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Goldwater Heads Back to AZ Supreme Court to Protect Taxpayers’ Rights

September 15, 2023

The Arizona Supreme Court announced Tuesday that it will take up the Goldwater Institute’s latest lawsuit against unconstitutional government subsidies to private businesses. The case—which involves the city of Scottsdale’s decision to lease government-owned property at below-market rates to a private business—will mark the eleventh time the Institute has argued before the state’s highest court since it began litigating in 2007.

The case began in 2021 after Scottsdale officials chose to lease out swimming lanes in government-owned swimming pools not to the highest bidder, but to a business that the city simply preferred. As a result, taxpayer-owned resources were rented out at far below the market price, which amounts to a large subsidy to the private company that city politicians decided to favor. We sued on behalf of the company that submitted the highest bid—a business called Neptune Swimming Foundation—arguing that the state Constitution’s ban on gifts, loans, or other kinds of subsidies prohibits the kind of special-interest benefit that the city gave out in this case. We also argued that the city violated its own procurement rules in the process.

Arizona’s constitutional ban on subsidies to private business is only one of dozens of such prohibitions across the country. In fact, most state constitutions forbid government from giving or lending public resources to private beneficiaries. These rules were created in the nineteenth century after several states triggered financial disasters by investing taxpayer money in railroads and other businesses, which often failed, leaving taxpayers holding the bag. As Goldwater Institute scholarship shows, Arizona’s Gift Clause is actually the strongest in the United States, prohibiting any form of public aid to private enterprise.

Such subsidies aren’t just unconstitutional; they’re also a terrible idea. They encourage business owners to spend their time courting political favors instead of improving their businesses—and they typically result in financial waste, because the businesses don’t have to satisfy customers, they only have to satisfy politicians. That’s why economists have shown time and again that government subsidies don’t produce the economic improvements that politicians typically claim. Instead, they result in such boondoggles as balloons to the stratosphere in Tucson, or millions of dollars for a few parking spots at a shopping mall in Phoenix.

The reason is simple: if there’s actual consumer demand for a product or service, businesses will provide it, because there’s a profit to be hand. The only reason for government to subsidize a business is because there’s insufficient market demand—which means, inevitably, that the company will result in an economic loss.

The Neptune lawsuit has an unusual twist, however. Unlike most subsidy situations, which involve government giving money to a private business—often by paying a company more than something is really worth—this case involves the government selling or leasing something to a private business for less than what it’s really worth. Unusual as that may be, however, Arizona courts have still made clear that giving away public resources is still an unconstitutional gift. In one 1974 case, for example, an Arizona appellate court held that the city of Tempe violated the Gift Clause by leasing land to a private business for $1 for 99 years. And in 1991, the same court said the state violated the Constitution by selling publicly owned land at far below market rates.

That makes sense: whether it’s a cash handout, or a cut-rate deal, government aid to private business can take many forms. And whatever form it takes, it’s unconstitutional. Public resources should be devoted to public uses. And that’s one reason why, in addition to the constitutional prohibition on subsidies, state and local governments also have procurement rules—restrictions on how government can buy and sell things. Those rules are designed to ensure that when government decides how to buy and sell things, it does so in an open, fair, and transparent process—not through arbitrariness and favoritism.

Unfortunately, Scottsdale officials didn’t just disregard the constitutional ban on subsidies; they also violated these procurement requirements. After officials discovered that Neptune had offered more for the swimming lanes than the company that the city preferred, they cancelled the procurement process entirely, and just decided to approve its preselected favorite, instead. That’s just the kind of arbitrary action that the procurement laws were written to forbid.

As the Arizona Supreme Court has put it, “The letting of contracts for public business should be above suspicion of favoritism.” Whether it’s taxpayer dollars, or government-owned property, the principle is the same: government should protect the rights of all—not promote the private interests of some.

You can learn more about the Neptune case here.

Timothy Sandefur is the Vice President for Legal Affairs at the Goldwater Institute.



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