Devil’s Advocate: ‘Vital’ tax break worth it? Your guess is as good as mine

Devils Advocate-01

This is the proposed location of the new Fry's development. The developer has said that it will likely pursue a GPLET agreement to offset high construction costs. (Nathan Thrash/DD)
This is the proposed location of the new Fry’s development. The developer has said that it will likely pursue a GPLET agreement to offset high construction costs. (Nathan Thrash/DD)

The tax incentive that’s been propping up development in downtown Phoenix is complex and hard to understand — raising the question of whether it’s actually worthwhile.

Touted as a vital way to bring big, economically beneficial projects to downtown, the tax incentive, executed through Government Property Lease Excise Tax agreements, is being used on 18 current and future developments downtown, according to the city’s Economic Development department. GPLET agreements transfer tax burdens to local business owners and residents, and it’s hard to tell whether giving tax breaks to those developers is worth it.

RELATED: GPLET tax incentive draws developers but may also hurt small businesses

GPLET agreements are based on a provision in Arizona property tax laws that exempts city-owned property from being taxed. The city takes ownership over the property and leases it back to the developer for up to 25 years, a cap that took effect in 2010. This exempts it from property taxes. The GPLET is an excise tax that the business pays instead of property taxes.

Downtown redevelopment has been largely dependent on this incentive. The Arizona Center, CityScape, the Renaissance Towers, Collier Center, One North Central and the Freeport-McMoran building, along with many others, have received this tax break.

Because of the lack of proper independent studies and difficulty finding experts on the topic, it’s hard to know whether the costs associated with GPLET outweigh the benefits. And the conversation about whether to grant tax incentives is largely discussed in ideological terms or as a way to get specific community priorities, such as affordable housing or historic preservation, rather than in terms of the full impact to the area’s development.

For that reason, policymakers and citizens may be ill-equipped to determine the best course of action when the next developer asks for a tax break from the city, whether it be Empire Group LLC for its Circle Records and Tapes building development or RED Development on the project that could provide downtown with a supermarket.

In GPLET agreements, developers take on a considerable amount of risk. They spend tens of thousands to hundreds of thousands of dollars to negotiate these agreements, and banks are sometimes hesitant to finance these projects. However, the payoff is simply too good to pass up, as they can end up saving tens of millions of dollars over the course of the agreement.

There’s a fairly simple argument for GPLET. The cost of constructing a dense urban core is incredibly high without it. Without GPLET, some at City Hall and in the development community question whether large-scale projects like the Arizona Center and CityScape would have ever been completed.


But there are some important caveats to that argument.

First, economic theory holds that tax subsidies, which can be a reduction in taxes like GPLET, distort the way people would usually behave in a free market, especially when that cost is passed on to consumers (residents and local businesses).

In recent years, that tax burden transfer has been exacerbated by a change to school funding calculations. The state used to help offset the funding shortfall school districts experienced due to GPLET agreements, but since about 2012, that gap has been transferred to local property owners. The impact can be large: In fiscal year 2013, one tax expert estimated one portion of the Phoenix Elementary property tax was 20 percent higher.

The city has attempted to mitigate this by getting developers to strike deals with Phoenix Elementary. But whether it actually addresses the impact on local property owners is unclear. Furthermore, this requirement has only been in place for recent agreements. For example, the GPLET agreement for CityScape will continue without the separate school district deal for the rest of its 99-year duration.

Second, despite the momentum in development and construction the area has seen in recent years, it’s unclear if downtown development has staying potential. There’s an argument to be made that if the free market couldn’t support the developments that “require” tax incentives, then those developments shouldn’t be built. Developers gain a competitive advantage in the growing downtown-rental market when GPLET is used, which could have serious consequences for other smaller businesses and landlords in the long term.

There’s quite a bit of ambiguity on whether the use of GPLET has been good or bad for downtown, and I don’t pretend to know the answer. But I’m concerned that decisions will continue to be made while those answers are out of reach.

We rely on the city, which negotiates directly with these developers, and the developers themselves, to provide economic and community benefit analysis — hardly the ideal independent study. There’s also never been a comprehensive analysis that reflects the current usage of GPLET agreements. There’s plenty of data for an economic expert to sift through and come to some conclusions on the incentive’s general effectiveness.

There doesn’t seem to be serious discussion about what exactly the GPLET-less alternative to some of these developments would be. What would CityScape have looked like without GPLET? Is a couple of extra stories or more units really worth the cost?

Good public policy isn’t based on guesses. The community got one important concession on the Derby Roosevelt Row GPLET agreement when City Council stipulated that 5 percent of the units be rented out at reduced rates. But is that the smart or most economically efficient play in the long term? Your guess is as good as mine.

We’ve had some great reporting on Downtown Devil about GPLET this year. Staff reporters Kara Carlson, Daniel Perle and Kevin Lane have done an excellent job digging into this complicated topic. Then there’s the in-depth report I did two years ago. But there’s room for improvement. We’ll continue to dig into the topic, and it would be great to get audience input on what questions you want answered.

One thing is clear to me: Unless understanding the true impact of this tax incentive becomes a community priority, more of these projects will be granted without adequate scrutiny, and this community that so many have put so much time into building may not live up to its full potential.

To continue the conversation or learn more, you can tweet @agnel88_philip.

Agnel Philip is Downtown Devil’s Editor-in-Chief. Contact him at aphilip3@asu.edu.

Editor’s note: Government Property Lease Excise Tax agreements are a complex topic that the Downtown Devil broke down extensively in a previous report. If you’d like to learn more about GPLET you can read the report here.