Speaker's Commission on State / Local Government Finance

The Mall Sales Tax Trap:
Study documents the price that localities pay
for lusting after big retailers and their tax revenues.

Los Angeles Times - Monday, July 19, 1999

Local government in California needs rescuing from the sales tax trap. Increasingly, cities are striking a Faustian bargain as they compete for big retail businesses and the sales tax revenue they generate. Given a choice among an industrial park, a housing development and a shopping mall, cities will usually pick the mall, offering tax incentives, zoning exemptions and other favors to win it. "Cash boxes" such as Kmart stores and auto malls are prize catches. The reason is that localities get to keep part of the statewide sales tax raised in their boundaries, with no strings attached.

Anecdotal evidence of winners and losers abounds. Cerritos, for example, finances a good portion of its city government with sales tax proceeds from the giant auto mall and shopping center that bracket the 605 Freeway. But the zeal with which cities pursue sales taxes has its costs. For the first time, researchers have documented the sacrificing of sensible planning and the disregard of the wider needs of the community, from housing to jobs.

The study, by the Public Policy Institute of California, a San Francisco-based nonprofit research group, is based on detailed interviews with officials of more than 300 cities. It finds that the quest for sales tax revenues is the biggest single influence on land development. This happens even though sales tax income statewide is stagnant, influenced by growing tax-free sales of out-of-state catalog companies and Internet retailers.

Since 1956, cities and counties have received one cent for every dollar of taxable sales in their jurisdictions. Sacramento collects the money as part of the 7.25% general statewide sales tax and returns it to local government. Sales taxes account for an average of only 10% of cities' revenues, but it's an important share because the cities can spend the money as they wish. This is especially important because cities and counties have lost major portions of their property tax revenues in the past 25 years.

State government sends other forms of aid to cities and counties but often dictates how the money is to be used. Local governments plead for more flexibility, arguing that they know best how to spend their funds, and they are correct.

There has been lots of talk about reform in recent years but little action. This might be the year to finally get something done. Legislative leaders and Gov. Gray Davis support a change, and several blue-ribbon commissions are studying ways to redistribute the fiscal pie among the state and the localities. Any of those ways might require a constitutional amendment.

The commissions should come to a decision, and legislative leaders should make it their priority to draft and approve any necessary legislation or amendments for California voters to consider next year. The issue has momentum now, and if lawmakers miss this chance it might be years before it is revisited. In the absence of reform, cities will continue to fight one another for auto malls.

Copyright 1999 Los Angeles Times. All Rights Reserved

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