It’s not unusual for cities to offer businesses sweetheart deals _ or incentives _ to get them to move or set up their companies inside their borders.
In exchange, the cities get jobs, economic activity, and an increase of tax dollars.
But the rules for doing that in Arizona changed earlier this year.
“I can tell you throughout the United States, this is the most restrictive laws on use of economic development incentives,” said Kelly Schwab, Chandler’s city attorney. “Arizona is no longer on an even playing field with the rest of the country.”
The gift clause is part of the Arizona Constitution.
It states, in part: “Neither the state, nor any county, city, town, municipality, or other subdivision of the state shall ever give or loan its credit in the aid of, or make any donation or grant, by subsidy or otherwise, to any individual, association, or corporation.”
For decades cities have been able to offer incentives as long as they passed a two-part test. The first was there had to be a public benefit. That’s usually easy to meet.
The second test, however, is that due consideration of the benefits must be made.
Earlier this year the Arizona Supreme Court changed the landscape by striking down a deal between Peoria and a private university. That city had offered incentives of $2.6 million to Huntington University to encourage it to put a digital media arts campus in Peoria.
The court found there was a public benefit, but said there was not adequate consideration.
The Goldwater Institute, a conservative think tank, brought the suit and praised the ruling as a “victory against corporate welfare.”
“Illegal subsidies like this discourage businesses from shouldering risks and instead encourage them to look to bureaucrats, who can dip into taxpayers’ wallets,” the institute said.
“Peoria chose to dole out $2.6 million to its hand-picked favorites _ an amount that could have funded more than half of the cost of the city’s police criminal investigations unit for an entire year,” it continued, adding that the ruling sent “a powerful reminder to government officials across the state that they can’t spend taxpayers’ hard-earned money on sweetheart deals for select private businesses, but can only purchase goods and services that truly benefit the public.”
The high court ruled that going forward, only direct benefits can be counted as consideration.
“Other cities outside of Arizona have all kinds of incentives they can offer,” said Nancy Davidson, who is general counsel for the Arizona League of Cities and Towns. “We are extremely limited.”
That ruling came down on Feb. 8. So far, at least one economic development leader says it has not had a major impact.
“The ruling has had no impact on companies selecting Greater Phoenix for expansion or relocation, and there has never been more interest from firms currently evaluating the region for investment,” said Chris Camacho, president/CEO of the Greater Phoenix Economic Council.
“In Fiscal Year 2021, 45 companies expanded or relocated to the region representing nearly 10,000 jobs for our residents and $13 billion in capital investment. Our current active business pipeline consists of 270 companies representing a potential 16,000 jobs and more than $50 billion in capital expenditures.”
Another economic development leader says the ruling has thrown uncertainty into their jobs.
“The Supreme Court ruling was somewhat vague,” said Carrie Kelly, executive director of the Arizona Association for Economic Development.
“It left open questions about incentives for each municipality to determine,” she said. “Since the ruling came down, some municipal economic development departments have stopped structuring incentive agreements, while some continue to move forward.”
She said her organization “continues to monitor the impact, and as of yet, we haven’t seen a significant impact on development in our state.”
Schwab says the biggest issue now for cities is trying to determine what the court means by “direct benefits.”
In the past, increasing tax revenue for municipalities would be seen as an indirect benefit.
The state Supreme Court ruled that going forward, indirect benefits are “valueless” under the gift clause. Schwab said it was those indirect benefits that most cities, towns and counties relied on in making previous deals for economic development.
“The days of the less-defined benefits are gone in Arizona,” Schwab said. “We’re going to have to have that third-party evaluation of the impact. We have to have a net-positive return on investment.”
The other key part of the ruling gives courts the power to determine if the benefits received were equal to the expenditures a city is offering. In the past, judges gave municipalities the benefit of the doubt in determining that on their own.
Schwab said as long as there are direct benefits that can be measured, cities like Chandler will be able to offer incentives to companies considering setting up shop inside city limits.
Davidson said Arizona still has other attributes attractive to businesses, including its weather. Still, it increases the challenge when a company is looking at multiple states as a possible landing spot.
“They don’t have many tools already,” she said. “If you want to bring a hotel to an area that has no hotels, your options are pretty limited.”