Horizon, Host: Ted Simons

February 2, 2010


Host: Ted Simons

CityNorth Tax Incentives


  • What the Arizona Supreme Court ruling on a tax incentive agreement between the City of Phoenix and the developer of the CityNorth retail development means for the future of similar tax incentive deals.
Guests:
  • Clint Bolick - Goldwater Institute
  • Tim Berg - Attorney
Category: Business/Economy

View Transcript
Ted Simons: A recent Arizona Supreme Court ruling allowed incentives given to developers to Phoenix's CityNorth project to stand, even though the court thought the city did not get enough in Return for the deal. But the ruling does impact future incentives to developers. Joining us to talk about the court's decision and where we go from here is Clint Bolick of the Goldwater Institute, which filed the suit against Phoenix. Also here is attorney Tim Berg, who represented the city of Phoenix in the case.

Clint Bolick: Great to be here.

Ted Simons: Thoughts on the Supreme Court decision?

Clint Bolick: The court got it almost entirely right. Basically saying that under our constitution's gift clause, that give-aways like the CityNorth deal are not going to be tolerated any longer. But kind of gave the city a Mulligan on the CityNorth deal saying we understand you could be confused by past decisions so we're going to let this go.

Ted Simons: Was it a clear win, loss in this, or seemed a little muddled?

Tim Berg: Frankly, we're very happy with the result in the case. We think the court did three things that are good from the point of Phoenix and cities generally. First, vacated the court of appeals for gift clause compliance which was a restricted and unclear test. Second, it adopted a clear view of public purpose. What cities can look at projects for. And recognized that it ought to be the city council that decide that's, rather than the courts. The last thing it did was set a framework for the courts to decide and frankly for cities and contracting parties to decide whether the deal they're putting together will pass muster under the gift clause. I think it's a positive development from that point of view.

Ted Simons: Is that broad view a good thing or are we going to have these cases flying up all the time?

Clint Bolick: It's unclear. Whether the city can read this decision and constrain themselves. They've engaged in incredibly destructive conduct by trying to outbid each other to give subsidies to developers. If they say there's things we can't do with taxpayer money, we're not going to have to sue anybody.

Ted Simons: You mentioned how broad this is in terms of the gift clause. What is the gift clause?

Tim Berg: The gift clause provides that the government, the state, cities, counties, shouldn't give money to private people. I mean, it forbids a gift or donation, essentially. And the test of whether something is a gift or donation then becomes was it for a public purpose or did the city or government entity giving the money get something back that's appropriate value back so that you have a real exchange of value between the two.

Ted Simons: I know the indirect benefit, the court said those cannot be considered. If you're talking indirect benefits being jobs, being tax revenue and these things, a lot of these deals are based on those, aren't they?

Tim Berg: Part of it will depend on how the deal gets structured. Jobs may be something where you may be able to structure it to make that a direct benefit by requiring the party to guarantee it will provide so many jobs. An example in the case we had, for example, is I think if the city had gone out and bought a parking garage and had gotten one in exchange for the money it was paying, Clint and I might fight about whether we paid too much or too little for the parking garage, but I think that's what the court says the new test is. Did you get something and was it of the right level of value.

Ted Simons: Interesting, the idea if the city were to pay a certain amount and get in return, 800 jobs. Would that have made sense?

Clint Bolick: If the developer can guarantee it and deliver it, that would be adequate consideration depending on how much the city was paying. But that's not what's happening in deal after deal and the CityNorth is a classic example. A Chicago developer comes in and says I'm going to build Shangri-La and it will produce so many jobs and so many wonderful benefits and we've seen what happened. It's a ghost town and a disastrous decision by the city and the court said if you're going to promise that other people are going to suddenly come forth and give you benefits, that's not good enough for forking over taxpayer money. In this case, $97.4 million.

Ted Simons: Can it be fine-tuned to where there's a better idea, a better guess or what kind of development is going to happen and what success a development will have?

Clint Bolick: It's got to be more than a guess. It's got to be that these benefits are actually delivered. If a company says I will create 600 new jobs that didn't exist in Arizona before and I won't get a dime unless I deliver those jobs, that's fine. But if they come in and say, oh, you know, when we build this shopping center, you know, it's going to generate untold billions of dollars in tax revenue the and it's based on somebody's guess or forecast, that's not good enough anymore.

Ted Simons: You mentioned shopping center. It seems like spec projects and retail projects could be hurt by this decision, do you agree?

Tim Berg: I think it will depend on how you structure the transaction. I think what the city and future developer of a retail project are going to have do is sit down and come up with a way of guaranteeing it the city pays money, it get specific value back from the developer of the project. If may be in the form of a parking garage or in the form of jobs that the developer actually provides itself as part of the project. I think it depends and it's hard when you sit there with a court case it think of all the different ways you can do things. But the advantage of this court case is it gives the city and people who are contracting with the city, developers, more guidance on how to do that.

Ted Simons: The critics of the Goldwater Institute in this case --

Clint Bolick: There were critics?

Ted Simons: There were some. It's hard to believe. A lawsuit like this, it gives the image of Arizona of being difficult to deal with. At a time when we're trying to get business out here, incentives are part of some deals in other parts of the country, they're looking at the headlines and thinking, I don't know if I want to deal with that.

Clint Bolick: The problem was, it was too easy to deal with. Just about any corporation could come in and roll the state. What this state needs to do is establish sound economic policy. It's the entrepreneurs who are the backbone of our economy but they never get subsidies. They simply pick up the tab. We need low taxes and moderate regulation for all businesses, not the government picking winners and losers and using taxpayer money on a roulette wheel.

Ted Simons: How do you respond to that?

Tim Berg: I think the real answer, remains to be seen. I think there's an issue about us competing with other states. For example, if Arizona wants to attract a major employer and that employer is looking at a place like Las Vegas on Albuquerque, it's going to remain to be seen how it works and whether we're put at a competitive disadvantage. I think the court's opinion gives us enough room to continue to be competitive that will get jobs here and I agree with Clint to a limited extent. It's important to have all kinds of business flourish here. Whether it's small business, medium sized or large. But I think it's naive to assume we can continue to prosper as a state by tying one hand behind our back and let the other states attract the large employers that help drive the economy also.

Ted Simons: If you were to find out that certain deals, certain cities were working with regarding companies out of state had fallen through or slow to buy in constant pressure, no incentives or incentives in kind, does that help Arizona at its core?

Clint Bolick: The pick and choose benefits that are given to the largest corporations don't help Arizona, and, you know, the Goldwater Institute is second to no one in advocating business-friendly policies. But so many times these deals don't work out. They don't deliver. CityNorth is a classic example. They don't deliver the promised benefits and companies up and leave for the next best offer. We need a business climate, a tax climate, a regulatory climate that is consistent and consistently positive. And that way not only do you attract and you keep them here.

Ted Simons: So we don't have as many failed projects as we apparently had, was the decision a good thing?

Tim Berg: I think the decision is a good thing. One, because it reaffirmed that public purpose is broad. The government does have a role in things like economic development. And two, because it's made it clearer, I think, for both cities and developers when they sit down and try to make a transaction like this work. What it is they have to put in the transaction to make it work. I think anything that provides additional certainty, unless it's so draconian that you can't do anything at all, can be helpful for cities and businesses.

Ted Simons: Last question, so many of these are based on tax revenue, is Arizona too dependent on the sales tax? Would this thing solve itself if we did a different code as far as our tax structure is concerned?

Tim Berg: I'm not a tax lawyer or economist, so I don't know what an optimum tax structure would look like. I think it's reasonable to assume that some kind of sales tax is going to be part of a tax mix in a state like Arizona and, therefore, you have to be able to structure these kinds of transactions in ways that is development produce bad results under tax policy.

Ted Simons: What do you think?

Clint Bolick: I think absolutely. Our sales taxes are already too high. They destroy jobs and cities are too dependent on them which makes them do crazy things and that's why we have to file lawsuits.

Ted Simons: We have to stop it there. Thanks for joining us. Appreciate it.

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