I Told You Arizona Was Conflicted

A couple of posts ago I said that Arizona could be very libertarian, and then could be just the opposite on the next day.  I showed the libertarian side in that post, here is the other:

The state Senate voted 17-11, with two senators not voting, to allow a
rock-and-roll theme park proposed between Phoenix and Tucson to issue
$750 million in revenue bonds to help build the project....

Revenue bonds are repaid with income from the funded projects. The park would tax visitors to repay the bonds.

To issue the bonds, the developers must come up with $100 million of their own financing.

Oh my god, three quarters of a billion dollars of public financing for a theme park?  And we give the theme park operator taxation authority?  And the developer has to come up with less than 1/8 the total cost from private sources?  Yuk.  Just for scale  (I know the spending sources are apples and oranges), $750 million is more than 2.5 times the total of the federal earmarks that go to Alaska, the #1 porkbarrel state.  So here we are patting ourselves on the back for being Congressional pork-free, and then our state Senate does something like this.  Sigh.


  1. JohnF:

    I'm not sure any public funds are involved here. The linked article provides no details, but in the typical revenue bond set up, an artificial entity is created that qualifies as a municipality and can therefore issue bonds whose interest is exempt from taxation. As such, when they are sold to the public, a lower interest rate is available to the issuer. After they are sold to the public, the "municipality" lends the money to the developer, who builds the project. The bondholders can only get repaid if the developer repays the loan to the municipality, and cannot look to any public body, such as the city or state, for repayment. That's why they are called "revenue" bonds--they are dependent for repayment solely from the revenue of the project that goes back to the artificial municipality.

    In short, no public funds are involved. Only the money raised from investors from the sale of the bonds. Plus the developers' own $100 million.

  2. ColoComment:

    If JohnF is correct, then it would be analogous to a privately-financed toll road, where bonds are offered and sold to the public to raise the capital for the road construction, and the investors are paid back principal with interest from the toll fees. Yes?

    But, if that's the case, then WHY is Arizona state senate approval required?

    PS: does the world really need another theme park? And, if so, why not just convert that Biodome-thingy that's somewhere between Tucson & Phoenix?

  3. JohnF:

    Government approval would be needed to create the artificial municipality.

    Also, another scenario I did not mention is that an existing municipality could issue the revenue bonds. That would also need governmental approval, I assume (I'm not an expert on AZ law).

    However it is done, if these are true revenue bonds, all the money comes from bond buyers, all funds to pay back the bonds come from the revenue stream of the project, and the public fisc is not at risk.

  4. Dave:

    I agree with JohnF.

  5. CT_Yankee:

    Naturaly, anyone trying to raise cash for another business (without political connections) has to pay higher interest to compete with the tax-exempt bonds. The finance market is tightening up, so there is already less money left for legitimate businesses.

    There cannot be a good reason for this.

  6. markm:

    JohnF, it's not clear what the deal actually is (why do news media send financial ignoramuses out to report on things like this?), but any way I see it, the public fisc is at risk. If those are tax-free bonds, the treasury is out those tax collections, but more importantly, if the state of Arizona issues bonds, I expect it will be responsible for repayment if the business fails.

    What in heck do they mean by, "The park would tax visitors to repay the bonds."? I think this means that a portion of the ticket sales will go to bond repayment. IF the project is successful and draws as many customers as expected, no tax money is involved, but what happens if it fails to draw enough business to pay off? I'm thinking that this is just a roundabout way of financing a private business with loans guaranteed by the government. I hope you all understand that this saves the business from paying a risk premium in higher interest rates, while the risk becomes the taxpayers' problem.

    And depending on how the contract is drawn up, the operators might even wind up with a profitable business - from the rides and concessions - while low gate revenue leaves the taxpayers holding the bag for part of the bonds. Why should politicians care about details like this when it's not their money, and their role in creating the mess will have been forgotten by the time the cost becomes clear?

  7. Anonymous:

    These are revenue bond similar innature to those created by school districts to fund new buildings from revenue. One can argue that amusement parks sbould be entirely privately funded but it is erroneous to argue that these bonds are funded by tax dollars.

  8. JohnF:


    You are right that we don't really have the details on this from the link, but I don't think the state is "out" any tax dollars--to assume that is to assume that the project could go forward with taxable bonds, which appears not to be the case (but who knows), and, moreover, that the bondholders receiving the taxable interest live in AZ. If they don't, AZ wouldn't get any income tax from them anyway.

    Moreover, the only thing the government is giving up here is that it is lending its tax exempt status to a developer. No government cash is at risk.

    You could make an economic argument of some sort that if the developers couldn't make a go of the project with non-tax exempt bonds, then maybe the whole thing is wasteful, but that seems to me something of a reach.

    I reiterate, however, that if these are to be classic revenue bonds, the bondholders take the risk that the project will or won't be able to pay them off--the state is not on the hook, by guarantee or otherwise.

  9. John Moore:

    If these are tax-free bonds, then this is certainly government playing in what is normally the private sphere. One could argue that the theme park has negative externalities (i.e. brings in revenue through indirect effects such as payroll, supporting businesses, increased tourist flow, etc), but that is going down a slippery slope that has been long abused.

    Tax-free bonds means the public is subsidizing the interest rate by foregoing taxes on the higher interest rate that would be otherwise charged. True, AZ gets to push the subsidy off on other states (where there are bondholders), but it's still a subsildy.

  10. Kyle Bennett:

    the public is subsidizing [fill in the blank] by foregoing taxes

    I sometimes wish I had a button that could send a painful but non-harmful electrical jolt to the seat of anyone saying this.

    In this case, it is the buyers of the bonds who are not subsidizing the public tit by paying taxes on their investments. Oh, I'm sure the developer is well-connected and that there's all kinds of ancillary benefits that will accrue to the connectees who put this together, and to their legislative co-conspirators, but the foregoance of taxes is, in and of itself, purely a good thing. The travesty is that the rest of us who are not so well connected will continue subsidizing everything else, regardless of whatever sordid details of the park we were deemed unauthorized or too incompetent to be informed of by the state news organs.

    And John, I'm (mostly) kidding about the electrocution. No malice or ill-will is seriously intended.

  11. JohnF:


    Remember, there is only an "avoidance" of tax payments if, in the absence of the tax-exempt deal, there would be tax payments. Then the tax exemption thwarts the tax payments. But why do you assume that would be the case? More likely, the project would be too expensive for the developers if they couldn't borrow at the low rate--they would deploy their capital elsewhere.

  12. John Moore:

    In the perfect world, and out of context, you'd be right. But in the real world, where people do pay taxes on some interest, the cost is shifted. The only interesting value propositions are after-tax.
    BTW - notice that municipal bonds shift tax burdens from localities to the federal government (and hence to the people at large) in the same way.

    For a strong example of how after-tax vs before-tax economics works, just look at the late '80s S&L collapse. Without going into all the government action that set up the ridiculous S&L system, let me point out that when the 1986 Democrats insisted on removing the "tax shelter" from "passive investments" (real estate limited partnerships, movies, etc), they guaranteed the collapse of the S&L's. Changing the earnings from before to after tax knocked about 30% off the asset value of commercial real estate, making the S&L's insolvent. Naturally, GHW Bush, who wasn't on the scene, took the political blame.

  13. Scott:

    OT, but a post on 'What is normal' that I think will gladden you. You are not the last sane person on Mother Gaia.


  14. Kyle Bennett:


    the project would be too expensive for the developers if they couldn't borrow at the low rate--they would deploy their capital elsewhere.

    True, but if the tax on the investment return alone is enough to make the deal infeasible, then all it says is that taxes distort economic calculations in real and concrete ways. I'm not assuming that's not the case, I'm expressing my opinion that not paying taxes is good, and if this deal allows capital to be put into tax-free vehicles rather than second-best taxed vehicles, then it's a good thing.

    John Moore:

    municipal bonds shift tax burdens from localities to the federal government

    Your unstated premise here is that you take some currently extant level of tax burden as a given that must remain constant and has to be satisfied in some way. Given current political realities, that's not entirely unfounded, but it skews one's evaluation of the practical and moral consequences of this kind of deal. It puts the blame for your high tax burden on those who do not shoulder "their part" of it. I implied, and here state plainly, that no-one's current tax burden is properly their share (aside from perhaps that miniscule part that funds legitimate functions of government), and the fault for your being saddled with it lies squarely with those who impose it on you (who could instead choose to actually forego the taxes they declined to take from that other guy), not with those who escape it in some part.

    I'd go through the example of the neighbor whose house doesn't get robbed after yours does, or the thief who steals your good silverware but deigns to "subsidize" you by letting you keep your wide-screen TV, but I'm sure you've heard them before.

    The S&L example is more of the same. You apparently meant it to demonstrate the market distortions that taxes create, and it succeeds at that. But is there a larger point? How does it speak to your argument about the shifting of tax burdens?