Sunday, February 29, 2004
Arizona Challenges Public Subsidies for Development
(see bottom for pros and cons to subsidies)
Lesley Wright
The Arizona Republic
Arizona lawmakers and residents have, until now, stood by and watched as
their cities engaged in a cutthroat competition that can best be called the
incentive wars.
Dubbed in turn a subsidy, rebate or taxpayer giveaway, cities and towns have
only upped the ante as they put multimillion-dollar deals on the table to lure
big-buck retail centers.
The payoff is a swift infusion of sales tax dollars, which make up the bulk of
city budgets used to fund fire, police, roads, parks and other services demanded
by an exploding Valley population.
But some are fed up.
Two key projects helped motivate Arizona lawmakers to try to halt the flow of
tax dollars into the bank accounts of developers:
• Gilbert hit a new high in the retail subsidy game by offering Disney heir
Bill Lund $60 million to build a 17-dealer auto complex.
• Scottsdale agreed to give developer Steve Ellman $36.7 million to build
a big-box retail center at the site of the old Los Arcos Mall.
Many legislators and citizens could not believe it.
The deals so upset state Sen. Jack Harper, R-Surprise, that he launched Senate
Bill 1043, a proposed law that would force cities to document why an incentive
is necessary and to show the likely impact on surrounding businesses.
"The Ellman deal was the straw that broke the camel's back for the Legislature," said
Harper, who described himself as a small-business owner infuriated by the unfair
advantage given big developers. "When Gilbert gave away $60 million to an
auto dealer, that really solidified it. Many people were repulsed by that."
Residents of the two municipalities have expressed their own disbelief.
"I want to bring businesses in, but I don't think giving away $60 million
is the way to do it," said Gilbert resident Walt Laramie, a 50-year-old
engineer. "I don't think giving away tax dollars to private businesses is
right."
A revolt in Scottsdale
The collapse this month of the $36.7 million subsidy for developer Steve
Ellman to build a Wal-Mart and other big-box stores at the old Los Arcos
Mall site in Scottsdale certainly signaled to lawmakers the limit of citizen
tolerance.
Scottsdale voters are poised March 9 to vote a resounding "no" on
Proposition 300, a referendum on the Los Arcos subsidy, which the Scottsdale
City Council narrowly passed 4-3 last summer.
Seeing the writing on the wall, Ellman announced on Feb. 19 that he was backing
out of his agreement with Scottsdale, pledging to come back with a bigger,
better deal, but one in which he would seek some kind of handout.
Scottsdale officials decided last week to let Ellman twist in the wind a bit,
declining a dissolution to their deal with Ellman and leaving it to voters
to deliver the final blow. After all, Scottsdale voters had successfully fought
all the way to the Arizona Supreme Court in January to secure the right to
challenge Ellman, a potential precedent that could empower other voters to
challenge their city officials.
In Scottsdale , the defeat of Ellman's big-box subsidy would be the ultimate
taxpayer revolt against a developer who expects the city to "make him
whole" for a $68 million investment in a property that city officials
and others say is worth only $23 million.
"The taxpayers are not going to let that happen," said Scottsdale Mayor
Mary Manross. "The sooner we give him a resounding 'no,' the better it is
for the community."
But if Scottsdale turns off the subsidy tap, it could lose the retail development
battles that fuel an ever-increasing spiral of developer expectations.
Municipalities battle
In this game, the winning municipality gets the large commercial project
that is the lifeblood of its revenue stream, bringing in more than property
taxes or revenue shared by the state.
As long as cities must live on sales taxes, they must have enterprises that
regularly churn out the big receipts. And if they fail to offer enough "incentives" to
land the next big retailer, they can bet the next city or town will.
"If we could have gotten this (auto mall) without giving up money, we would
have," Gilbert Mayor Steve Berman said, explaining that his town expects
the project over time to pour $253 million into municipal bank accounts. "But
we couldn't afford to be wrong."
Berman still suffers anxiety over the deal, saying recently that he hopes in
the future to share the money with adjacent cities instead.
"If you've got to give away 50 percent of the money, I'd much rather give
it to Chandler than a group of developers," he said. "We shouldn't
have taxpayer-funded turf wars between cities."
Cities defend practice
But while the Legislature amends and debates the bill to put the brakes
on developer handouts, cities argue that subsidizing a project is more complex
than merely handing over a check.
Kevin Adam, legislative director of the League of Arizona Cities and Towns,
said developers tend to use the municipality's millions to build freeway exits,
widen streets, improve drainage and do other public construction. The end result
is good for the community, he added.
Phoenix , for example, dangled a $19.3 million incentive before the Mayo Clinic
Hospital , with $15 million earmarked for sewer and water improvements and
a $1 million waiver of developer fees. Phoenix officials now point to 700 new
jobs.
But not all municipal officials oppose Harper's measure.
"The taxpayers are the ones who are losing, and certain select businesses
are winning," said Mesa Councilwoman Claudia Walters. "And that concerns
me."
Finding a solution
Shutting off the incentive valve may quell some taxpayer fury, but repairing
the underlying causes will be more difficult.
A potential help would be to lessen the dependence on sales taxes. If property
taxes, which are stable and predictable, were higher, then cities would not
be at the mercy of developers with those heart-stopping promises of sales tax
revenue, local officials said.
Revenue sharing between cities could also put an end to the competition, since
developers could not play one city against another.
Chandler and Tempe formed a revenue-sharing pact in 1996 when Tempe landed
Arizona Mills Mall, but Chandler officials ended the accord last year after
the opening of Chandler Fashion Center - which Chandler lured with more than
$40 million worth of incentives.
A recent bid by Gilbert to promote a unified East Valley sales tax rate increase
died when Chandler responded that it was in good financial shape and didn't
need it.
Piecemeal efforts so far
Scottsdale Mayor Manross said recently that she hoped Phoenix and Scottsdale
could reach some kind of revenue-sharing accord before the incentive wars
begin in earnest for two massive commercial projects on the border near Scottsdale
Road and the Loop 101.
In the upcoming competition between the two, Phoenix already has agreed to
reimburse Paradise Ridge Auto Mall developers up to $15.7 million, and Scottsdale
pledged $7 million to Lund Cadillac to open a large auto mall on its side of
Scottsdale Road.
Subsidy arguments
Giving developers subsidies to land big retail projects is a growing concern for Arizona cities, which depend heavily on sales tax revenues. Arguments are being formed on both sides of the issue.
Pro:
• Cities argue that developers have a choice about where to build and the
incentives can make or break a city's chance to land a project.
• The money cities give to developers usually goes toward improving freeway
exits, streets, sidewalks, drainage and other public infrastructure needed for
a large project. In Tempe, for example, the city will give Miravista Holdings
about $50 million in tax rebates to perform environmental cleanup before it builds
a mall southeast of McClintock Drive and Rio Salado Parkway.
Con:
• State Sen. Jack Harper, R-Surprise, who is fighting the use of incentives,
argues that developers should be responsible for any public infrastructure improvements
that serve their projects. The incentives give big developers an unnecessary
break.
• Competition among businesses is skewed since small businesses usually
wind up paying the full cost of public improvements without receiving municipal
aid.
AMIBA adds: local tax dollars should be spent to support community-rooted enterprises first--those who envigorate the local economy, rather than to support those removing dollars from the community.
Staff writers Edythe Jensen, Charles Kelly, Adam Klawonn, Stephanie
Paterik, Ginger Richardson and Alia Rau contributed to this article.
Reach the reporter at lesley.wright@arizonarepublic.com or
(602) 444-6883
© 2004 Arizona Republic
Fair Use Notice
This site occasionally reprints copyrighted material, the use of which has
not always been specifically authorized by the copyright owner. We make
such material available in our efforts to advance understanding of issues
and to highlight the accomplishments of our affiliates. We believe this
constitutes a 'fair use' of any such copyrighted material as provided
for in section 107 of the US Copyright Law. In accordance with Title
17 U.S.C. Section 107, the material on this site is available without
profit. For more information go to: www.law.cornell.edu/uscode/17/107.shtml
If you wish to use copyrighted material from this site for purposes of
your own that go beyond 'fair use', you must obtain permission from the
copyright owner.