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Arizona's Booster Socialism

November 8, 2014

PHOENIX — When the upscale stores — Bloomingdale’s, Nordstrom and other magnets for affluent shoppers — open their doors at the CityNorth “urban village” now being built, Phoenix taxpayers will be there, sort of. They are providing a $97.4 million subsidy to the Chicago-based developer of the 144-acre project that will include residential, office and hotel facilities.

The subsidy — allowing the developer to keep sales taxes collected up to $97.4 million — might, however, violate the state constitution. Represented by the litigation arm of the Goldwater Institute, six taxpayers who own small, unsubsidized businesses say the subsidy violates three constitutional provisions.

The equal privileges and immunities clause says government cannot without good reason — a large loophole — provide a privilege or immunity to one taxpayer without granting it to all. Another provision forbids laws conferring special benefits on a single corporation.

The third, and most interesting, provision, “the gift clause,” was supposed to erect a wall of separation between government and corporations by forbidding gifts or loans of state credit, or state donations, grants or subsidies, or the state becoming a shareholder. This clause, of which many other states have variants, was born of chastening experiences, but has been vitiated in Arizona and elsewhere by judicial mischief.

The plaintiffs say, reasonably, that the clause’s original intent was sensible and should be restored through strict construction. The developer says, reasonably, that it undertook the $1.8 billion project on financial understandings that should not now be altered.

The developer’s profits come primarily from residential and office portions of the project, but Phoenix cares most about sales taxes from the retail stores. The city says, plausibly, that the subsidy is necessary because otherwise it would be engaging in unilateral disarmament: Burgeoning suburbs, which are rubbing up against it and one another, stand to reap substantial sales tax windfalls by luring — with subsidies — businesses to locate on one side or the other of jurisdictional boundaries. If the CityNorth subsidy had not been offered, the developer would be building a differently configured project.

This is a new imbroglio about an old and discredited practice — booster socialism. In the 19th century, governments practiced what is now called “corporate welfare,” particularly benefiting railroads, which could make or break farmers and communities. Benjamin Barr, a senior fellow at the Goldwater Institute, writes:

“Illinois invested $10.2 million in 1837 for internal improvements, including 1,341 miles of railroad. Only 26 miles of the railroad were completed, making the interest on the debt exceed the state’s revenue, which forced the state into default.”

Arizona, having made improvident investments of public money in private corporations, adopted the gift clause at its 1910 constitutional convention. But the clause has been hollowed out by judicial decisions allowing entanglements of government and corporations when the entanglements satisfy the elastic criteria of having a “public purpose” or providing a “public benefit.”

Arizona’s Supreme Court has held that whether a government transaction with a private corporation violates the gift clause depends on “the motivating and animating cause of the transaction.” Got that?

This is how courts weakened the U.S. Constitution’s Fifth Amendment restrictions on how government could take private property “for public use.” In the original narrow understanding, “public use” meant public works such as roads, bridges, courthouses. Then taking property to cure “blight” (another elastic term) became a public use. Now property is taken and given to developers just because they will pay higher taxes than the original owners.

Similar judicial malpractice has enabled John McCain and other campaign “reformers” to eviscerate the First Amendment. “Congress shall make no law … abridging the freedom of speech” — unless Congress claims that the law’s rationale is to prevent “corruption” or the “appearance” thereof.

Courts have misconstrued the gift clause into a nullity, so legislators now use any asserted public benefit, however remote, to justify using subsidies to compete with rival jurisdictions for businesses and their tax revenues — or to rationalize conferring benefits on powerful interests. For example, suburban Scottsdale’s City Council has given $1.5 million for 19 automobile dealerships — some of them owned by companies with revenues in the billions — to spend on marketing.

Today, Phoenix taxpayers are paying the cost of a pricey law firm’s defense of the constitutionality of their subsidy of CityNorth. Perhaps courts, which unleashed the subsidies competition by making mush of the gift clause, can make amends by reinvigorating that clause, as the Goldwater Institute requests. Failing that, Arizonans can stop booster socialism and enforce general disarmament among their cities by amending the clause with language that stipulates the original intent. The most effective cure for foolish politics is still sensible politics.



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