February 17, 2021
By Christina Sandefur
The Arizona Supreme Court ruled unanimously in Schires v. City of Peoria last week that government officials violated the state Constitution’s Gift Clause when they gave away millions of taxpayer dollars to two private businesses who promised nothing in return to the public, but received the money only to run their own businesses for their own private profit.
So it comes as no surprise that attorneys who make their living helping cities skirt the rules would bemoan this outcome and attempt to portray it as some radical departure from existing law. To the contrary, Arizona’s Gift Clause was written to ban exactly what Peoria officials did in this case: giving public money to private businesses in hopes that by operating, those businesses would spur “economic development.” And Arizona courts have made clear for generations that such subsidies are unconstitutional.
The text of the Gift Clause could not be clearer: It prevents government from “mak[ing] any donation or grant, by subsidy or otherwise, to any individual, association, or corporation.” That language was chosen precisely because in Arizona’s early days, government officials generously subsidized railroads, banks, and other corporations with taxpayer money, believing these subsidies were “critical for economic development.” But spending taxpayer money to subsidize private entities in the name of economic development led to waste, corruption, overbuilding, and economic crises. Consequently, almost every state amended its constitution in the 19th century to include limitations such as the Gift Clause, which forbids public aid to private enterprises and assert that “government should not be engaged in economic pursuit of any kind.” This was the purpose behind Arizona’s Gift Clause: to ban all manner of government aid to private entities—even those with “great potential for public benefit.”
Arizona’s constitutional prohibition on corporate welfare wasn’t just an historical accident. Subsidies to business are economically wasteful and politically dangerous because when government officials try to pick winners and losers in the economy, they tend to choose those businesses that have political influence rather than those businesses that consumers actually want. And politicians aren’t particularly good at picking winners anyway, because they get paid even if they pick wrong. Private businesses have an economic incentive to make good investments, because they have to put their own money on the line (or convince lenders that their enterprise will be successful). If they succeed, they enjoy the rewards, and if they fail, they suffer the economic consequences. But when bureaucrats dole out taxpayer money to select businesses, it’s taxpayers who bear the risk if the business fails. In fact, if the business fails, politicians typically see that as reason why the business should get another subsidy out of the public purse.
That’s why the people of Arizona made it clear from the start that that taxpayer dollars could only be spent on public purposes—police, infrastructure, fire protection, and the like—and leave it to the private sector to decide which businesses succeed, based on merit instead of political influence. And that’s why the state Supreme Court has consistently said that whenever officials spend taxpayer money, it must be for public purposes, and it must benefit the taxpayers directly. Mere hopes of future prosperity resulting from corporate welfare have never been enough to satisfy the Constitution.
And for good reason: Subsidies typically do not actually generate the promised economic benefits. Even those who favor corporate welfare schemes admit that “giveaways” “have not worked out well” much of the time. A decade ago, New Mexico taxpayers were left with what Popular Mechanics dubbed a “ghost town” after officials gave $200 million dollars to Virgin Galactic to build a private spaceport that never panned out. In Arizona, the town of Gilbert left taxpayers with $36 million in new debt and students with thousands of dollars in loans when it subsidized St. Xavier University, only to see it shut its doors after only a semester. Indeed, Peoria itself left taxpayers in the lurch only a few years before when it gave money away to Trine University, which closed its doors in 2017 after failing to generate the economic prosperity the city had hoped for. But even when subsidies do generate economic activity, they’re still inefficient because we cannot compare that activity to what people might have done with their money if they’d been allowed to choose for themselves instead of being forced to subsidize a private business.
A decade ago, when there appeared to be some confusion about what the Gift Clause means, the Arizona Supreme Court clarified. In Turken v. Gordon, it declared that Phoenix officials violated the law when they gave almost $100 million to a private developer to build a shopping center. The city claimed it wasn’t a handout—it claimed it was actually paying for public parking spaces. But the court held that this was a “grossly disproportionate” amount to pay for parking spots, and therefore it amounted to a subsidy. The Court ended its decision with a warning. “We understand,” it said, that cities might have not have understood that subsidizing private businesses in this way was illegal, but from now on, cities must obey the rules: spend money only for public goals, and don’t pay private entities vast amounts of money without getting something valuable in return.
Last week’s decision in the Schires case was nothing new—it was simply a reinforcement of what the Court said a decade previously—indeed, a century previously—and what too many local governments have been ignoring since.
Ignoring the lessons of history, local bureaucrats and their defenders have tried to mischaracterize the Schires decision as a drastic departure from existing law—in part because they also ignore the lessons of economics, and insist that government subsidies to private businesses are a good idea. Fortunately, Arizona’s founding fathers saw fit to write the lessons they had learned into the state’s fundamental law. And the role of courts is to enforce the Constitution, not to decide cases based on pie-in-the-sky views of government economic planning. There’s nothing radical about enforcing the Gift Clause’s ban on subsidies—it’s bureaucrats who have been behaving contrary to well-established law. Fortunately, the state Supreme Court refused to be swayed…again.
Christina Sandefur is the Executive Vice President at the Goldwater Institute.