listen to consultants and arguments and other kinds of things. And like any legislator you sort those things out and make a decision. That's where the decision should be made. Not in a court. I think it's kind of ironic that what we have here, and Clint's a wonderful lawyer, but you have a lawyer beseeching judges to be very activist in interfering with economic regulation by a legislative body.

Clint Bolick:
And should the council members who received campaign contributions from the developer recuse themselves? They didn't in this case, you need an independent arbiter to say does this violate the rights of the tax payers and that can only be the court. The council cannot be the judge of its own actions.


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