OV council says no to retail incentives

Posted on August 22, 2007 | Type: In the News
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As cities and towns across the state grapple with their own growing pains, Oro Valley recently decided to change how it attracts businesses, particularly retail establishments.

Across the state indeed across the country municipalities often attempt to lure retail outlets by offering them and developers perks and incentives.

In the past few years, voters in Oro Valley and local officials, have opted to sweeten development deals by sharing percentages of sales tax revenues with developers that promise to bring retail centers to the town.

Actions taken last week by the Oro Valley Town Council have, for now, put an end to that practice.

Last Tuesday, the council voted to no longer offer retailers or developers sales tax rebates when negotiating for their location to Oro Valley.

Its long overdue, said Councilwoman Helen Dankwerth, who voted in favor of the measure.

Councilman Barry Gillaspie first proposed the change, which won the support of the entire council except for Mayor Paul Loomis.

There was more information that could have gotten out there, Loomis said.

The Legislature has also weighed in on the issue, recently voting to prohibit Maricopa and Pinal counties from using tax breaks and incentives to attract retailers.

At the local level, Oro Valley may be slightly ahead of the curve on the issue of sales-tax kickbacks.

A recent lawsuit filed in Maricopa County Superior Court challenges the practice on grounds that it violates the state constitution.

The framers of the Arizona Constitution confronted this issue directly, said Clint Bolick, an attorney with the Goldwater Institute, a Phoenix-based think tank that filed the lawsuit on behalf of Valley retailers.

The plaintiffs complaint challenges a retail-incentive deal passed by the Phoenix City Council, which gives nearly $100 million in sales tax rebates over 11 years to a Chicago-based developer thats building CityNorth, a mixed residential and commercial development.

Specifically, the lawsuit claims that sales tax rebate deals violate the constitutions gift clause, equal privileges or immunities clause and a third outlawing special laws.

Bolick said the gift clause prohibits the giving of gifts in the form of subsidies or otherwise.

If one company is singled out for tax advantages and another isnt, then its not getting equal treatment, Bolick said about the practice of handing out sales tax incentives.

Plaintiffs in the case would appear to be blazing a new legal trail, but as such, they face a series of challenges.

Courts typically have been hesitant to meddle in the incentive deals municipalities hammer out with developers and retailers, a fact that may prove the biggest challenge the plaintiffs will face.

Courts are very reluctant to intervene with these types of legal decisions, said Robert Glennon, professor of law and public policy at the University of Arizona law college.

Glennon described incentive deals like sales tax sharing as arms length transactions, because both parties benefit from the arrangements.

In the case of retail development incentives, cities gain jobs and at least a portion of sales taxes the retailers generate.

The problem with the gift clause is that the entity (the city or town) is getting something in return, Glennon said.

But exactly how much municipalities actually do get in return is up for debate.

Oro Valley, too, has in the past enticed retailers by negotiating away sales tax revenues.

The most controversial of the towns economic incentive deals involves coughing up $23 million in sales tax rebates to Vestar Development, builders of the Oro Valley Marketplace.

With out incentives we would not have been able to go forward with this project, said David Malin, project manager for the Oro Valley Marketplace.

Malin said incentives are essential to projects the size of Oro Valley Marketplace, which Vestar likely will spend more than $100 million building.

Such deals generally are seen as the price a city pays for doing business.

If youre looking for a business, especially one with as thin of a profit margin as retail, youre going to have to offer incentives, said Scott Krugman, spokesman with the National Retail Federation.

Krugman said the reason is that many times large retailers are the first to come into economically challenged areas that towns want to improve. That involves a high risk on the part of the retailer, Krugman said.

Another deal the town entered, for the Oracle Crossing shopping center, included $6.5 million in sales tax rebates.

The town also bargained with future sales taxes for Steam Pump Village and the not-yet-built Oro Valley Town Centre.

Ive never been in favor of these incentive deals for retail, said Oro Valley Economic Development Administrator David Welsh. Theyre rarely as effective as municipalities think they will be.

A towns population and its residents income should drive retail development, Welsh said.

Towns that are willing to give away sales taxes just to fast-track retail development are attempting to exert more influence over the economy than feasible, Welsh contends.

The prevalence of sales tax rebate deals leads many experts to question if they actually work to improve the financial outlook of a city.

If the goal (of these deals) is to grow the economy, then the answer is no, said Stacy Mitchell, senior researcher with the New Rules Project, a Minneapolis-based think tank that focuses on strengthening local economies.

Mitchell said cities have better lasting success when they invest in locally owned businesses rather than seducing chain retailers that tend to export most of their profits outside of the community.

Cities that opt, instead, to nurture and expand local economies and focus on what makes them unique, is a better approach in the long term, said Mitchell, who is also author of the book Big-Box Swindle.

Another concern retail incentives raise is the bidding wars neighboring communities often get into in the quest for large-scale shopping centers.

Bolick seems hopeful that the Goldwater Institutes lawsuit will dramatically change how cities contend for business.

Retailers wont be able to pit one city against another, he said.

Gillaspie said the sort of one-upmanship that has occurred in other parts of the country when neighbors vie for the same retailer would be counterproductive to the regional economic approach pursued in the Tucson area.

My position has always been that we shouldnt do it, Gillaspie said of retail incentives.

Oro Valley, at the moment at least, is at the forefront of retail incentive policy changes, having taken sales tax sharing out of the swag bag of goodies it can offer developers.

But reversal of the new rule could be just one council vote away, if in the future another retailer comes a-knocking with promises of chic shopping centers.

You can only go so far to influence future (town) councils, Welsh said.

Bolick said success in the lawsuit means retail subsidies would be taken completely off the table, which he thinks would affect more fiscal responsibility.

City governments, Bolick said, (have been) completely incapable of exercising self-control.

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