Byron Schlomach

Deal Breaker: A Critique of Phoenix's Subsidy of CityNorth

Posted on August 08, 2007 | Type: Policy Report | Author: Byron Schlomach
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Subsidies for private business activity in various forms have become an increasingly popular use of government power. The federal government has subsidized farming for decades. It has also provided for federally-guaranteed loans to large employers such as Chrysler and airline companies. Favored industries such as those engaged in research and development also receive income tax credits and deductions. State governments have acted similarly, providing in kind benefits such as specifically targeted infrastructure as well as direct subsidies and tax breaks.

Local governments may well be most active in subsidizing private activity in various ways, mostly in efforts to make sure new facilities that bring new employment and economic activity are located within their jurisdictions. Tax breaks can take as many forms as types of taxes that can be imposed at the local level. For example, most local governments levy a property tax. These taxes are often abated to some degree for some specified period when a favored company chooses to locate a new facility in the community. Then, of course there can be outright subsidies – such is the case with Phoenix’s $100 million sales tax rebate for the CityNorth project, a $1.8 billion retail and residential development on prime Phoenix real estate.

Proponents justify government subsidies of private industry in the name of “economic development.” Many communities have economic development offices, often organized through the local chamber of commerce. These activities are justified on the basis of job creation and expansion of the tax base; both will obviously be accomplished when new businesses choose to locate in a community or when existing businesses expand. It is questionable, however, whether the benefits outweigh the costs when government gets involved in economic development through direct subsidies and tax breaks. Phoenix’s estimate of tax benefits from the CityNorth project was based primarily on a study by Elliott D. Pollack and Company, whose key findings were subsequently undercut in a study by Keyser Marston Associates, Inc. The Pollack study, which the developer reportedly commissioned, was not made available to the Goldwater Institute, despite repeated requests.

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