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Smart Land Use Choices Are Critical for California's Economy

Center for Continuing Study of the California Economy (Published June, 1999)

There is a compelling business case for improving land use decision-making in California - to attract the entrepreneurs and workers who will lead California's knowledge-based industries. There is also a compelling community case for improving land use decision-making in California ? to maintain a high quality of life for ourselves and future generations.

"The future of our region will be determined in large part by the way in which we accommodate an expanding population and economy. How and where we build our homes, factories and office buildings will determine how much time we spend in traffic, the quality of our air and water, and how much open space remains to us."

-- Trends and Challenges Association of Bay Area Governments

The good news is that business leaders and residents share many common interests and objectives regarding land use choices. Hopefully, these common interests can provide the basis for collaboration to overcome some of the barriers that have made land use and development choices so contentious in the past.

Land use decisions play a critical role in determining how many high wage, high growth firms can locate and actually choose to locate or expand in California's regions. These locational choices have a direct impact on the opportunities available to California workers to earn a rising standard of living for their families.

There are two direct links between land use decisions and a growing economy.

Land use decisions and incentives directly affect the availability and affordability of housing and quality of transportation. Business leaders report that high housing prices and long commutes are a major challenge in recruiting new workers.

Today, there are strong disincentives to new housing in most California communities, including 1) low tax revenues from housing for cities, 2) the reliance on high development fees, which greatly increases the cost of moderately priced housing, and 3) the preference of residents for higher density housing to be built elsewhere ("not in my backyard").

Land use decisions and incentives directly affect the choice that local communities face in evaluating new retail vs. manufacturing developments. In most communities, current fiscal realities strongly favor retail development over manufacturing facilities. The unintended result is that fiscal rules favor retail activity paying low wages over manufacturing or high wage service jobs (e.g., multimedia, software, consulting).

In addition, land use decisions have a major impact on quality of life; quality of life has a major impact on business location decisions. The links between land use decisions and quality of life are well known to both residents and business leaders.

1. Land use decisions affect the location of jobs and housing. Today these choices are resulting in longer commutes and more congestion.

2. Land use decisions affect the revenues available to communities for public services. Under today's fiscal rules there is a disincentive for much new housing and job creation, and funding for quality of life services such as parks, libraries, open space, and schools is under severe pressure.

3. Land use choices affect the environment through impacts on air quality, water availability and quality, and waste disposal.

4. Land use choices affect California's urban areas. Today's fiscal incentives encourage sprawl and impede the revitalization of core city neighborhoods.

5. Land use choices affect development pressures on agricultural lands.

6. Land use choices affect where land is preserved, as well as where land is developed. Today these choices are made in isolation, not simultaneously, and as a result, neither goal is met well.

Another obstacle is that Californians are not in agreement about who should pay for new infrastructure. Californians are particularly divided on the question of whether new residents should be entirely responsible to pay for new infrastructure - "growth should pay for itself." While this slogan is initially attractive to some people, there are two reasons to take a different view:

1. While some infrastructure directly serves new residents (e.g., new schools and roads in an undeveloped area), much of the new infrastructure either modernizes existing facilities or also serves existing residents and businesses.

2. There is broad agreement that California's last wave of infrastructure spending ended in the 1960s. Since then residents have not paid to keep pace with growth, and serious infrastructure shortages have developed.

For these reasons, placing the burden of funding infrastructure solely on new residents will lead to inadequate funding relative to the state's economy and create an equity imbalance between new and existing residents.

The following text is excerpted from a list of principles for prosperity and quality of life included in the report.

Fiscal Reform is Essential Meeting economic prosperity goals requires fiscal reform. Funding infrastructure for economic and quality of life goals requires fiscal reform. Creating land use planning incentives for sustainable regions requires fiscal reform.

While there is no agreement yet on solutions, there is growing agreement that is bringing economic, planning, and environmental interests together on three major problem areas.

Current Fiscal Rules Give the Wrong Land Use Planning Incentives

Local governments have a fiscal incentive to add major sales tax generating activities and often have a fiscal disincentive to add housing and even manufacturing facilities. The economic reality is, however, that the number of big retail facilities is limited and the only choice is where they locate within a region - so the fiscal competition adds nothing regionally. On the other hand, fiscal disincentives for housing can reduce a region's housing production or make housing more expensive, as cities place high fees on new housing to make up for lagging revenues from other sources.

"Today, however, land use planning no longer creates a healthy balance in California's communities. All too often, communities are forced to make land use planning decisions based entirely on budget decisions. The question of how to create healthy, balanced communities has become secondary to the immediate need to balance the budget."

--Restoring the Balance:Managing Fiscal Issues and Land Use Planning Decisions in California California Planning Roundtable

High development fees are a feature of California's post-Proposition 13 local government finance system. These fees, designed to help revenue-starved communities finance infrastructure and public services, add substantially to the cost of new housing.

"Our analysis shows that the fees imposed on new construction are significant, typically falling in the range of $20,000 to $30,000 per development. In one community, the fees and assessments totaled 19 percent of the mean sales price."

--Who Pays for Development Fees and Exactions Marla Dresch and Steen M. Sheffrin Public Policy Institute of California

These fees may encourage sprawl by leading residents further out into rural areas to find cheaper housing - even though all evidence suggests that residents want to live near their jobs if available housing is close to their price range.

Current fiscal incentives may even cause communities to think twice about approving manufacturing or research facilities because they don't provide much revenue.

"There is no incentive at this point for local government to spend any time or money pursuing industrial development. The only real incentives are in the retail area ... and that doesn't create a sustainable economic strategy for the region."

-- Lee Harrington, president Los Angeles Economic Development Corporation

California's fiscal system directly impedes environmental protection. The results of poor fiscal incentives for housing endanger rural and agriculture lands. The results of inadequate local revenues from development restrict open space preservation. Sprawl spreads the impacts of poor air quality.

"The environment is a big loser in the state's dysfunctional local government fiscal rules. Local communities are forced to focus land use planning on raising revenue. California needs fiscal incentives to reduce sprawl."

--Mary Nichols, executive director Environment Now, Los Angeles

Current Fiscal Rules Make Infrastructure Funding Difficult

Current laws impede the ability of Californians to fund infrastructure investment in two major ways.

1. State bond issues and the state budget fund part of California's infrastructure investment. At present there is no systematic capital investment planning in California. Moreover, the state budget still requires a two-thirds majority for adoption.

2. Local governments fund another part of California's infrastructure investment. There is great concern that the two-thirds voting requirement for most local infrastructure funding prevents a majority of voting Californians from controlling decisions on planning for the future.

"The tax structure should enhance the state's economic competitiveness, taking into consideration the level and quality of public services the tax system finances. Particular concern should be paid to the capability of the tax system to support investment in planned infrastructure critical to the state's economic competitive-ness and to accommodating the state's rapid population growth. In particular, a simple majority of local voters should be able to approve general obligation bonds for infrastructure projects if the projects are included in a local capital improvement plan. The tax system should not include fiscal disincentives to sustainable development and should have minimal influence on local land use decisions."

--Concepts for State and Local Tax Structure Reforms California Prosperity Through Reform Project and California Council for Environmental and Economic Balance

Current Fiscal Rules Do Not Support Economic Growth

California's state-local fiscal relationships are failing on both quality of life and economic growth criteria. In 1998 the fiscal policy interests of residents and business are closely aligned in the desire for fiscal reform.

Residents want attractive communities with high quality public services. Businesses know that such communities are essential to attract cutting edge industries, entrepreneurs and workers.

Residents want public infrastructure investment to ensure adequate capacity in schools, transportation, water, airports and prisons. Even when capacity can be expanded through better use of existing facilities, California faces a large backlog of infrastructure investments. Businesses know that world class infrastructure is essential to support California's technology and export sectors.

Residents know that current fiscal rules make most housing development a drain on their public services. Businesses know that current fiscal rules make it difficult for regions to provide the amount and diversity of housing that companies need to attract workers and their families.

The Sales and Property Tax Base Does Not Keep Pace With Economic Growth

California's local communities rely heavily on sales taxes and property taxes to finance local public services. The fiscal disincentives for smart land use caused by the current system were discussed in the preceding section. It is also true that the sales and property tax base is not keeping pace with economic growth - i.e., local communities are funded by the state's slowest growing major tax bases.

Since 1990, total personal income in California has grown by 35.5 percent - slightly outpacing the rate of population growth and inflation (30.9 percent). Personal income tax revenues - the state government's major tax base - have grown even faster.

The sales tax base has grown by just 20.9 percent during the same 7 years while assessed value has grown by 23.6 percent. Sales tax revenues are likely to continue falling behind income growth as consumers spend an even greater fraction of their income on non-taxable items and some Internet transactions are not taxed.

While the property tax base has grown rapidly in some years and in some communities, the overall property tax base will always be limited by the 2 percent annual cap on assessed value increases on specific property. The sales tax and property tax bases that currently finance local governments in California are not keeping pace with economic growth. Even one-time adjustments, such as giving local governments a higher share of the sales tax, do not solve the long-term challenge of providing local governments with a revenue base that keeps pace with economic growth and provides positive incentives for smart land use decisions.

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