Arizona Attorney General Mark Brnovich filed a lawsuit against the Arizona Board of Regents (ABOR) to stop Arizona State University (ASU) from entering into land deals that allow commercial developments to benefit from educational institutions’ property tax exemption.
Two recent transactions—one completed, the other proposed—brought matters to a head. In one deal, ASU rented out some of its property for a massive State Farm Insurance campus. State Farm pays rent to ASU but enjoys the university’s property tax exemption because ASU retains ownership of the land. A similar deal is in the works for a proposed 330-room Omni Hotel with a 30,000-square-foot conference center. As with State Farm, Omni’s development would be exempt from property taxes.
The lawsuit filed in Arizona Tax Court on January 10 alleges ABOR lacks the legal authority to approve the ASU land deals allowing private companies to avoid paying taxes.
ASU's ‘Straw Man Role’
The use of the tax exemption, while profitable to ACU, reduces revenues to local governments, says Brnovich.
“These construction projects are therefore not included in the property tax base available to local schools and governments, even as ASU receives substantial income for its straw-man role,” the lawsuit states.
“ASU is a public university, not a commercial enterprise or an urban development authority,” says the lawsuit. “It is inappropriate for this educational institution to pick winners and losers in the highly competitive property development industry by negotiating for the use of ABOR’s tax shielding status.”
‘A Real Legal Question’
The AG should not insert his office into university business, says Ron Shoopman, chair of ABOR, which governs three state universities.
“Management of Arizona’s public universities’ real estate assets is the purview of the Arizona Board of Regents,” said Shoopman in a January 11 statement. “With the Arizona Attorney General’s latest lawsuit against the board, the Attorney General is inappropriately inserting the courts into an issue of public policy.”
The authority of ABOR to abate taxes on commercial developments through these deals is questionable, says Sean McCarthy, a senior research analyst with the Arizona Tax Research Association.
“We’re in strong agreement with the AG that there is a real legal question as to whether the universities have the authority to abate taxes in this matter,” said McCarthy.
“We look forward to a quick resolution to this matter in the courts,” McCarthy said.
Other Taxpayers Pay
By keeping commercial developments off the tax rolls, ABOR is harming other institutions in Arizona, says state Sen. Vince Leach (R-Tucson), who served in the Arizona House of Representatives until his election to the Senate in November 2018. Leach filed a bill last year to stop ABOR’s real estate dealings and requested an opinion from the AG, which led to the lawsuit.
“What happens … if you abate taxes, [is] you take away income from fire districts, special districts, flood zones, libraries, and the biggest one is obviously K-12,” said Leach.
The damage extends to schools in other parts of the state, says Leach, since the loss of revenue to local schools is made up by taxpayers in the rest of the state.
“We have equalization of taxes,” said Leach. “[For example,] on a yearly basis, Tempe pays about $6 million out of the General Fund to make up for equalization to cover the lack of taxation on these properties.”
Problem ‘All Over the Country’
Other states have debated whether universities should be allowed to use their tax-exempt status for private businesses, says Jenna Robinson, president of the James G. Martin Center for Academic Renewal, based in North Carolina.
The 1929 Umstead Act in North Carolina specifically prohibits governmental entities that do not pay state and local taxes from competing with private individuals or businesses, says Robinson.
Over the years, however, both North Carolina State University and East Carolina University have allowed private development to take place on their property, with companies benefitting from the educational institutions’ tax-exempt status, Robinson says.
“Universities all over the country take advantage of their tax-exempt status and compete with private business,” said Robinson.
“The most common abuses are running hotels and conference centers and leasing commercial real estate,” Robinson said. “The land itself is rarely taxed, despite being used for commercial purposes.”
Bonner R. Cohen, Ph.D. (email@example.com) is a senior fellow at the National Center for Public Policy Research.