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Legally Speaking: Lawsuit could change how downtown Phoenix is developed

(Flickr Photo/Alan Stark)
LISTEN: Jim Manley, Senior Attorney for the Goldwater Institute

Angel’s Trumpet House is blowing her horn against the city of Phoenix, which could lead to a massive change in how the revitalization of downtown Phoenix continues.

Picture this scenario: A developer owns a large piece of property it wants to develop that is subject to property taxes of around $14,000 per year. The developer “gives” the property to the government, which eliminates the requirement to pay the yearly property tax.

The government then leases the same property back to the developer — but with a rent that is lower than the taxes would have been. The developer then builds the property with the expectation the property will be worth millions of dollars that could result in $500,000 in annual property tax.

However, the developer will not have to pay any annual property tax for a certain period of time, and then a reduced property tax amount thereafter. All the while, the taxpayers may see an increase in their taxes to make up for the shortfall.

Sound fair? Angel’s Trumpet Ale House doesn’t think so and, with the help of the Goldwater Institute, has filed a lawsuit against the city of Phoenix.

It is no surprise that downtown Phoenix, like many other downtowns, is in need of improvement. In fact, over the past two decades, Phoenicians have seen a significant change in its downtown and surrounding areas — condos, apartments, new businesses, restaurants, bars and universities now stand where ugly and dilapidated buildings with graffiti once stood.

Although there have been significant improvements, there are still areas in need of deconstruction and improvements. This results in the need for cities, such as Phoenix, to work with private developers and provide incentives for the greater good.

These incentives must still be within the confines of our laws however. Therefore, government entities will often pass ordinances (laws) to facilitate those incentives for growth. One such law is the Arizona Government Property Lease Excise Tax.

According to the plaintiffs, “the GPLET (A.R.S. § 42-6201–6210) allows cities…to lease government-owned tax-exempt property to private parties (such as developers). The government then collects a lease excise tax instead of property tax. The excise tax is lower than the property tax. This creates a benefit to both the city and the private party. The government gets a new revenue stream, and the private party gets a substantial discount on taxes, theoretically allowing it to invest more money into the community.”

This sounds great, a win-win for everyone involved. Right?

Now, add the fact that the tax is typically abated for eight years, as in this case. That means no property tax and no tax on the rent for at least eight years.

Does it still sound like a win-win?

Angel’s Trumpet Ale House doesn’t think so and asked what about those businesses and persons who have to pick up the slack and possibly pay more taxes because the government is giving a substantial break to someone else?

This is one of the big reasons behind the filing of the lawsuit — fairness.

To explain and give credibility to its position, the Ale House laid out several arguments.

They said “Article 9, § 2(12) of the Arizona Constitution provides that ‘[n]o property shall be exempt [from property taxes] which has been conveyed to evade taxation.’”

It argued the entire reason the property was transferred in the first place was to evade the property tax.

It also raised the gift clause issue when arguing the “Arizona Constitution prohibits state or local government from subsidizing or lending money to private companies.”

It is the plaintiffs’ position the city of Phoenix is violating this gift clause by giving money to the private developer. The city will undoubtedly argue the development of this land will provide economic improvement, but the plaintiffs will say that is not enough under the law.

There is also Arizona’s uniformity clause that “requires property taxes to be equal for all similar property.” The plaintiffs argue there is no equality in this situation.

My students at the law school are subjected to my fairness lecture every semester. I explain to them that the word fair doesn’t exist in our legal system. It is too vague and too subjective, even though everyone uses it. The problem, at its root, is what one considers fair is not what another considers fair.

Angel’s Trumpet Ale House believes this transaction is unfair and it has some very good legal and practical arguments in the complaint and explains all the hurdles that stand in the city’s way.

However, the city has yet to respond and its likely it will have little trouble vaulting over those hurdles, at least some of them, in the name of progress.

But is it fair?

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