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Court of Appeals needs to end retail-subsidy blunder

November 8, 2014

The last time I debated Grady Gammage Jr., he predicted if voters approved Proposition 207, the Private Property Rights Protection Act, it would spell disaster for urban planning.

Two-thirds of the voters disagreed, and we now have far greater protection of property rights–with none of the sky-is-falling calamities Gammage predicted.

Now, Gammage warns in his Jan. 13 guest column, “CityNorth ruling puts Arizona economy at risk,” that if the Arizona Court of Appeals decision striking down a $97.4 million taxpayer subsidy for a Chicago developer to build the opulent CityNorth mall stands, it will mean the end of retail development in Arizona.

Apparently, profit-seeking retailers will not sell to consumers unless cities pay them to do so. That assertion stands on its head a basic economic reality: that retail follows rooftops.

Gammage points out that infrastructure is expensive, but nothing in the court’s carefully reasoned decision prevents a city from reimbursing a developer for providing public infrastructure. CityNorth, by contrast, involved a developer seeking a handout for a project it contended the market would not support without a subsidy. That assertion should have sounded alarm bells; but instead, a city salivating for sales-tax dollars couldn’t say yes fast enough.

All too predictably, the subsidy now looks more like a bailout. The developer chose to first build luxury condominiums before it created a reason for people to want to live there. Then it opened in-line retail stores two years before the large department stores that would attract customers. Those bad decisions combined with a recession to create a ghost town on land that the developer itself calls the most commercially desirable in the state.

All of which confirms the wisdom of the framers of the Arizona Constitution, who crafted the Gift Clause along with other provisions to prevent government from trying to pick economic winners and losers. Initially, the clause was aimed at railroad subsidies. Retail subsidies are even more dubious and just as unconstitutional.

For whatever reason, the more grandiose and utopian the scheme, the more apt politicians are to subsidize it.

Meanwhile, the small businesses that are the backbone of our economy are not only suffering from the recession and higher sales taxes but also are forced to pick up the tab to subsidize their competition.

In 2007, the Legislature codified the Gift Clause by curtailing retail subsidies, but only in Maricopa and Pinal counties. By enforcing the clause, the Arizona Court of Appeals puts all state cities on a level playing field.

Cities are not without economic tools to attract development. Low taxes and a favorable regulatory climate appeal to businesses, large and small. If cities are concerned about losing sales-tax revenues to their neighbors, they can agree to share revenues near their borders, just as Phoenix and Scottsdale did before turning instead to open warfare. That way, all sales tax dollars remain in government coffers, not in a developer’s pocket.

Displaying great wisdom, Mayor Phil Gordon at one time denounced the subsidy wars, proclaiming that developers need to learn there is “no constitutional right to drink at the public trough.” With that assertion, the Court of Appeals emphatically agreed. Facing $270 million in budget cuts, Phoenix simply cannot afford to subsidize a retail developer to the tune of $97.4 million. Here’s hoping the Court of Appeals decision puts a merciful ending to a public-policy blunder.

Clint Bolick is director of the Goldwater Institute Scharf-Norton Center for Constitutional Litigation and represents the six small-business owners challenging the CityNorth subsidy.



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