“If Arizona cities think property tax rates are too high, they should lower tax rates for everyone, not use GPLET to let the politically connected few avoid paying any property taxes at all while everyone else shoulders the burden.” – Jim Manley, Goldwater Institute senior attorney
When Angel’s Trumpet Ale House opened in 2011, the Englehorn family was proud to help revitalize downtown Phoenix. They had no idea the City would force them and other small businesses to subsidize the property taxes of huge multi-state developers. Now, the Goldwater Institute is suing the City of Phoenix on behalf of the Englehorns and other taxpayers to block this illegal subsidy.
The City is allowing the developer of a 19-story high-rise apartment building to avoid all property taxes for eight years, and then pay a reduced rate for another 17, forcing neighboring property owners—including Angel’s Trumpet—to pick up the tab. In total, the developer will get an $8 million tax subsidy. Here’s how this arrangement, called a Government Property Lease Excise Tax (GPLET), works: the developer transfers the ownership of the property to the city, the city declares it “blighted,” and then the city leases it back to the developer. Because the land is now government property, it is exempt from property taxes. Developers are supposed to pay an excise tax for leasing government property, but this tax is routinely waived, as in this case.
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“The Constitution mandates that all property taxes be equal among similar properties and prohibits the government from handing out gifts or special privileges to certain businesses,” said Jim Manley, a senior attorney at the Goldwater Institute and the lawyer representing the owners of Angel’s Trumpet. “If Arizona cities think property tax rates are too high, they should lower tax rates for everyone, not use GPLET to let the politically connected few avoid paying any property taxes at all while everyone else shoulders the burden.”
The problem with GPLET waivers is that they leave gaping holes in school-district, community college, hospital, and county budgets, all of which rely on property-tax revenues for their bread and butter. State law requires the state general fund must make up the difference for schools, but hospitals, counties, and community colleges are often left out in the cold. That means taxpayers in Tucson and Yuma are paying for Phoenix schools because the City of Phoenix is letting a high-rise apartment developer avoid property taxes.
The Goldwater Institute is challenging this subsidy under four provisions in the Arizona Constitution—the Gift, Uniformity, Conveyance, and Special Law Clauses—as well as statutory limits on GPLET and competitive-bidding requirements that the City did not follow. Goldwater has won previous lawsuits enforcing the gift, uniformity, and special laws clauses. This will be the first time anyone has challenged a subsidy under the Conveyance Clause.
In 1980, voters amended the Arizona Constitution to prevent exactly this sort of shell game that transfers property only to avoid taxes. 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.” The GPLET agreement shamelessly flouts this provision: “City acknowledges and agrees that the intention of the Parties is for all of the Site and eligible improvements on the Site subject to the Lease be subject to the Government Property Lease Excise Tax (“GPLET”) (and not to ad valorem taxation) during the term of the Lease and for the GPLET to be abated for a period of eight (8) years.” The stated purpose of the agreement is to evade property tax. The developer is conveying its property to the City for no other reason and in violation of the Arizona Constitution.
State lawmakers are considering a bill that would eliminate some of the most egregious GPLET abuses. The Goldwater Institute published an investigative report about GPLET abuse, Shifting the Burden: Cities Waive Property Taxes for Favored Businesses, in 2010.
The Goldwater Institute filed Englehorn v. Stanton in Maricopa County Superior Court on March 1, 2017. Read more about Englehorn v. Stanton here.