Bill to curb municipal tax breaks for development projects advances in the Senate

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A Republican bill that would rein in a controversial tax break used by municipalities to entice large development projects that cities say they need is one step closer to being sent to the governor’s desk. 

The legislation, which is backed by conservative groups, would cut in half 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. Such deals have long been a target of free-market Republican lawmakers. They also earned the ire of former Attorney General Mark Brnovich, who said the tool improperly shields development from property taxes. 

The conservative Goldwater Institute, which backs House Bill 2309 and has for years pushed legislation to curtail GPLETs, 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.  

Proponents of HB2309 pointed to those decisions and others as a rationale for the bill, saying that passing the legislation will help shield the state and localities from further lawsuits. 

“We think that it is time as a result of the gift clause decisions for this to be narrowed,” Kevin McCarthy, president of the Arizona Tax Research Association, told the Senate Finance Committee on Monday. “This year’s bill is mainly towards an eye to make sure this stays legal.” 

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. 

Chad Heinrich, the state director of the Arizona chapter of the National Federation of Independent Business, told the committee that the bill is about creating more fairness in the taxation of properties across the state. 

“We think that this does strike that more fair balance,” Heinrich said, adding that smaller businesses generally do not have access to economic development tools like GPLET. 

But cities and towns that use GPLET argued that changing the abatement period could have dire economic consequences for the state and localities who have used the tool to attract large development projects. 

“We’re driving the market to a tighter area,” Christine Mackay, community and economic development director for the City of Phoenix, told the committee. Mackay argued that Phoenix has already revised how it uses the tool, created tighter guidelines for its use and the tool has allowed for mixed use development to be created that has attracted jobs, businesses and residents back to the city’s core. 

Tom Savage, a lobbyist for the Arizona League of Cities and Towns, made a similar argument, adding that GPLET is the only economic development tool available to municipalities across the state due to the nature of Arizona’s gift clause and other laws. 

Savage cited a report by the Rounds Consulting Group, which is run by local economist Jim Rounds, that said the change in the abatement period could lead to a reduction in the number of projects being finished and have economic impacts for the state. 

“[T]he project of smaller scale likely would have been less sensitive to the duration of the GPLET incentive, meaning the legislative proposal could impact larger projects to a greater degree,” Rounds concluded in his report. “This would cause some economic development harm.”

“Such a decrease in the incentive period may deter the development of higher-quality projects, as their financial feasibility would be negatively impacted,” the report says. 

Critics of GPLET argue that the use of the incentive creates a tax burden on nearby residents. 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. 

“I get where people are concerned about this,” Sen. Brian Fernandez, D-Yuma, said when explaining his opposition to the bill. “I do understand the apprehension that small businesses have when seeing this used.”

Committee Chair J.D. Mesnard, R-Chandler, said that he agreed with Fernandez’s comments — and that is why he voted for the bill. 

The bill heads next to the full Senate for consideration.

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