State governments treat public university land as non-taxable because the mission of these institutions is nonprofit education. But when state legislatures aren’t careful, university administrators can take advantage of their non-profit status—at the expense of taxpayers.
In Arizona, the university system has a cavalier attitude regarding the use of its tax-exempt status. In one glaring example, the state’s largest commercial office development, built in 2016 and anchored by State Farm Insurance, pays no property taxes and will not for 99 years, thanks to a tax avoidance scheme developed by Arizona State University (ASU). The 2.2 million-square-foot glass complex in Tempe is technically owned by the Arizona Board of Regents (ABOR) and resides on their land; however, the effective owner is Transwestern Investment Group, which leases it to State Farm. The state of Arizona and ABOR are exempt from property taxes, meaning the entire property and the land underneath it are exempt as long as ABOR holds the deed to the property.
Like most states, all property in Arizona is subject to state tax unless exempt in the state Constitution. Consider a city or county that is seeking to attract businesses for economic development through tax incentives. If this local government entity takes ownership of property and leases it to a private interest, the lessee must pay an in-lieu state excise tax (that functions as a property tax). The city or county cannot shield private interests from taxation entirely.
However, this excise tax does not apply to state-owned land, which includes university property. Arizona law does not anticipate these types of university deals—and the ambiguity is being leveraged by the state universities.
Private businesses operate on public land all the time. In Arizona, they would typically owe the same property taxes as private businesses on private land because they own the buildings. Businesses pay taxes on the improvements to the land with what is called an Improvements on Possessory Rights (IPR) tax, assessed on the building. However, in this State Farm deal where the building resides on university property, the tax is avoided through a lease-back deal whereby ABOR, not private companies, owns the buildings for decades.