City bets $217 mil on business jackpot

Posted on June 09, 2006 | Type: In the News | Author: Peter Corbett
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SCOTTSDALE - Scottsdale is betting taxpayer money - $217 million - on incentives for retail and redevelopment projects that it expects will pay off over 20 years to generate nearly a half-billion dollars in city revenue.

SkySong, the costliest incentive project at $125 million, is the latest investment for the city. It is wagering that the ASU Scottsdale Innovation Center will revive Scottsdale's sagging southern flank.

As construction gears up at SkySong amid concern about the direction of the initial development, city economic development leaders are confident that the project will more than double the city's investment with the tax revenue it generates. advertisement 
 
 More importantly, they hope that SkySong will prosper as a research and office park that brings jobs, innovation and more redevelopment surrounding the 37-acre site at McDowell and Scottsdale roads, said Dave Roderique, Scottsdale's chief of economic development.

But not everyone is so sure of the big payoff.

"It's a huge gamble of hundreds of millions of dollars of the city's money, well our money," said Noah Clarke, an economist with the Goldwater Institute, a conservative think tank. "You have no guarantee that any of these businesses are going to prosper."

Despite the critics, Scottsdale has not been timid in offering incentives over the past two decades and competing with Phoenix and other Valley cities for coveted projects.

That includes going after everything from a Costco warehouse store to improvements at Scottsdale Fashion Square and a pitch to lure Google Inc., which Tempe landed this year for an operation on the main Arizona State University campus.

$466 million projected

Its retail and redevelopment incentives are projected to generate $466 million in city tax revenue over 20 years.

In most cases, Scottsdale has offered tax rebates over several years to lure businesses. With city sales tax revenue flat in the 1980s, Scottsdale turned to other incentives to generate more revenue for the city.

Those incentives have gone for retail and redevelopment projects, major employers and a historical preservation project.

-The restored Hotel Valley Ho is getting $2.5 million in tax breaks over 20 years with an expected return of $13 million.

-Scottsdale started with incentives in 1987 when it gave $105,967 to Costco to build a warehouse store in the Scottsdale Airpark after the company had staked out a site in northeast Phoenix. Scottsdale estimates that Costco has contributed more than $22 million in revenue for the city.

-In the 1990s, Scottsdale gave $8.2 million for five shopping centers, and $2.5 million to six car dealers to keep them in Scottsdale on Frank Lloyd Wright Boulevard instead of fleeing to Phoenix.

-Scottsdale Fashion Square has benefited with two incentive deals that will cost the city $66 million with an estimated return of $185 million.

95 percent return

Overall, the $17.9 million in retail-project incentives are expected to generate $331 million for Scottsdale's tax coffers. That would mean that city gets a 95 percent return on its investment.

Roderique, the city's economic development leader for 20 years, said some of the retailers would have come to Scottsdale without incentives but the city wanted to make sure they did not locate in Phoenix or on the Salt River Pima-Maricopa Community.

Salt River caught the city's attention in 1989 when its Scottsdale Pavilions shopping center cut into Scottsdale's sales tax revenue.

"We look at it as paying an insurance policy of five percent to make sure they came here," Roderique said of luring the retailers.

Now, with the larger redevelopment incentives of $8.2 million for the Scottsdale Waterfront and $125 million for SkySong the city is focused on sparking other redevelopment and creating jobs, although the financial return is important, he said.

Strategy debated

Economists and conservative business observers have long debated the wisdom of incentives.

Scottsdale business consultant Craig Cantoni, a frequent critic of government spending, said incentives are unfair.

"It discriminates against small businesses," he said. "A dry-cleaner up the street doesn't get a tax break."

Cantoni added that the private sector would have eventually redeveloped the Los Arcos Mall site without the city incentives that are going to SkySong.

Dennis Hoffman, an economics professor at the W.P. Carey School of Business at Arizona State University, said he sees the benefits of Scottsdale investing in SkySong and Phoenix spending millions on an ASU downtown campus and biotech research facilities.

But he questions whether Valley cities are wise to compete with incentives for retail projects.

There ought to be a more regional approach to economic development, Hoffman said.

"With a talented business like Google coming in, the whole Valley wins," he added.

Reform suggested

Hoffman suggests reforming the way Arizona shares its sales tax revenue to halt the incentives and competition between cities.

Clarke, the Goldwater Institute economist, said the incentives game keeps escalating as each new company asks for more money.

Plus, the payoff for Scottsdale is slow.

"We have to wait 20 years before we get our money back," Clarke said, "That's not the way to do it."

The better way is to reduce government red tape and lower taxes so that businesses want to locate in Scottsdale, he argued.

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