Sales tax lust: Chasing retailers doesn't help the economy

(Published Nov. 12, 1999)

The city of Sacramento's economic development staff is interested in backing an auto mall in South Natomas if the mall would lure auto dealers from Fulton Boulevard in the unincorporated county. Call it the Bonnie and Clyde theory of municipal finance: When you want more money in your pocket -- in this case, the 1.25 cents of the sales tax that goes to the local jurisdiction where the sale occurs -- you steal it from someone else.

Sacramento city officials are not alone in having sales tax lust in their hearts, as Bee Staff Writer Mary Lynne Vellinga made plain in a recent article. Promoters of the new city of Elk Grove are supporting a new regional mall at Lent Ranch, on the county's urban service boundary, a development that would shift buyers and therefore tax revenue from the unincorporated county and give the new city a stronger revenue base. On the flip side, Citrus Heights is facing the possibility of revenue drain when a new Roseville mall opens soon to compete with Sunrise Mall.

Yet from the perspective of the region as a whole, all the public energy devoted to the sales tax hunt is a dead waste. Luring stores and auto dealers from one jurisdiction to another adds nothing to the regional economy.

Retail is the lounge car on the economic train. Except where retailers can draw customers and dollars from outside the region (think San Francisco's Union Square or Manhattan's Fifth Avenue), the retail sector is pulled along by the engine of a region's economy. The more goods and services a region produces and the more its population and incomes rise, the more stores it can support. Auto malls and home improvement warehouses are the consequence of economic growth, not the cause.

The lust for the sales tax dollars can hurt communities. Researchers at the Public Policy Institute of California concluded in a recent study that the main effect of the chase for stores "is probably to shift resources from the public sector to retailers, their developers and landowners." They also found it warps planning priorities; city managers, they report, value generating sales tax dollars over creating jobs, controlling traffic congestion, building affordable housing and protecting the environment.
And in the coming decades, even the winners in the sales tax chase may find themselves deep in regret. As the Internet revolutionizes how we shop, the most troubled cities could be those stuck with figuring out what to do with vacant big box stores and auto dealerships.

Experts and policy-makers around the state have been talking about the irrationality of the sales tax chase for more than a decade. But local governments find it hard to practice unilateral disarmament, lest they lose revenue to their neighbors. And governors and lawmakers have been reluctant to deal with the issue -- both because piecemeal fixes can have unintended consequences and because the needed overhaul of California's broken system of state-local finance requires a longer attention span and more political capital than they have been willing to bring to the issue.

Until some leaders step forward in the state Capitol, local governments will spend too little time building stronger economies and too much energy trying to filch sales tax fruits from their neighbors' trees.

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