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Authorities debate whether lavish economic development incentives are worth the price

Arizona’s city, county and state governments are handing out billions in economic development incentives to attract business — but not without resistance from critics who dispute their necessity.

Incentives are vital tools in cut-throat competition for major corporations and high-paying jobs, proponents say. Detractors claim they allow government to pick winners and losers at taxpayer expense, are costly and unfair.

Incentive lists are long and the programs complex: government-funded infrastructure, sales tax rebates, property tax reductions, job grants and tax credits. Both sides say the lures are commonplace across the nation because large corporations have grown to expect them and the skilled players know how to play one state or city against another.

How successful they have been in Arizona depends on who’s talking.

Political leaders tout companies that bring high-wage jobs, taxes, construction projects, employees who buy homes and shop locally, and create sustainable communities.

Intel in Chandler tops the list. Christine Mackay, Chandler’s economic development director, said Intel returns $2.6 billion a year to the state’s economy, more than any other single company. That eclipses years of property tax reductions, city-funded infrastructure and municipal operation of the plant’s specialized water treatment system. A $5 billion expansion is underway at the site. Intel employs 11,000, and the average annual salary is $130,000, said Barry Broome, president of the Greater Phoenix Economic Council, which is funded by Maricopa County, Valley cities and local corporations.

He and Mackay agree the company would not be in Chandler were it not for the incentives. But the dollar values of the incentives that Arizona and Chandler have given Intel over the years are not public record.

Broome points to Boeing’s recent decision to launch a $1 billion expansion in South Carolina after the state agreed to pay a $120 million incentive — cash he said Arizona never would have put on the table even though the corporation has a presence in this state. “These companies are mobile and the market is competitive. Every one of them is getting some type of significant tax break or they’re not making the investments,” he said.

A question of transparency
Critics say there’s no proof desirable industries wouldn’t have come here without the incentives and that governments have been less than transparent about the deals’ costs to taxpayers.

Kevin McCarthy, president of the Arizona Tax Research Association, cites the high Phoenix Union and Phoenix Elementary school district property tax rates, which he said are the result of property tax breaks known as Government Property Lease Excise Taxes granted to several large downtown Phoenix projects.

GPLETS replace high property taxes with considerably smaller excise tax payments. However, McCarthy said the high value of the land and buildings has resulted in reduced state education money for the districts, which is based on property valuations, not tax revenue.

Records show the combined Phoenix Union High School and Phoenix Elementary School district primary tax rate is $7.75 per $100 assessed valuation, double the rates for Scottsdale, Chandler, Gilbert and Paradise Valley Unified school districts, which include elementary and high schools.

The variety and complexity of incentives make clear-cut arguments difficult for both sides. Public reports rarely contain comprehensive financial information. Property tax calculations don’t include what the rates would have been without incentives. And state law prohibits the Arizona Department of Revenue from disclosing sales tax payments by individual payers, making it nearly impossible to determine if sales tax-related incentives are paying off. Although he is a strong supporter of incentives, Broome agrees that agencies must do a better job of reporting results, give incentives stricter time limits and make sure incentives are performance-based.

However, he is frustrated by the opposition whom he said stand on political theory while his agency, the Arizona Commerce Authority and city economic development officials are working to improve Arizona’s prosperity. “They’re not responsible for Arizona’s economy; we are.”

While detractors such as the conservative Goldwater Institute point to questionable retail incentives and failed solar projects, Broome said economic development programs must be nimble. Technology and economies change and so must incentives. “Companies fade; technologies fade. We have to have policies to compete for export industries because we have to recycle our market.” Hence the search for industries of the future and the trend away from incentives for retail projects which may return sales tax dollars but pay low wages.

Moving away from retail
More than 20 years ago Phoenix contributed land, worth an estimated $8 million, and granted the developer $40 million in sales-tax rebates to build Arizona Center as a retail and entertainment hub for downtown.

Now most of those hoped-for retail spaces are vacant or have been converted to offices.

More recently, Phoenix won a lengthy legal challenge by the Goldwater Institute to give the beleaguered CityNorth development half of all the sales taxes it collects up to $97.4 million for 11.3 years. The project has languished since it opened in 2008, and more than 25 retailers and restaurants have left or decided against opening.

But Mackay said Chandler Fashion Center’s $35 million sales tax rebate that was paid off in 2005 was a good investment. The money funded infrastructure — including road improvements around the center that benefits other retailers. And although annual sales tax figures for the 11-year-old center are not public record, Mackay said the city’s annual sales tax revenues for the mall and surrounding retailers is $5 million.

The Gilbert Town Council recently approved a $2 million sales-tax incentive for a furniture store which members were told would return a projected $11million in sales-tax revenue over seven years. But Town Councilman Victor Petersen voted against the deal after he learned there was no way for the public to know if the furniture store brought in the anticipated revenues. Petersen also said he believes the store would have come to Gilbert without the incentive.

Phoenix no longer offers incentives to retail projects and is concentrating on downtown redevelopment and bringing large companies that create thousands of jobs, said John Chan, economic development director. He said Arizona has fewer tools to encourage downtown redevelopment than other states and that high property values and aging infrastructure make infill projects especially challenging.

Without incentives, Chan said downtown Phoenix would not have an Arizona State University campus, the Sheraton Hotel or the Cityscape mixed-use development built on the site of the former Patriots Square Park.

In March, financial-services giant USAA announced plans to hire 1,000 workers over the next three years to expand its north Phoenix branch.

Chan credits Phoenix’ economic development incentives that started in 1999 when the city spent $10.5 million to improve roads, and other infrastructure around the corporate site. “Our 1999 investment is still paying dividends,” he said.

William Jabjiniak, Mesa’s economic development director, and Brian Friedman, Glendale’s economic development director, did not respond to phone and email requests for interviews. A failed Gaylord hotel project in Mesa and city-subsidized sports arenas that have strained Glendale’s budget have come under fire by incentive opponents.

Steve Slivinski, economist for the Goldwater Institute, said Arizona governments and those in other states “may be throwing money at companies that might have come here anyway. It’s a sad reality but hard to prove. In Arizona, there are very few performance reports and they’re very spotty.”

Government also doesn’t have a good selection record, Slivinski said, citing the rise and fall of retail incentives and the failure of short- lived solar projects. But he doesn’t expect Arizona to stop them unless the federal government steps in with national limits. “We can’t blame cities for doing this because everyone else is.”

The solar company decline brought negative attention to a GPEC-backed tax incentive program for renewable energy. Suntech closed its two- year-old Goodyear plant in March. First Solar built a plant in Mesa but never opened. Broome blames new federal tariffs on the demise but said there has been no loss to taxpayers because the incentives were performance-based and haven’t been paid. He estimated the communities will come out ahead financially because the companies paid taxes and constructed buildings that can be occupied by new users and the Valley received national attention. “They failed and we still made money,” Broome said. “And we’re not giving up on renewable energy.”

Opening up opportunities
Like the businesses they are trying to attract, Arizona’s economic development incentives are constantly changing. The two-year-old Arizona Commerce Authority has a $25 million Arizona Competes deal- closing fund and a long list of incentives for nearly every size and type of business.

Sandra Watson, president of the Arizona Commerce Authority, formerly the Arizona Department of Commerce, said the agency’s multiple programs are enhancing the state’s pro-business image and opening opportunities for innovation and small companies. They are spurring new enterprise and encouraging private investment with tax credit programs for investors. She and Broome are hopeful that the momentum will continue and have supported changes to state law that would create a more uniform system and expand eligibility. The prime targets, Watson said, are export-based industries that will bring wealth to the state: aerospace, semiconductors, manufacturing, renewable energy and financial services.

House Bill 2264 would have expanded property tax incentive eligibility. It was passed by the House but died in the Senate. The proposed property reclassification program had GPEC support and would have set job, investment and wage eligibility requirements for companies to seek a 10-year 72 percent property tax reduction.

Whatever changes are in store for future incentives, Broome said abandoning them would do serious harm to Arizona’s prosperity as aging industries languish and new ones go to the more generous states. “When the economy goes down, there’s no popular political position to stand on. There were no political winners in Detroit,” Broome said, referring to the Michigan city’s struggle after the decline of the auto industry.

Angel Investment
A maximum 35 percent income tax credit for investors in qualified small businesses.

Arizona Innovation Accelerator Fund
An $18.2 million loan program with private finance partners to stimulate finances for small businesses and manufacturers.
Arizona Innovation Challenge
Sets aside $1.5 million for $100,000 to $200,000 awards that go to promising technology ventures.

AZ Fast Grant
Pays up to $7,500 to help a technology company start the commercialization process.

AZ Step Grant
Matching U.S. Small Business Administration and Arizona Commerce Authority funding that offers services to small businesses as they enter international markets.

Commercial/Industrial Solar
Up to $50,000 annual income tax credit for business installing a solar energy device.

Job Training
Reimbursable grants to employers that provide job training.

Military Reuse Zone
Companies located in one of these zones can get sales tax exemptions, tax credit for new jobs and property tax reductions.

Quality Jobs
Income tax credits up to $9,000 for each new job.

Renewable Energy Tax Incentive
Companies engaged in the solar, wind, geothermal and other renewable energy industries may get up to a 10 percent income tax credit and up to a 75 percent reduction on real and personal property taxes.

PIII Playbook
A training and technical assistance program for small technology firms with high-growth potential.

Qualified Facility
Income tax credits for capital investment and new jobs.

Research & Development
Income tax credits for investments in research and development Healthy Forest Several types of tax reductions and credits for harvesters, processors and transporters of small diameter timber.

Additional Depreciation
Accelerates depreciation schedules for acquisitions of commercial personal property.

Foreign Trade Zone
Up to 80 percent reduction in state real and personal property taxes for businesses located in a zone.

Health Insurance Premium
Tax credit to an insurer for insuring individuals and small businesses who were not previously covered by health insurance.

Lease Excise
All real property tax is waived and replaced with an excise tax that is an established rate per square foot and based upon the type of use.

Pollution Control Tax Credit
Ten percent income tax credit on the purchase price of real or personal property used to control or prevent pollution.

Renewable Energy Production Tax Credit
Income tax credit for utility-scale generation systems based on the amount of electricity produced annually for a 10-year period using solar or wind energy.

Sales Tax Exemption for Machinery and Equipment

Exemptions for machinery and equipment used directly in manufacturing, production and distribution of electric power or in research and development.

Solar Liquid Fuel Tax Credit
Income tax credits for research and development, production and delivery system costs associated with solar liquid fuel.
— Source: Arizona Commerce Authority

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