The Arizona Constitution’s Ban on Government Subsidies—Past, Present, and Future

Almost all state constitutions contain provisions that forbid the government from subsidizing private enterprises with taxpayer money. These so-called Gift Clauses prohibit the government not only from directly handing cash over to a private company, but also from giving private entities—whether for-profit or non-profit—other kinds of valuable benefits, such as cut-rate leases, land grants, or exemptions from debt.

Gift Clauses are a legacy of the nineteenth century, when state and local officials frequently tried to encourage development by giving special favors to private companies. The result of such favoritism was case after case of waste, corruption, and financial catastrophe—including, in some cases, the bankruptcy of entire states that had over-spent in hopes of encouraging private companies to build railroads, canals, and other kinds of improvements. By the time Arizona’s Constitution was written in 1910, these kinds of schemes had proven themselves so dangerous and foolhardy that the Grand Canyon State’s founders crafted the strongest prohibition on subsidies that had ever been written. Arizona’s Constitution forbids any kind of aid to private companies, whether it be outright cash payments, or more subtle forms of assistance such as loan guarantees or schemes to exempt private developers from property taxes.

Now, in a pair of in-depth research articles, the Goldwater Institute’s Timothy Sandefur explores the past, present, and future of the Arizona Constitution’s Gift Clause. The first article, which appears in the latest Regent University Law Review, examines the history of the Gift Clause, tracing it through the era of railroad development—when states such as Pennsylvania and California suffered serious financial and political disasters due to foolish investments of taxpayer dollars—to the sometimes wacky schemes states engaged in to try to subsidize private companies. (Did you know one Texas town promised to exempt a railroad company from any legal liability for 1,000 years in exchange for it building a line into town? State judges declared that unconstitutional.)

Perhaps most intriguing was the effort by states such as Montana to encourage railroad construction by exempting these businesses from taxation. Tax exemptions were quite controversial during that period; some states allowed them because they seemed to be ways of financing construction without actually spending any money—but other states opposed them, because they shift the tax burden onto other people’s shoulders and represent an unjust form of government favoritism. Montana ultimately decided to prohibit them, as did Colorado in its 1876 Constitution. When Arizona’s founders assembled in 1910 to prepare the state’s constitution, they copied the language Montana’s Constitution used, but then also copied a line from the Colorado Constitution to prohibit the government from ever “contracting away” its tax power—that is, prohibiting special tax exemptions as a form of subsidy.

Sandefur’s second article, which appears in the new Drexel University Law Review, explores the ways in which courts have interpreted the Arizona Constitution’s Gift Clause—and how judges should apply it in the future. Carefully examining the Clause word-by-word, Sandefur shows why it not only bars outright donations or loans, but also forbids the government from zeroing out a company’s debts. Unfortunately, this is a common tool used by those who favor subsidies to private businesses—particularly the so-called GPLET scheme that the Goldwater Institute is currently challenging in a lawsuit in Phoenix.

Under a GPLET (or Government Property Lease Excise Tax) scheme, a private business will “sell” its land to the government for a nominal amount, and the government will “lease” the property back to the private owner, who can still use it for private profit. Because the land is now technically owned by the government, it’s exempt from the state’s property taxes—and often the owner’s tax bill will fall to zero. That tax, of course, must be paid instead by neighboring landowners, meaning it’s a type of subsidy that the Arizona Constitution forbids. (You can learn more about our lawsuit involving GPLET schemes here.)

America’s federalist structure was designed, as the Federalist Papers put it, to provide a “double security” for individual rights: the federal government protects us from state wrongdoing, but our fifty state constitutions also contain scores of important protections for individual freedoms not found in their federal counterpart. Sadly, legal scholars often overlook the later protections, tending to focus instead on the meaning of the federal Constitution. Through research like these articles, the Goldwater Institute is paving the way for future legal victories that will secure individual rights under state constitutions—and ensure that Americans enjoy the “double security” for freedom that our legal system promises.