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Arizona's Landmark 'Bailout' Battle

November 8, 2014

By any reading of the man, George W.P. Hunt — Arizona’s first governor — was a progressive Democrat. He favored creating an income tax, extending the right to vote to women, and passing compulsory education laws. But when it came to drafting a constitution that would bring Arizona into the union as the 48th state, “Old Walrus,” as he was called for his weight of about 300 lbs and his handlebar mustache, presided over a convention in 1910 that banned nearly all government subsidies to private business.

Hunt would probably be amazed at what’s happening in Arizona today, as the old battles are once again being fought — this time in the state Supreme Court, which is taking up a lawsuit to determine whether cities can give subsidies to private companies.

Arizona’s founders banned gifts to private companies as the result of bitter experience. In the closing decades of the 19th century, local governments borrowed money to force-feed private railroad development. Pima County outside of Tucson, for example, took out $300,000 in bonds in 1882 for a railroad that promised to build some 100 miles of track. The money was spent but the railroad dissolved after a mere 10 miles of track was constructed. The bonds were worthless, but taxpayers were still on the hook for the money.

This time around it’s shopping malls and the like, and the preferred subsidy is tax rebates rather than bonds. But the result is the same. Local governments are foisting the cost of private development onto taxpayers as private companies promise that with just a few tax dollars they will create a wealth of new jobs.

People aren’t buying it, and there’s a revolt underway against government subsidized megaprojects. In November, voters elected mayors in Mesa, Scottsdale and Tempe who promised to fight taxpayer subsidies. In Phoenix, voters have elected three candidates to the city council who oppose wooing developers with taxpayer money. And it is in Phoenix where the biggest fight is taking place.

Two years ago, the city signed a contract with developer Thomas J. Klutznick, who is building an outdoor mall. The city has to rebate to him $97.4 million in sales taxes over the next 11 years, in return for which it gets 200 parking spaces for commuters catching a municipal bus. The mall, called CityNorth, will be home to an Ann Taylor Loft and other retailers, as well as residential apartments that are already being rented. Arizona Republic columnist Laurie Roberts summed up the deal earlier this year by noting the city will spend about $487,000 for each commuter parking spot. “Wouldn’t it be cheaper to just chopper them in to work?” she wrote.

Nonetheless, CityNorth is the kind of project that city planners dream about as they seek to remake urban landscapes — grand in scale as it stretches 144 acres, and grand in impact as it serves tens of thousands of residents and shoppers. City officials promise it will create a “second downtown” for Phoenix.

That second downtown will be at the expense of employers who are lured away from other cities, and give companies in the new mall a tax advantage over business outside of it. That’s hardly fair, so the Goldwater Institute, a free-market think tank in Phoenix that I run, sued Phoenix Mayor Phil Gordon in state court on behalf of Meyer Turken, who owns a real estate company, and five business owners. The suit seeks to enforce the provision in Old Walrus’s constitution that bans government handouts. The provision is known as the “Gift Clause.”

We lost the first round in the case, but two days before Christmas last year the Arizona Court of Appeals unanimously reversed the lower court ruling and said, “We think these payments are exactly what the Gift Clause was intended to prohibit.” Phoenix then took Turken v. Gordon to the state Supreme Court, which this week agreed to hear the case.

Cities across Arizona are waiting to see what the court does. This has become a fight over just how involved in the economy government should be allowed to get — whether local and state governments should be in the business of bolstering some, but not others, with tax breaks.

Government-sponsored development isn’t popular. Public Opinion Strategies polling found earlier this year that 80{010c6536f15f83a69f09c4467fdfb4a5656804feab27fe0dec71ed1e80da306f} of Phoenix taxpayers oppose their city’s subsidies for CityNorth and agree that the developer and the retailers who move into the new mall “should pay their own way.” The subsidy is also attracting opposition outside of Phoenix. Last week, Mayor W.J. Lane of neighboring Scottsdale won support from his city council to file a friend-of-the-court brief in support of our lawsuit.

New York, Maryland and 34 other states have gift clauses similar to Arizona’s. Thus, Arizona’s legal precedent could influence how local and state governments approach redevelopment across the country. On the federal level, any member of Congress upset with the bailouts of the auto or financial industries might want to consider proposing a Gift Clause amendment to the U.S. Constitution that would explicitly ban bailouts that benefit one company or industry.

When asked about the lawsuit, Phoenix Deputy City Manager David Krietor told a reporter that “This is a landmark case that will dramatically impact our ability to do economic development.” He’s right. But Mr. Krietor should be considering whether it’s right for the government to “do” this at all. As his Democratic progressives came to understand in Old Walrus’s day, government payouts to private businesses don’t always pay off — and often it’s taxpayers who end up having to pay up.

Darcy Olsen is president and CEO of the Goldwater Institute. This article first appeared in the Wall Street Journal.

Learn more:

Goldwater Institute: Turken v. Gordon (CityNorth subsidy case)

Goldwater Institute: Appeals Court Voids CityNorth Subsidy

Wall Street Journal: Arizona’s Landmark ‘Bailout’ Battle



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