Wednesday, January 11, 2006
As an economist, when cities subsidize retail it galls me.
4.8.2005
Cap Needed on Cities’ Developer Subsidies
by Dave Wells
Published Friday, April 8, 2005 in East Valley Opinins of the Arizona Republic as “Cap needed on cities’ developer subsidies.”
The circus has arrived in Mesa with performances now through May 17 featuring some truly jaw-dropping stunts. Marty DeRito, developer of the Riverview at Dobson project, is sponsoring 20 Mesa Little League teams so children’s uniforms can tout the project. Dan Harkins supports the “No” camp as market analyses indicate only one of two competing cinemas can be sustained—and his is part of the competing subsidized Tempe Marketplace a couple miles away. Jeff “Alt Fuels” Groscost has funneled $32,000 into the “No” campaign while just happening to be a consultant on the Tempe project.
May I suggest, we not do this again.
As an economist, when cities subsidize retail it galls me. The basic premise of retail development is to locate in proximity to the customer, so where you have people, you’ll have retail. If cities think subsidies are needed, taxpayers need a state legislative fix.
If the Mesa Riverview project is built, money spent there will not drop out of thin air. If I buy a television at Wal-Mart, I’m not going to be buying another one at Best Buy.
Disregard the developer’s projections that the developer and city will split $146 million in tax revenue over the next 20 years. It assumes all tax dollars are new and fails to factor in that a dollar today is more valuable than a dollar you have to wait 20 years to receive.
If one assumes that two out of every three dollars spent at Mesa Riverview would have otherwise been spent outside Mesa, then I project over the next 20 years Mesa will net in current dollars between $11 and $18 million on this project. The developer will net between $43 and $59 million, using Ernst & Young’s build out estimates. Why isn’t the gain two-thirds for the city, if two-thirds might be new dollars? Because Mesa is giving between 50 and 75 percent of city sales tax revenues back to the developer, Mesa only gains new revenue after the one-third of sales replacing other sales in Mesa are covered. Across all cities, developers profit at taxpayer expense.
Competing with fellow cities to increase sales tax revenues is lousy policy. Cities shouldn’t be placed in this position. While I find it encouraging that Tempe, Chandler and Phoenix have identified a subsidy-free zone, it’s a mistake to think this zone solves the problem. A regional problem requires either the intervention of the Maricopa Association of Governments (MAG) or the State Legislature.
HB2499 (formerly SB1201) sponsored by Sen. Jack Harper (R-Glendale) and Sen. Ken Cheveront (D-Phoenix) would outlaw these subsidies and slap a sharp financial penalty on cities which proceed to use them anyway. It’s supported by most of the East Valley legislative delegation. Meanwhile, the cities balk at a loss of local control.
I consider this legislation sound tax policy. The bill gives cities ample leeway. As developers are often made to pay for road improvements, regardless of whether a project succeeds, the bill allows cities the discretion of repaying developers for this expense. Likewise, environmental clean up costs can be reimbursed. That’s not to say there’s no room for adjustments. For instance, if in effect as currently drafted the Riverview project’s shared sales tax subsidies would be illegal, but the Tempe Marketplace would be exempt because it’s in a redevelopment zone, an unfair advantage. While in economically depressed areas some subsidies beyond reimbursing site preparation costs might be needed, a cap of 25 percent of sales taxes over 10 years would be wise.
To give cities a chance, the measure only goes into effect if MAG can’t deal with the problem by next April. The cities still want to kill it.
Look beyond the Mesa Riverview debate and call your State Senator and Representatives at 1-800-352-8404. Tell them you want local sales taxes for parks and police, not for developers!
Dave Wells of Tempe holds a doctorate in Political Economy and Public Policy and teaches at Arizona State University. Reach him at Dave@MakeDemocracyWork.org.
