Republicans seek to curtail property tax breaks for big developments
A Republican bill would rein in a controversial tax break used by municipalities to entice large development projects that cities say they need.
Rep. Travis Grantham, R-Gilbert, wants to reduce the amount of time a property can receive a Government Property Lease Excise Tax, or GPLET for short, from eight years down to four years.
GPLETs are a development tool used by cities to allow entities to skirt property taxes by making the city the owner of the property and the entity the “tenant” as government property does not pay property taxes. These deals have come under scrutiny by lawmakers and former Attorney General Mark Brnovich who have said the tool shields properties from property taxes improperly.
The conservative Goldwater Institute has sued the City of Phoenix over its use of the tool, claiming it violates the state constitution’s gift clause, which restricts how governments can give incentives to private companies. In 2020, a judge agreed with the Goldwater Institute, saying that a 2016 GPLET deal for an apartment complex violated the gift clause as the benefit was not equal to the tax rebate given by Phoenix.
That ruling was a key part of discussions held by the House Ways and Means Committee Wednesday when discussing Grantham’s House Bill 2309, with cities contending that they have enacted self-reform to avoid further issues and Republican lawmakers expressing concerns over further legal troubles.
Kevin McCarthy, President of the Arizona Tax Research Association, told the committee that bringing the period from eight to four years will help future GPLET deals “survive a legal test or possibly end up with no legal test.” ATRA, which largely represents the interests of utilities and other large-scale property owners, generally opposes GPLETs.
McCarthy cited Attorney General Kris Mayes’ recent opinion on the constitutionality of the Arizona Commerce Association’s spending on events as a sign that more legal challenges to GPLETs could be in the offing.
GPLETs have been reformed in previous years, with a change made most recently in 2017 that shortened the length of time properties could take advantage of the tax break to the current eight years from 25 years.
“Make no mistake about it…the underlying policy questions still remain and will remain after this bill,” McCarthy said, adding that the tool allows for cities to pick “winners and losers” in economic development.
City economic development leaders said they understood the concerns of lawmakers and advocates like McCarthy but see the tool as a way to entice development and create more affordable housing.
“I would argue that these developments wouldn’t have happened if we didn’t bring that tool to bear,” Christine Mackay, community and economic development director for the City of Phoenix, told the committee.
Mackay said that Phoenix has seen more than $3 billion in new development due to the use of GPLET and that the Phoenix City Council has reined in how projects are chosen and crafted additional reforms to how it is implemented.
Mackay said the city does a “full analysis” of a project prior to ever considering a GPLET, and in November 2022, the city council directed that GPLET be used to create more affordable housing along with other reforms. Mackay also said that these new changes to how the city conducts GPLET agreements led to a judge siding with the city on another gift clause challenge.
However, she was unable to sway the bill’s sponsor and other Republicans.
“When is enough enough of (giving away) other people’s money?” Grantham asked Mackay, citing information provided to the committee by ATRA that GPLET projects increase taxes for nearby properties and municipalities. An analysis by the Arizona Republic found that taxes increased by roughly 1% in two areas examined with GPLET properties, with homeowners seeing a $10 increase and businesses seeing between a $70 to $80 increase.
“We are very thoughtful to make sure we are analyzing it constantly,” Mackay said. “We are not using it willy-nilly.”
Mackay and others argued that a change from eight to four years would not allow for developers to “cover the gap” in projects that developers are looking to do in order to recoup costs.
If that’s the case, Grantham said, then GPLETs should be eliminated altogether. He said that cities like Phoenix and Mesa have been able to grow, and compared their use of GPLETs to that of an addict.
“At some point, we have to cut the cord and wind things down,” he said.
Republican lawmakers also took issue with how GPLETs have an impact on school financing and the state’s general fund. Rep. David Livingston, R-Peoria, asked Mackay how the city ensures that school districts — which levy property taxes — are made whole when a GPLET exempts a valuable property from paying taxes.
Some school districts have voiced their opposition to GPLETs, but Phoenix contends that schools are made whole by agreements in GPLET contracts that require developers to write a check to school districts for the lost taxes.
Ian Linssen, the City of Mesa’s assistant city manager, told the committee that Mesa handles the issue slightly differently, with developers having to provide a one-time lump sum in the amount of the total tax liability the property would see during the GPLETs’ time off the tax rolls.
In instances where local property taxes don’t amount to enough to meet the minimum school funding rates — whether because of a GPLET or low property values — the state kicks in the difference.
McCarthy said GPLETs make it more likely that state taxpayers will cover the education costs instead of the city’s property owners.
“One might be reminded you are spending millions to backfill money into schools,” he said.
Mackay contended that Phoenix schools are made whole and dismissed claims that GPLET projects adversely impact the state’s general fund, but said that cities using GPLET need to be cognizant of this issue.
“I think it really is incumbent on the cities to pay attention to those things and be respectful to our taxpayers,” she said.
Democratic and Republican lawmakers were split on the measure, with Republicans supporting the change and Democratic lawmakers saying that, in lieu of other tools being made available for cities to do economic development, they could not support the measure.
Republicans argued that the affordable housing Democratic members and cities said they needed GPLET for could be created using the federal Low-Income Housing Tax Credit program, which has been a boon to some states looking to create more affordable housing. Cities contended that the tax credit is competitive and that would make it harder to ensure they receive the money to build those projects.
Livingston suggested that the legislature look at reducing regulatory hurdles to housing and said that the Low-Income Housing Tax Credit money would ensure that projects are done “fairly.”
Democratic members claimed that GPLET has been used to bring things other than large residential developments to their areas.
“It is also used to bring medical facilities to parts of the city that don’t have access like the rest of the cities do,” Rep. Mariana Sandoval, D-Goodyear, said, citing the City of Hope Cancer Center that was built in Goodyear using GPLET.
“I don’t like government picking winners and losers,” Grantham said before voting yes on his bill.
Lawmakers voted along party lines to approve the bill. It will next head to the full House of Representatives for a vote.