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Loopholes in university tax law can allow private businesses to avoid property taxes

Private businesses will always take tax breaks where they can get it. Sometimes they can find such a break within a loophole in property tax law—one that is supposed to apply only to universities.

As Sean McCarthy writes at the James G. Martin Center, “when state legislatures aren’t careful, university administrators can take advantage of their non-profit status—at the expense of taxpayers.”

McCarthy, a senior research analyst at the Arizona Tax Research Foundation, cites the case of Arizona’s “largest commercial office development,” one which “pays no property taxes and will not for 99 years, thanks to a tax avoidance scheme developed by Arizona State University.”

How has this come to pass? The development is actually owned by the Arizona Board of Regents, but the “effective owner” is a private entity. Since the Arizona Board of Regents is exempt from property taxes, “the entire property and the land underneath it are exempt as long as ABOR holds the deed to the property.”

Normally a development sitting on public land would be subject to an effective property tax, McCarthy writes; however, in this case the structure of Arizona state law allows the business to avoid it altogether:

Like most states, all property in Arizona is subject to state tax unless exempt in the state Constitution. Consider a city or county that is seeking to attract businesses for economic development through tax incentives. If this local government entity takes ownership of property and leases it to a private interest, the lessee must pay an in-lieu state excise tax (that functions as a property tax). The city or county cannot shield private interests from taxation entirely.

However, this excise tax does not apply to state-owned land, which includes university property. Arizona law does not anticipate these types of university deals—and the ambiguity is being leveraged by the state universities.

Private businesses operate on public land all the time. In Arizona, they would typically owe the same property taxes as private businesses on private land because they own the buildings. Businesses pay taxes on the improvements to the land with what is called an Improvements on Possessory Rights (IPR) tax, assessed on the building. However, in this State Farm deal where the building resides on university property, the tax is avoided through a lease-back deal whereby ABOR, not private companies, owns the buildings for decades.

“Essentially, the developer and the university split the value of the unpaid property tax; for both of them, it’s a win-win. The university gains a new revenue source and a development which improves the campus, while the developer avoids the full tax bill,” McCarthy writes. But, “for all other taxpayers who must support the underlying jurisdictions that rely on the property tax, it’s a raw deal.”

Read the analysis here. 

IMAGE: Vova Shevchuk / Shutterstock.com

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