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May 21, 2008 > Redevelopment - boom or bust?

Redevelopment - boom or bust?

This is the sixth chapter reprinted with permission from Redevelopment: The Unknown Government, A Report to the People of California published by Municipal Officials for Redevelopment Reform (MORR). Ninth Edition, September 2007.

Redevelopment agencies are debt machines that have amassed nearly $81 billion in statewide bonded indebtedness.

By law, a redevelopment agency can receive property taxes only after it has first incurred debt. Property tax increment revenues may only be used to pay off outstanding debt. Debts may be in the form of bonds, accounts payable to developers or reimbursements to cities for operating expenses.

Part VI: Sales Tax Shell Game

A drive north on the Santa Ana Freeway (I-5) from Disneyland toward L.A. reveals the chaos redevelopment has wreaked. There is the Buena Park Auto Square, built around dealerships lured from nearby Fullerton. Just north is the old Gateway Chevrolet site. Where did it go? Just across the county line to La Mirada which lured it from Buena Park with its own publicly-financed auto mall (on land conveniently designated as "blight").

Still further north is another auto mall in Santa Fe Springs, with numerous long-vacant parcels waiting for the dealerships that will never come. To the west is Cerritos, whose giant redevelopment-funded "Auto Square" became a pioneer in auto dealer piracy, draining off dealerships - and sales tax revenue - from its neighbors. Nearby Lakewood lost so many car dealerships that its city manager labeled Cerritos the "Darth Vader of cities."

Drive any stretch of freeway in San Diego, Los Angeles, Santa Clara or other urban counties and you'll see redevelopment-funded auto malls, with their hopeful reader boards and carefully graded - and vacant - dealer sites. They're the product of a bitter fiscal free-for-all, as cities coax each other's dealerships away with ever-sweeter giveaways.

Car dealers, of course, are loving it. They no longer have to make a profit from mere customers. They can now play one city off against another for cheap land, tax rebates and free public improvements. You can't blame them. But you can blame the laws that encourage this shell game.

The same pattern is repeated with department stores, discount chains, home improvement centers, professional sports franchises and even gambling casinos. Corporate decisions once based on market forces are now determined by which city's redevelopment agency will cut the best deal.

Costco played off Morgan Hill against Gilroy for the highest public subsidy, finally settling for $1.4 million in tax hand-outs from Gilroy. "They played us against someone else to get a better deal," said Planning Director William Faus (San Jose Mercury News, August 6, 2002).

The expected big box sales tax bonanza rarely materializes, however, as they increasingly sell non-taxable food. More Costcos and Wal-Marts mean fewer Ralphs and Safeways. Non-grocery retailers, too, suffer from subsidized competition, as K-mart and Toys-R-Us have closed hundreds of stores. There is no economic development, only a costly shifting of customers within the same market area.

The rush for sales taxes has caused cities to favor commercial development over all other land uses. This fiscalization of land use offers incentives to giant retailers, while discouraging new housing and industry. It favors consumption while discouraging production, all in the name of economic development.

The California Redevelopment Association (CRA) encourages retail developers to expect public handouts. The CRA regularly co-hosts conferences with the International Council of Shopping Centers (ICSC) where retailers and mall promoters shake down city officials for handouts.

"California has more than 300 redevelopment agencies," gushes the ICSC magazine Shopping Centers Today. "Unlike smokestack industries and manufacturing plants, retail development is a source of clean revenue for cities" ("ICSC Forges Public/Private Partnerships," May 2001).

This pro-retail/anti-industrial bias pervades redevelopment promoters. They value low wage retail jobs at the expense of high paying manufacturing jobs. They value people only as consumers, not as skilled workers. They value consumption at the expense of production.

Per capita sales tax revenues vary widely from city to city. Affluent suburban ring cities get more than older urban-core cities hit hardest by sales tax inequality. Redevelopment has added to these distortions as cash-flush suburban cities lure retailers out of the poorer inner city.

In California Cities and the Local Sales Tax (Public Policy Institute of California, San Francisco, 1999), researchers Paul Lewis and Elisa Barbour show how the sales tax bias has skewed local decision making and how the billions in redevelopment subsidies have failed to expand sales tax revenues: "From the 1970's to the 1990's, sales taxes, measured in real dollars per capita, were a fairly stagnant source of funds."

Even as personal incomes grew rapidly in the halcyon '90s, sales tax revenues remained flat. An aging California population is investing more of its money or spending it on health care, travel and personal services, none of which is subject to sales tax.

Internet commerce, too, will cut into future sales tax revenues. Burgeoning interstate online purchases are sales tax exempt by federal law, and taxes on in-state purchase are difficult to collect.

These factors make it unlikely that the huge public subsidies poured into retail businesses will ever pay back the new sales taxes so touted by redevelopment boosters.

State leaders are finally focusing on the need for sales tax reform. The "fiscalization of land use" promoted by redevelopment practices now show signs of being addressed.

AB 178 was sponsored by Assemblyman Tom Torlakson (D-Martinez) and signed into law in 1999 by Governor Davis. It requires any city or agency that uses public money to lure a business away from a neighboring city to reimburse that city for half the sales taxes lost, over a 5-year period.

Proposition 11, passed in 1998, allows neighboring cities to enter into regional sales tax sharing agreements. This would stabilize revenues and end bidding wars for retailers. With so many cities packed into certain urban counties (Los Angeles County has 88 cities), however, it is difficult for cities to work out such agreements on their own.

A more far-reaching reform would be to replace the point-of-sale to a per capita sales tax disbursement. This would create a more equitable distribution of public revenue, and completely end costly competition over major retailers.

The Public Policy Institute's sales tax study indicated that 59.9% of the state's population live in cities and counties that would be better off in a per capita system, especially residents of older cities.

Newspapers as diverse as the L.A. Times and Orange County Register have editorially supported sales tax reform.

Then-speaker Antonio Villaraigosa's Commission on State and Local Government Finance proposed replacing half the cities' and counties' sales tax share with more stable property tax revenues.

In 1999, Controller Kathleen Connell's State Municipal Advisory Reform Team (SMART) issued its recommendations, including a phased-in per capita sales tax disbursement system over 10 years that would assure cities and counties a greater share of property taxes.

A move away from sales tax reliance will restore fiscal rationality to local government and balance to land use decisions. It will also undercut the leading rationale for redevelopment agencies.

With assured and stable revenues, cities will cease subsidizing retail and treat residential and industrial uses more fairly. With a greater share of the property taxes for their general funds, cities will be loathe to divert them into their redevelopment agencies.

A return to common sense in local government finance will end the irrationality that redevelopment has created.

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