PHOENIX--Some Arizona cities that recruit major shopping malls and high-rise buildings have used a special tax incentive that waives most of the development's property taxes, often for 50 years or longer. A Goldwater Institute investigative report found development projects valued at more than $2 billion pay only a small fraction of what they otherwise would in property taxes. As a result, local governments raise property tax rates for nearby businesses and homes that don't qualify for this special tax break.
To qualify for the property tax exemption, building developers transfer ownership of the property to the city and then lease it back to operate. State law requires that the developer pay a Government Property Lease Excise Tax, or GPLET, that is supposed to replace a significant portion of the waived property taxes. Mark Flatten, a Goldwater Institute investigative reporter, shows that GPLET projects throughout Arizona pay at least $31 million less in property taxes each year.
"Arizona's high property taxes deter businesses from moving here. It's no surprise that companies look for ways to lighten the tax burden using the GPLET system. However, any time you offer a tax break to one business, it should be available to all," said Darcy Olsen, president and CEO of the Goldwater Institute. "GPLET programs that single out select businesses for deals essentially leave neighboring businesses and homeowners with the tab."
Most GPLET projects are located in Tempe and Phoenix, where most downtown high-rises built since 1996 benefit from a property tax exemption. Other communities have started to approve GPLET projects as well. For example, Mesa has agreed to waive an estimated $776 million in property taxes over 50 years for a future convention center and luxury resort near Phoenix-Mesa Gateway Airport. Mr. Flatten reports cities generally don't worry about lower property tax revenue because property taxes are a relatively small portion of their budgets.
School districts and community colleges, on the other hand, depend more heavily on property taxes. But school districts haven't had to worry either, because the state government had filled the gap created by GPLET projects. That will change this year because lawmakers have changed the law that protected school district budgets. Now, GPLET projects likely will prompt school districts to raise property taxes or reduce spending. "It's a great concern. It shifts the tax onto our property owners, our homeowners, and it's a huge shift," Antonio Sanchez, superintendent of the Wilson Elementary School District in Phoenix, told Mr. Flatten.
Some lawmakers have tried in the past to change GPLET laws to limit the length of the new leases and to increase the amount that new projects have to pay in excise taxes so that it is more comparable to what businesses that do not have a special exemption are required to pay. These efforts have been thwarted by lobbyists for cities and developers who expect to benefit in the future, Mr. Flatten reports. State Representative Rick Murphy has introduced a bill this year that will try to curb the practice.
The Goldwater Institute recommends that governments pursue economic development efforts that would benefit a wide range of businesses, instead of giving a handful preferential treatment. The Arizona Supreme Court recently reinforced the Arizona Constitution's "Gift Clause," a prohibition that GPLET leases might violate. Examples of more appropriate business incentives would include reducing property tax rates for businesses to match the rates paid by homeowners and the expansion of enterprise zones in which reduced tax rates are offered to all businesses.
"These deals show that Arizona's tax burden is too high to attract business. That is easy to correct without giving special privileges to the few. Lower property taxes to competitive regional rates for all of our businesses and help Arizona grow its way out of the recession," said Ms. Olsen.
The Goldwater Institute is an independent government watchdog supported by people who are committed to expanding free enterprise and liberty.