A conservative think tank is threatening legal action if the city doesn’t repeal an ordinance designed to help Tucson businesses.

The Goldwater Institute sent a letter to the city in October outlining why the local preference ordinance, which allows the city to award contracts to local companies even though those companies might not be the lowest bidder, is illegal.

Goldwater contends the ordinance drives up the prices for taxpayers and violates both state law and the city’s charter.

Tucson’s local preference ordinance was passed in June 2012. It allows the city to grant a contract to a local business or vendor who made an offer up to 5 percent higher than the lowest bid.

Both the city’s charter and state law mandate contracts be awarded to the lowest bidder.

The ordinance allows the city to get around that, and it grants extra percentage points to local companies during the bidding process. Tucson businesses get an extra 5 percent. And Arizona firms outside the Tucson metro area get a 3 percent preference over national competitors. Meanwhile, national franchises that have local owners receive 1.5 percent.

The preference policy applies to city contracts for goods and services ranging from $50,000 to $1 million, which is roughly 60 percent of all city contracts.

Proponents say it keeps dollars local and is a vital tool for Tucson companies to remain competitive.

“When somebody does business with a local company, the money stays here and generates more tax revenue,” said Katharine Kent, owner of The Solar Store, who was on the advisory committee that developed Tucson’s ordinance. “Getting business locally has the multiplier effect, and it’s much better for our community to keep the work here.”

Kent said more than 20 states have local preference laws in effect already, and Tucson’s law is no different.

“It’s intended to level the playing field,” Kent said. “If businesses are not able to do business in New Mexico, we should make it easier to do business here.”

But Goldwater Institute attorney Jon Riches disagrees.

He said local preference ordinances allow local officials to hand out contracts to “favored special interests” at the expense of the general public.

He said the ordinances squander tax dollars and harm companies.

“We know the direct cost to taxpayers is at least a five percent increase on those contracts,” Riches said.

Indirectly, prices continue to rise even higher as qualified, out-of-town companies become discouraged and stop bidding on city contracts, he said.

Also, Tucson companies could be shut out of other markets as other towns enact their own ordinances in retaliation, Riches said.

The best course of action, he said, is for the city to repeal it.

But that seems unlikely at this point.

“So far, we’ve heard nothing but crickets,” Riches said. “We’re disappointed that we haven’t heard back from the city.”

As for moving forward with a lawsuit, Riches said his organization is currently exploring its options.

Mayor Jonathan Rothschild doesn’t see anything wrong with Tucson’s ordinance.

“It is my belief the ordinance is legal,” Rothschild wrote in an email. “Ordinances like this have been utilized across the country to benefit business communities. If someone who has standing thinks otherwise, they can challenge the ordinance.”

City Attorney Mike Rankin said his office is prepared to defend the ordinance if Goldwater decides to take the matter to court.

Other Arizona municipalities, such as Phoenix, have local preference statutes on the books. Riches said Goldwater chose to confront Tucson first because its ordinance was the most far-reaching and affected a large number of businesses and people. He said his group would wait until the Tucson situation plays out before it considers addressing other municipalities.

Contact reporter Darren DaRonco at 573-4243 or ddaronco@azstarnet.com. Follow on Twitter @DarrenDaRonco