Cities are at war with each other in a high-stakes bid to lure retailers to their area. To win the corporate spoils, cities offer incentive packages that include everything from land grants to a share of sales tax revenue. In this bidding game, however, the only winners are the corporations. Cities and taxpayers lose money, and existing businesses face unfair competition.
But thanks to constitutional "gift clauses" that restrict states from subsidizing private companies, taxpayers can fight back against cronyism and government waste.
Throughout the 19th century, states invested heavily in private railroad developers, canal builders, and other projects that ultimately went bankrupt and left taxpayers with the bill. During the 1840s and 1870s, states defaulted on their debt obligations seventeen times.
In response, nearly every state amended their constitutions to prohibit certain types of “gifts” or subsidies to private business — loans, investments, and appropriations for private projects. These bans were intended to build a wall of separation between government and business.
As political consensus deemed them unnecessary, these “Gift Clauses” fell into disuse, but recently, two challenges to public subsidies in Arizona have been upheld by the Arizona Supreme Court. In all, 48 states have adopted some form of these provisions into their constitutions.
Recently, two legal challenges to corporate subsidies in Arizona have been upheld by the state Supreme Court, based on the constitution's "gift clause."
Article IX, Section 7 of Arizona’s Constitution reads:
"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, or become a subscriber to, or a shareholder in, any company or corporation, or become a joint owner with any person, company, or corporation.”
In his famous letter to the Danbury Baptists, Thomas Jefferson declared that the Constitution erected a “wall of separation between church and state.” The Father of the Constitution James Madison agreed. “Religion and government will both exist with greater purity, the less they are mixed together,” he wrote in an 1822 letter.
Two centuries later, a new wall of separation must be built, this time between business and state. It is becoming clearer every day, to all ends of the political spectrum, that business and government will, as Madison wrote of religion, “both exist with greater purity, the less they are mixed.”
“Sometimes the law defends plunder and participates in it. Thus the beneficiaries are spared the shame, danger, and scruple which their acts would otherwise involve. Sometimes the law places the whole apparatus of judges, police, prisons, and gendarmes at the service of the plunderers, and treats the victim — when he defends himself — as a criminal. In short, there is a legal plunder...
Legal plunder can be committed in an infinite number of ways. Thus we have an infinite number of plans for organizing it: tariffs, protection, benefits, subsidies, encouragements...guaranteed profits...free credit, and so on, and so on. All these plans as a whole — with their common aim of legal plunder — constitute socialism.”
— Frédéric Bastiat, The Law, 1850