When I moved my family to Gilbert 20 years ago, my friends would laugh and ask where the rest stop was on the way there. Arizonans know well what has occurred since then. On top of being one of the fastest growing municipalities in America, the town now sports a surging downtown along Gilbert road. And they did it without giving away tax subsidies to developers. Bravo, Gilbert.
Fair treatment for all taxpayers and letting the market develop itself seems like a no brainer, but in the world of municipal economic development, it’s rare. An entire cottage industry exists to lobby for and extract tax breaks. Bureaucrats in City Hall play the real-life version of “SimCity,” trading tax incentives for the authority to influence private development. Developers reduce their tax exposure and elected officials take credit for “legacy projects.” A tempting proposition, no doubt.
One way this occurs is through a mechanism called Government Property Lease Excise Tax (GPLET) whereby a city shields a private business from property tax by holding their deed, since government is exempt. GPLET has been tinkered with over time, but the crown jewel of the deal is the abatement― where a business pays zero in property tax for the first eight years.
Downtown Phoenix has historically used GPLET more than any other. Phoenicians would find it curious to know they pay some of the highest property tax rates in Arizona while roughly one-third of the largest buildings downtown received a massive break― some lasting decades. Tempe has jumped into this game, recently handing out several GPLETs to developers who swear they won’t build unless the city provides the best deal state law allows.
Local governments claim that “but for” these tax breaks, new development would not occur. City Hall proudly cuts the ribbon to the new restaurant or hotel while neighbors look on wondering why they pay the full rate. The truth is the “but for” argument is impossible to prove. Decades of sustained growth in Arizona suggests it’s mostly bunk. One fact is indisputable: tax breaks beget more tax breaks. How can a city deny the next request?
Local leaders should take note of the instances where a deal was denied and a project occurred anyhow. The Hilton Hotel Monroe in Phoenix was unable to secure a GPLET and yet the project proceeded. Agrochemical giant Monsanto stopped pursing a controversial property tax break in Pima County and is continuing with its development. Companies have the fiduciary incentive to demand the best deal possible. City leaders ought to be stingy with giving away public dollars and creating unfairness in tax treatment.
The Arizona Legislature is attempting a bipartisan effort to curtail GPLETs at the capitol under the leadership of Rep. Vince Leach, R-Tucson, in HB 2213. Some cities who previously haven’t used GPLET are balking. They would be wise to take a page from the Town of Gilbert and treat all taxpayers fairly, not carve out deals for the well-connected. A city can try to make a downtown by subsidizing development and pitting competitors against one another. That may build buildings, but it undermines the community they wish to improve.
Kevin McCarthy is the president of the Arizona Tax Research Association