In every region of the country, chain store developers have successfully played neighboring communities against one another to gain approval for their stores and to exact the biggest tax breaks and public subsidies. But nowhere have city officials been as desperate for sales tax revenue—and thus big box stores, shopping malls, and auto dealerships—than in California, where the competition for retail development has been especially costly and destructive.
The problem dates back to 1978, when California voters passed Proposition 13, which slashed property taxes and dramatically reduced revenue for city services. The state made matters worse in 1991 when it reduced cities’ share of the remaining property tax revenue.
To make up for the losses, local governments have aggressively pursued sales tax revenue. Cities collect a one-percent tax on every retail dollar spent within their borders. The sale of a $25,000 car will thus generate $250—more than many houses contribute to city coffers through property taxes over an entire year.
Dependence on sales tax revenue has led California cities to make land use decisions that would otherwise seem unwise. Many have rejected much needed new housing or office buildings with high-paying jobs in favor of adding more low-wage retail to an already over saturated market.
Car dealerships, superstores, and shopping malls have rapidly proliferated in new suburbs and along highways. Often these developments cannibalize sales from older retail centers, forcing local businesses and established malls to close, and further aggravating competition for tax base.
Chain store developers have adroitly manipulated this competition to exact huge tax breaks and subsidies, and, in some cases, to gain exemptions from environmental regulations.
“Short of betting in Las Vegas, it would be hard to devise a worse way to fund city services,” contends Rick Cole, Azusa city manager.
Now, a broad coalition is backing a bill that would move the state one step closer towards ending what critics call “cash box zoning.”
Sponsored by Assemblyman Darrell Steinberg of Sacramento, the bill would establish a system for sharing sales tax revenue among the 18 municipalities in the Sacramento metropolitan region. Supporters hope it will create a model for the rest of the state.
Originally, Steinberg’s bill called for full revenue-sharing, where all of the sales tax revenue in the region would be pooled and redistributed based on each community’s population. Steinberg later modified the measure to enhance its chances of passing.
As currently structured, the bill would pool only sales tax revenue generated from new development. One-third of the pooled revenue would be redistributed to the cities based on population. Another third would stay in the city where the development is located. The final third would also go to the host city provided it meets certain “smart growth” goals, including affordable housing creation, open space preservation, and infill development.
Backed by a coalition of labor unions, neighborhood activists, and city planners, the bill passed the California Assembly by a one-vote majority in January.
The bill now goes to the Senate, where several powerful trade associations have vowed to block its passage: the California Business Properties Association, which includes Wal-Mart, Chevron, and McDonalds; the California Retailers Association, representing Home Depot, Target, Circuit City and the like; the California Chamber of Commerce; the International Council of Shopping Centers; and the California Building Industry.
The state’s municipalities are strongly divided over the measure, with struggling cities in support and wealthy new suburbs opposed. The California League of Cities has come out against the bill on the grounds that it undermines local control. Supporters counter that it is developers, not cities, who now call the shots.