Phoenix accused of ‘gifting’ large tax breaks to developer

The Goldwater Institute has filed a civil complaint in court against the city for entering into a development deal that plaintiffs argue doesn’t benefits taxpayers.

PHOENIX — A complaint filed in court accuses the city of Phoenix of violating the state’s constitution by “gifting” millions of dollars in tax breaks to a developer planning to build a high-rise building downtown. 

The Goldwater Institute filed a lawsuit last week on behalf of two property and business owners in downtown Phoenix who object to the city giving a tax break to developers building a 26-story apartment building near Garfield and Sixth streets. 

In the complaint, the plaintiffs argue that the tax abatements given to the Hubbard Street Group to build the complex are unnecessary and potentially violate the “gift clause” of the Arizona Constitution. 

“There have been other high-rise residential developments in the Central Business District in downtown Phoenix that have been financed and constructed without a tax abatement or other financial assistance from the City,” the lawsuit states.

The issue involves Phoenix’s use of the Government Property Lease Excise Tax, a program intended to help spur economic development by letting private entities lease out government-owned buildings. 

But the Goldwater Institute believes the city improperly offered the GPLET incentive to Hubbard’s developers, especially considering Phoenix has previously faced litigation with how it doles out tax breaks.

In 2020, an Arizona judge ruled in a separate case that Phoenix had given an “illegal” tax break to developers wishing to build a 21-story complex downtown near Second and McKinley streets.  

Now the Goldwater Institute is going after the city again for another project that the plaintiffs think is a burden to taxpayers. 

“The City of Phoenix is doing it anyway and they’re doing it in defiance of that order and in defiance of clear direction from the Arizona Supreme Court,” said Jon Riches, Goldwater’s director of national litigation.

Public records show the Hubbard project will cost $87 million to build and is estimated to generate up to 77 permanent new jobs in the downtown region. 

According to the deal with the city, developers will convey ownership of the property over to the city and Phoenix will lease the building back to developers for a period of at least eight years. 

After the lease expires, ownership of the building transfers over to developers.

During the years Phoenix owns the building, the developers would pay $25,000 in rent for years one and two, $50,000 each for the third and fourth years, $75,000 in the fifth year, and $100,000 in each of the last three years. 

Developers additionally agreed to make a one-time payment of $100,000 into the city’s affordable housing trust fund, public records show.

Plaintiffs argue the amount of rent paid to the city pales in comparison to the estimated $7.9 million in property taxes Phoenix is forfeiting. 

The Phoenix City Council voted 7-2 in October 2020 to pass the Hubbard development agreement with members Sal DiCiccio and Jim Waring voting against it. 

During that meeting, Mayor Kate Gallego and Vice Mayor Laura Pastor expressed some hesitation they had about the development deal before deciding to vote in favor of it.

“I do have some concerns in this for the future,” Pastor said during the October council meeting.

A spokesperson for the city declined to comment on the Goldwater Institute’s complaint.

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