The Arizona Republic
Developers get tax breaks, and citizens get the bill.
The cities of Phoenix and Tempe struck deals in recent decades exempting high-rise developers from millions of dollars in taxes, subsidies that added to their downtown skylines but pushed additional costs onto neighboring property owners. ● As a result, the tax breaks, known as Government Property Lease Excise Tax agreements, have become a flashpoint at community gatherings, city council meetings and the Arizona Legislature over the past decade. ● Supporters of this development strategy, chief among them city officials, credit it with getting projects built that otherwise would never happen — in this case, high-rises to anchor burgeoning downtowns. Those projects, once built, contribute to the growing prosperity of all property owners in the area. ● Critics counter that the tax breaks have shifted additional financial burden onto other property owners and shortchanged school districts of tax revenue. And, they argue, the projects would likely have been built without incentives.
“You have to balance the interests of every party affected in the area. It’s a hard thing to do.” Nick Wood Lawyer who has represented developers GETTY IMAGES
The Arizona Republic analyzed two central Phoenix neighborhoods with the highest concentration of properties that have received GPLETs. State law requires that other properties make up for certain school district tax revenue lost to the incentives. An analysis of that shows:
❚ In the two areas examined by The Republic, the incentives boosted total property tax rates for school districts by less than 1 percent or, on average,around $10 more for homeowners and $70 to $80 more for businesses, according to Maricopa County School Superintendent’s Office data.
❚ School districts in those areas have seen no direct impact on their budgets or revenue from the incentives.
But those findings don’t reflect the tax breaks’ full effect. And definitive answers are hard to come by primarily because Phoenix hasn’t done a cost-benefit analysis of the incentives that would estimate the total taxpayer impact, and hasn’t been transparent in reporting how the incentives affect individual tax bills.
One Phoenix school district is so unsure of the impact on taxpayers that it no longer supports the incentives. But that hasn’t kept the city from proposing new GPLETs.
Last week, the Phoenix City Council voted to approve the incentive for a downtown Phoenix high-rise that includes some workforce housing units. The city estimates the project would create 300 constructions jobs and 20 permanent jobs.
Aside from the effect on local taxes, some downtown Phoenix community members say the incentives haven’t been used to support small businesses or address the affordable-housing shortage.
“The city of Phoenix definitely has a view of economic development where they look for silver bullets, they look for huge projects and they look to make big, splashy uses of public money,” said Sean Sweat, a downtown Phoenix community activist. “I don’t believe that is a good model for economic development whatsoever.”
Nick Wood, a lawyer who has represented developers in GPLET negotiations in Phoenix and Tempe, said enhanced reporting requirements and restrictions on the use of the incentives have made them fairer to taxpayers.
“You have to balance the interests of every party affected in the area,” said Wood, who also represented the project approved this week. “It’s a hard thing to do.”
A Government Property Lease Excise Tax agreement removes property from the tax rolls for a time. Instead of property tax, the developer pays an excise tax.
The excise tax, which has a lower rate, creates a shortfall in overall property tax revenue that, because of state school-funding requirements, must be made up by others in the tax district.
Put another way: Residents’ taxes increase every time city officials grant a new tax break, and decrease every time a tax break expires.
Because the revenue “lost” to GPLETs is made up by other taxpayers,school districts don’t directly lose money from the agreements.
Phoenix Elementary in downtown Phoenix, and Wilson Elementary near Sky Harbor International Airport experienced two of the largest tax-rate shifts because of GPLETs in metro Phoenix.
This coming year, property owners in the Phoenix Elementary district will pay an additional 1 percent in school district taxes because of GPLETs, equivalent to an extra $13 for the average homeowner and $83 for the average business.
The Republic analyzed the tax shift required by state law. The newspaper’s analysis doesn’t include other effects the incentives can have on tax bills, such as school and municipal bonds or fire districts. Based on available data it is impossible to know what might have been built without the tax break, making it unclear how much tax would be collected from those properties without GPLET.
The Arizona Tax Research Association says that analysis does not fully reflect the extra burden on taxpayers.
But in calculating the impact, the association, which opposes the incentives, assumes every project that received a tax break would have been built without it — an assumption city officials and developers say is false.
The association estimates the average downtown Phoenix area homeowner paid an extra $186 in school district taxes last year because of the incentives, and the average impact on businesses was $1,157.
The association’s calculation goes beyond tax revenue that feeds into the state school funding formula to include locally approved school bonds and overrides.
“It’s way more than a couple of cents,” association President Kevin McCarthy said.
Phoenix officials said these projects can bring down property taxes significantly once the incentive expires. The Arizona Center, which had an incentive until 2011, paid $3.87 million in taxes in 2018, according to the city.
Government Property Lease Excise Tax agreements were controversial almost as soon as they were implemented in 1996. For 22 years, the tax incentives have been revised and litigated over, but unknowns remain about their effectiveness, mostly because much of the program remains out of public view.
Economic development officials at the city of Phoenix, which has a central role in evaluating which projects receive the incentives, referred questions about their effect on property taxes to the county assessor and school superintendent.
The county assessor provided enough information for The Republic to determine how it calculates the effect on property taxes. But the assessor wouldn’t answer questions about that effect, citing pending litigation.
The Legislature has worked to make the incentives more transparent, requiring disclosure of how much GPLETs contribute to school district tax rates. However, city and county agencies are ironing out the details of those reporting requirements.
Phoenix was also unable to detail how it estimated the economic impact of GPLET agreements ahead of city council votes on the incentives. Officials said this was to protect proprietary information.
For some recent projects, the city provided the presentations and reports it gave to community groups and school districts that summarized the incentive’s impact.
There have been no studies, independent or otherwise, evaluating whether these agreements have been worth their costs. This means residents and policymakers don’t know whether projects truly needed a tax break, or what might otherwise be built without the breaks.
Phoenix economic developers are planning have an outside consultant examine the incentive’s overall benefits, city spokesman Eric Toll said.
Sean McCarthy, ATRA’s senior research analyst, said in an email that he wasn’t surprised by the lack of studies to evaluate GPLETs’ impact because city governments benefit more from the incentive than school districts and others who get much of their funding from property taxes.
He called it, “part of the game.” “The program is quietly considered a success because it trades other jurisdictions’ property tax revenue for development,” he said.
But some impacts can be measured. In Phoenix Elementary, the tax increase related to Government Property Lease Excise Taxes contributed to a $1.2 million budget shortfall last year.
The district exceeded its maximum tax rate and couldn’t raise taxes enough to cover GPLET and other school needs, such as desegregation funding, county data show.
City officials require developers in Phoenix to meet with the school districts that will be affected by the tax breaks to discuss donations or other agreements to negate the impact of GPLETs on taxpayers.
Despite this requirement, school district officials said they’ve received only two such donations from developers.
“Our board has decided not to enter into any more agreements with developers,” Phoenix Elementary School District Chief Operating Officer Rosanna Hidalgo said. “We just don’t feel like we can support the GPLET process anymore because of the impact it has on taxpayers, and taxpayers are the ones that support us.”
Christine Mackay, the city’s community and economic development director, said developer donations to schools typically start after a project has been completed and is taken off the tax rolls.
Despite the district ending its support for the incentives, the Phoenix City Council has approved two GPLET project this year, including last week’s.
Wayne Rainey, who owns the MonOrchid art gallery in the Roosevelt Arts District, will pay at least $116 more in taxes because of GPLETs in Phoenix Elementary. He said the effect on his balance sheet is small, but he’s concerned about businesses not paying their fair share.
“I think it’s a great tool ... when we have projects that don’t make sense financially otherwise,” Rainey said. “But if we’re giving them out to developers basically as an icing-on-the-cake thing, I don’t think it’s really a good idea.
“I think it’s kind of insulting to have the guys that really risked and went out of pocket in an economy, like myself, that really worked hard to make the downtown work and to have us pay for somebody who’s going to do a project that’s market rate anyway.”
ATRA’s McCarthy also doubts that every project that received the incentive would not have been built without it.
“We don’t accept the premise that downtown Phoenix, for instance, would be a vacant wasteland if not for GPLET,” McCarthy said. “There are properties being developed as we speak” without it.
Phoenix Elementary’s property owners’ wallets will get hit again as the city granted the incentive to the Sheraton hotelas part of its sale this year. Phoenix spent $350 million to build the hotel, which opened in 2008.
Rainey found it odd that the city would grant an incentive to a project that was already built and operating, especially given the public money the project has already received.
In Wilson Elementary, the average homeowner will pay an additional $10, while the average business will pay $70 more. The district faces a different situation than Phoenix Elementary.
Phoenix handed incentives to properties within Wilson’s boundaries more than a decade ago. But more than half the district’s residents fall below the poverty line, meaning any increase to property taxes to compensate for that lost revenue would be painful.
“We understand the city and county are trying to improve properties, but at what cost?” said Antonio Sanchez, Wilson’s superintendent. Even small tax increases can make it difficult to ask residents for overrides or bonds, he said.