Mark Flatten

New Law Reins In Property Tax Break Favored by Cities

Posted on May 12, 2010 | Type: Investigative Report | Author: Mark Flatten
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The Goldwater Institute Watchdog Report is a periodic publication intended to identify government corruption and waste and to hold politicians and public agencies accountable to taxpayers.

Cities will no longer be able to give lucrative property tax breaks lasting a half century or more to hand-picked developers because of a new law signed Tuesday by Gov. Jan Brewer.

The reforms will roughly double the payments that designated builders provide instead of property taxes and will cut in half the normal length of leases with cities, which have already taken developments valued at more than $2 billion throughout Arizona off the property tax rolls.

The Goldwater Institute reported in February that those high-rise office buildings and shopping centers would generate more than $30 million annually in property taxes if they were not exempted through lease agreements with cities. Surrounding landowners who do not benefit from such leases are stuck with higher property tax bills to pay for local schools, community colleges and other levels of government, according to the Institute’s investigative report, “Shifting the Burden: Cities Waive Property Taxes for Favored Businesses.”

The changes approved in late April by the Legislature will affect the Government Property Lease Excise Tax, or GPLET, which allows certain developers to avoid paying property taxes through transactions that title their land and buildings to a city with an exclusive right to lease the property back. Since cities do not pay property taxes, neither does the developer or end user.

The owner of a GPLET property does pay an alternative tax, but it typically amounts to less than 10 percent of what would be generated through property taxes, according to the Goldwater Institute’s report.

Critics have pushed since 2008 to scale back or scrap the law, arguing a better approach than doling out tax breaks to a few large developers is to lower everyone’s property taxes. However, opposition from cities and developers with GPLET properties had stalled reform talks.

Cities decided to compromise on GPLET reforms because of growing pressure after the “Shifting the Burden” report was published, said Sen. Ken Cheuvront, D-Phoenix, a leading advocate for reform at the Legislature. Municipal leaders worried about a potential lawsuit from the Goldwater Institute that would challenge the GPLET deals as an unconstitutional government gift to certain developers.

“The fear of the Goldwater Institute, that’s the main difference,” Cheuvront said. “That article put the fear of God into them. They wanted to ward off any effort to take this to court.”

Cheuvront said he would have preferred to eliminate GPLET tax breaks entirely. But he got most of what he wanted in House Bill 2504, which was passed with near-unanimous votes in the Legislature in the waning days of the regular session.

“It was 65 percent of what I wanted,” Cheuvront said. “And 65 percent is better than nothing. If I had my druthers, the whole thing would go away.”

The new law, which takes effect in July, will only affect new GPLET leases. Development agreements reached prior to June 1, 2010, will be “grandfathered,” meaning the terms of the existing law will remain in place for them.

Changes in the law affect:

• Tax rates – Alternative tax payments made under GPLET are calculated based on the size, height and use of a building. The new law maintains that approach, but roughly doubles the rates in all categories. Also, under current law, the alternative tax rates decline by 20 percent every decade, eventually reaching zero after 50 years. The new law will eliminate the declining rate structure and adjust the rates every year to account for inflation.
• Lease terms – Current law did not limit the amount of time that a GPLET lease could apply. The new law caps future deals to 25 years. Once a lease expires, the development will be charged normal property taxes.
• Disclosure – All GPLET deals will have to be reported to county treasurers and to the Arizona Department of Revenue. Currently there is no central reporting requirement.
• Accountability – County treasurers will collect GPLET payments and disburse the money to local governments that would otherwise receive property taxes from exempted developments. Cities currently handle all collections and payments.

Phoenix has been the most aggressive in entering into lease agreements with private developers, the Institute found in its investigation. Of the $2 billion worth of property exempted through GPLET deals, more than half is in downtown Phoenix or near Sky Harbor International Airport. Virtually every high-rise  office tower built in downtown Phoenix since the law was passed in 1996 is covered under a GPLET lease.

As a result of those deals, the owner of a $200,000 home near Sky Harbor pays about $183 in additional property taxes every year, according to studies from the Joint Legislative Budget Committee. The owner of a similar home in downtown Phoenix pays an additional $90 in property taxes as a direct result of GPLET deals.

 The $2 billion figure was based on 2009 property values, and did not count billions of dollars worth of new developments that will escape property taxes through GPLET deals, including a $1 billion resort and conference center planned for eastern Mesa.

Last year, a reform bill was blocked because of last-minute objections from Mesa officials and lobbyists for DMB Associates Inc., the landowner and developer of the planned Mesa resort. After the 2009 negotiations collapsed, Cheuvront threatened to work with the Goldwater Institute to bring a lawsuit challenging GPLET leases. At the time, the Institute was embroiled in a lawsuit challenging sales tax rebates to the developer of CityNorth, a Phoenix shopping center, as an unconstitutional gift of taxpayer money. The Arizona Supreme Court agreed with the Institute’s position earlier this year, ruling that promises of future job growth and other tax revenues are not enough to justify special tax breaks for favored builders. Those same promises are often made to justify GPLET deals.

Kevin McCarthy, president of the Arizona Tax Research Association and another critic of the existing GPLET law, said pressure from the Institute’s investigation and the threat that a lawsuit could void existing GPLET deals were enough to get cities to agree to significant reforms. McCarthy also credited Chuck Coughlin, DMB’s lobbyist, with helping to convince cities to accept changes in the law after his client was blamed for the collapse of the negotiations in 2009.

“There was a lot of remorse over their spinning out of control at the end of last session, recognizing this thing was moving ever closer to going into the courtroom,” McCarthy said in assessing why opponents of reform backed down this year. “In the courtroom, it was going to be anybody’s guess what a judge was going to rule.”

Coughlin said he and his client, DMB, have been unfairly blamed for sabotaging reform talks last year when, in fact, they have been advocating a change in the law for years. Coughlin’s firm, HighGround Inc., represents several clients with GPLET deals in the works. There was a realization this session that the existing law is vulnerable to a legal challenge and that changes needed to be made, he said.

“We’ve always understood that the law didn’t make a lot of sense,” Coughlin said. “We’ve thought that for years and have been attempting to get something done. It was just the appetite between interests down there for some level of reform always seemed to derail common sense.”

The bill’s sponsor, Rep. Rick Murphy, R-Peoria, could not be reached for comment.

Clint Bolick, director of the Goldwater Institute’s Scharf-Norton Center for Constitutional Litigation, said a lawsuit challenging the legality of GPLET deals remains a possibility, depending on the terms of future leases between cities and developers. While the reforms make a bad law better, they do not necessarily make it constitutional, he said.

“The devil is always in the details with these deals, so the possibility of a legal challenge remains,” Bolick said. “The court made clear in the CityNorth decision that a statute cannot insulate cities against liability for constitutional transgressions. But this law should rein in the most egregious practices.”

Mark Flatten is an investigative reporter for the Goldwater Institute.

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