Tax incentive gets too big for its britches

Finally, a tax incentive got too big for its britches, triggering a backlash. The bloated incentive in question is the misnamed government property lease excise tax, or GPLET in tax wonk circles. At root, GPLET is a fraud and an abuse.

Under the Arizona Constitution, government property is exempt from property taxes. With a GPLET, a developer pretends to convey its project to the city, removing it from the property tax rolls. The city then leases it back to the developer.

This is a fraud. The city retains none of the usual rights and responsibilities of an owner. The conveyance is entirely fictitious. The developer still calls all the shots.

The developer gets eight years of paying no real-estate taxes at all on the project. After that, for 17 additional years, the developer pays the GPLET, which is considerably less than would be owed if the project were on the property-tax rolls, as it should be.

This is an abuse in two ways. First, it is unfair to competitors who have to pay their full property tax freight. Second, it is unfair to other taxpayers, corporate and residential, who have to pick up the slack for the cost of government.

That unfairness radiates statewide. The way the school finance formula works, if the local property-tax collection is reduced, the state picks up the cost through additional state aid. So, if Phoenix offers a GPLET, taxpayers in Kingman end up picking up part of the tab.

And Phoenix has been particularly promiscuous in doling out GLPETs, turning downtown into a property-tax free zone. The Arizona Tax Research Association calculates that Phoenix has removed around $1.5 billion in commercial real estate from the property tax rolls.

Moreover, the state auditor general found that developers weren’t even paying what they owed in the alternative GPLET taxes.

This all proved to be too much. The Arizona Legislature approved a GPLET reform bill unanimously. Gov. Doug Ducey signed it.

Under the reform, cities can still abate property taxes for up to eight years. But after that, the project goes on the property tax rolls. No paying the lower GPLET rate instead for a prolonged period of time.

In the meantime, the Goldwater Institute has aimed a legal bazooka at the whole scheme, claiming that it violates multiple provisions of the Arizona Constitution.

The institute’s challenge should be a slam dunk.

The Constitution says that property can’t be conveyed to avoid paying property taxes. That’s the whole purpose of a GPLET. Why else would a developer pretend to give title to his property and improvements to a municipal government?

The Constitution says that governments can’t subsidize private businesses. Conniving with a business to enable it to escape paying property taxes is clearly providing a subsidy.

The Constitution says that “all taxes shall be uniform upon the same class of property.” GPLETs indisputably create disuniformity. Apartment Complex A pays property taxes, Apartment Complex B pays the lower GPLET tax, and Apartment Complex C pays no real-estate taxes whatsoever.

Whether the Goldwater challenge will turn out to be a slam dunk in court is a different matter. They apparently teach creative writing in law school, given the inventive evasions judges concoct to avoid applying the plain meaning of constitutional provisions and statutes.

The GPLET scheme is one of the more egregious, since there can be no claim of even regional benefit from it, much less statewide advantages. The tax dodge isn’t usually given to manufacturers, who arguably wouldn’t be here without one. The tax pass is given to commercial offices, retailers and apartments. All of that space would be built out someplace without a tax break, assuming there is a demand for it.

The cities aren’t the only ones gaming the level-playing field tax treatment envisioned by the Constitution. The Legislature has approved hundreds of millions of dollars of tax preferences to be sprinkled around by the Arizona Commerce Authority.

Ducey has been a disappointment in this regard. The economic libertarian circles he likes to be highly regarded within consider this to be crony capitalism. Yet far from reining them in, Ducey seems to delight in handing them out.

Nonetheless, GLPETs have been constrained and may be on their way to extinction. Perhaps a corner has been turned.