Virtually entire Arizona Commerce Authority is an anti-subsidy clause violation

Entertaining corporate prospects is one of the few things the ACA does that doesn't confer an unconstitutional competitive advantage.

The auditor general recently released a sunset review of the Arizona Commerce Authority. It got more than the usual attention these normally dry and nerdy exercises attract. That’s because it included a referral to the attorney general for a possible violation of the state Constitution’s gift clause. The potential violation was lavish entertainment spending on selected corporate bigwigs in association with the Waste Management Phoenix Open, a swashbuckling golf tournament, and the Super Bowl when it was in town.

Lordy, if that’s not failing to see the forest for a solitary and very scrawny tree. Virtually the whole of ACA’s operation is a violation of the Constitution’s gift clause, properly understood. In fact, one of the few things the ACA does that isn’t a gift clause violation, again properly understood, is fete corporate executives who might make an investment in the state. 

Here’s what the constitutional clause says, in relevant part: “Neither the state, nor any county, city, town, municipality, or other subdivision of the state shall ever give or loan its credit in the aid of, or make any donation or grant, by subsidy or otherwise, to any individual, association, or corporation ….” (Emphasis added)

It is unfortunate that this has become known as the gift clause. I’ve tried in vain to get it rebranded as the anti-subsidy clause, since that more accurately reflects its broadest intent and treating it as a ban on gifts misdirects legal thinking about its application in specific circumstances. This referral is a good illustration.

In simplest terms, the anti-subsidy clause forbids government assistance to a particular private actor that gives that actor a competitive advantage and isn’t broadly available to all other actors. And it is a universal and categorical prohibition. The “shall ever” language means never.

For decades, the anti-subsidy clause was a dead letter. Despite the categorical language, the courts read into the provision a public purpose exception that doesn’t exist. And they deferred pretty much entirely to the government officials granting the benefit as to what constitutes a public purpose.

Of late, the Arizona Supreme Court has breathed some life back into the prohibition, but not fully. The new rule is that government has to get at least equal value for any special deal granted to a particular business. And that generalized benefits, such as economic development, don’t count.

This is better than the clause being a dead letter. But, by focusing on what government gets, it is still misdirection. Instead, the focus should be on what the business gets and whether that gives it a competitive advantage that’s not available to others.

According to the auditor general’s review, in Fiscal Year 2022, the ACA doled out $429 million in tax credits and grants. A small percentage of this went to community colleges and others to establish broadly available educational and training programs for small businesses and budding entrepreneurs. These don’t run afoul of the anti-subsidy clause.

The overwhelming majority of the dough, however, went to specific companies to underwrite their operating expenses, including wages and capital expenditures. This clearly gives these companies a competitive advantage through special treatment not broadly available to all. And that violates the anti-subsidy clause, properly understood.

In fact, it even violates the anti-subsidy clause as the state Supreme Court has partially revived it. Unlike some recent efforts by cities to conjure up direct benefits to justify corporate giveaways, there is no pretense that state government as an institution gets anything tangible and direct from the tax credits and grants the ACA hands out to underwrite the operating expenses of specific businesses. The only return is economic development, which the high court has held doesn’t count in determining value received in exchange for a special benefit conferred on a particular business. 

The auditor general’s referral illustrates the wayward thinking calling this the gift clause induces. The actual, specific gift prohibition is on a government entity giving or loaning its credit to a private entity. Putting on the dog for corporate bigwigs at the Waste Management Phoenix Open and Super Bowl doesn’t involve or implicate the state’s credit a whit. 

From the ACA’s perspective, this was a marketing expenditure. Some could regard it as a gift to the corporate executives being feted. But it doesn’t give their companies, if they do locate or expand in the state, any sort of competitive advantage. Which means that it doesn’t violate the anti-subsidy clause, properly understood.  

The contretemps over the lavish entertaining of corporate prospects does illuminate how the Arizona Commerce Authority has failed to live up to its original billing. It was supposed to be a public-private collaboration, with the private sector more involved than possible with a state agency such as the Department of Commerce, the ACA’s predecessor. This was supposed to include a reasonable amount of private sector funding for the collaborative enterprise.

That hasn’t materialized. The ACA is virtually entirely taxpayer funded. 

If the lavish corporate bigwig entertaining had been covered from private sector contributions, there wouldn’t be an issue. 

Having taxpayers foot the bill makes it a political issue and possible problem. But not an anti-subsidy clause violation.    

Reach Robb at robtrobb@gmail.com.