PHOENIX -- When the upscale stores -- Bloomingdale's, Nordstrom and other magnets for affluent shoppers -- open their doors at the CityNorth "urban village" now being built, Phoenix taxpayers will be there, sort of. They are providing a $97.4 million subsidy to the Chicago-based developer of the 144-acre project that will include residential, office and hotel facilities.

The subsidy -- allowing the developer to keep sales taxes collected up to $97.4 million -- might, however, violate the state constitution. Represented by the litigation arm of the Goldwater Institute, six taxpayers who own small, unsubsidized businesses say the subsidy violates three constitutional provisions.

The equal privileges and immunities clause says government cannot without good reason -- a large loophole -- provide a privilege or immunity to one taxpayer without granting it to all. Another provision forbids laws conferring special benefits on a single corporation.

The third, and most interesting, provision, "the gift clause," was supposed to erect a wall of separation between government and corporations by forbidding gifts or loans of state credit, or state donations, grants or subsidies, or the state becoming a shareholder. This clause, of which many other states have variants, was born of chastening experiences, but has been vitiated in Arizona and elsewhere by judicial mischief.

The plaintiffs say, reasonably, that the clause's original intent was sensible and should be restored through strict construction. The developer says, reasonably, that it undertook the $1.8 billion project on financial understandings that should not now be altered.

The developer's profits come primarily from residential and office portions of the project, but Phoenix cares most about sales taxes from the retail stores. The city says, plausibly, that the subsidy is necessary because otherwise it would be engaging in unilateral disarmament: Burgeoning suburbs, which are rubbing up against it and one another, stand to reap substantial sales tax windfalls by luring -- with subsidies -- businesses to locate on one side or the other of jurisdictional boundaries. If the CityNorth subsidy had not been offered, the developer would be building a differently configured project.

This is a new imbroglio about an old and discredited practice -- booster socialism. In the 19th century, governments practiced what is now called "corporate welfare," particularly benefiting railroads, which could make or break farmers and communities. Benjamin Barr, a senior fellow at the Goldwater Institute, writes:

"Illinois invested $10.2 million in 1837 for internal improvements, including 1,341 miles of railroad. Only 26 miles of the railroad were completed, making the interest on the debt exceed the state's revenue, which forced the state into default."

Arizona, having made improvident investments of public money in private corporations, adopted the gift clause at its 1910 constitutional convention. But the clause has been hollowed out by judicial decisions allowing entanglements of government and corporations when the entanglements satisfy the elastic criteria of having a "public purpose" or providing a "public benefit." Continued...