Amidst the news 2021 will bring, we are sure to see major developments in litigation regarding the legality of development incentives in Arizona. Common incentives include sales tax rebates, municipal contributions towards infrastructure, and transfer/leaseback arrangements to qualify for the Government Property Lease Excise Tax (GPLET).
What is forthcoming in 2021 are two decisions from appellate courts, and possibly additional lawsuits, that will prompt questions regarding the legal rules for GPLETS and incentives for development.
Most important is the latest “gift clause” case, Shires v. Carlat, which was argued in the Arizona Supreme Court in December 2020. The issue is whether Peoria’s payments to assist the development of a private university satisfied the gift clause. Under Turken v. Gordon, a development incentive must pass two tests in order to satisfy the gift clause: (1) the incentive must serve a public purpose; and (2) local government must realize a sufficient benefit—“adequate consideration”— compared to the amount of its expenditures. Both the trial court and the court of appeals upheld the legality of Peoria’s actions. The Arizona Supreme Court granted review, which is not a good sign. It was argued in early December.
The case could be resolved in several ways, including a ruling that the whole transaction is legal. But the Supreme Court might issue rulings that could cast a shadow on other development incentives. The Court could hold that Peoria did not receive sufficient consideration for its assistance. Turken framed the question of consideration as a quantitative comparison, i.e., dollars spent vs. dollars returned. In this new case the Supreme Court could change the law by making the qualitative (and thus categorical) determination that securing the “operation of a private business” can never count as consideration. Alternatively, the Court could hang its decision on the public purpose requirement. Turken held that courts must give great deference to a city council’s determination of permissible public purpose. In this case, however, the Supreme Court has entertained the idea that spending money to encourage the development of a private business is not a permissible public purpose. Any holding to this effect would seriously disrupt incentive programs.
A decision in Schires could come at any time, probably in the first half of 2021.
A second gift clause case arises from the Attorney General’s challenge to an ASU project to build a hotel and conference center in Tempe. The Attorney General’s Office has challenged the ability of the development to escape property tax, and has also challenged the transaction under the gift clause. The lawsuit bogged down in procedural issues pertaining to the statute of limitations and the underlying authority of the Attorney General’s Office. The outcome will have more to do with procedure as opposed to the legality of the project itself, but the court of appeals could easily say things that would have a collateral effect on legal challenges in the future. This too will be decided in the next several months.
Finally, there is the prospect of new gift clause litigation, which could presumably pick up at the end point of the now-finished lawsuit between the City of Phoenix and the Goldwater Institute (GI). In 2017 the GI sued the City, raising numerous legal challenges to the use of a GPLET for a redevelopment project in downtown Phoenix. After three years the case was litigated to a draw—the trial court concluded that the agreement violated the gift clause, but rejected all of the other arguments made by GI.
The City of Phoenix did not appeal the trial court decision. The resolution offers both pros and cons for both sides. Because there will be no decision from a higher court, there will be no formal precedent that governs future cases. Moreover, the GI’s lawsuit challenged only that specific transaction—not the GPLET statutes themselves—meaning that its limited victory is quite narrow. In theory, the GI could argue that the judgment constitutes collateral estoppel on the issues concluded against the City of Phoenix. But this argument could only be made against Phoenix alone and, moreover, making this argument would force any future litigation into an esoteric debate over the scope of the issues that were resolved. In short, three years of GPLET litigation wound up “full of sound and fury, signifying nothing.”
These developments will resolve some questions, but inevitably raise new questions. A Supreme Court decision regarding the gift clause, for example, could easily contain obscure or ambiguous sentences. What does this sentence mean? Does it apply to this different context? Is the decision retroactive? We will stay ahead of these issues and be ready to advise our clients.