Daniel Weintraub: A bipartisan plan to wean our cities off the sales tax

By Daniel Weintraub -- Bee Columnist

Sacramento Bee

March 2, 2003

It's rare these days to see a Democrat and Republican in the state Capitol agree on anything, let alone an ambitious proposal to help solve one of the state's most vexing, long-term economic problems. So folks should really take notice of an idea floated last week by Assemblymen Darrell Steinberg and John Campbell.

Steinberg, a Democrat from Sacramento, and Campbell, a Republican from Irvine, want to re-jigger the way sales and property taxes are collected to remove incentives that now distort the way local governments view proposals to build new housing and commercial developments.

The problem today is that local governments have become too dependent on the sales tax. They are chasing and sometimes subsidizing retail projects that generate sales tax revenue. Cities will do anything to get a new Wal-Mart or auto mall in their jurisdiction, even offering lucrative tax breaks to lure these businesses across city lines.

Housing and commercial development, meanwhile, gets the cold shoulder from government planners, because these types of projects generate only property tax. Often, the amount of tax they generate in the current system is not enough to pay for the added city services their new residents and office tenants demand.

One way to fix this is to change the relative mix of tax revenues on which local governments depend, giving them a relatively smaller portion of the sales tax and a larger portion of the property tax. And this can be done without increasing or decreasing the total amount of tax paid in any jurisdiction.

The result would be a tax system that exerts less pressure on local officials to interfere in decisions that should be dictated by the real estate market and the shape of local communities, not by the revenue needs of city budget writers.

"I want to remove those disincentives so that local jurisdictions are not punished for building whatever they believe is appropriate for their community," Campbell said. "If that's apartments, if that's single family homes, if that's manufacturing or if that's shopping centers, so be it."

Campbell, who owns several car dealerships in Orange County, knows well how the game is played. He has been given low-cost loans and sales-tax rebates to locate his dealerships in one city over another. As a businessman looking out only for his own interests, he loved it.

But as a policy maker, he recognizes that the pursuit of retail over everything else can be destructive to a community or region.

"I've seen cities that wanted my business, and that was great for my business," he said. "But I think they ought to want some other things, too. I don't think they should just want my business to the exclusion of all else."

Campbell opposed a proposal by Steinberg last year to force cities in the Sacramento region to pool part of their sales tax and then redistribute it based on population rather than the location where it is collected. That would also have reduced incentives that favor retail development. But it would have limited the ability of any one jurisdiction to control its destiny.

"This really empowers local governments to make their own planning decisions and not fear they will be punished for choosing one type of development over another," Campbell said.

Steinberg, meanwhile, is thrilled to be working with Campbell, who is his ideological opposite but has become a good friend. The combination could be potent since each holds a powerful position in the Assembly, with Steinberg the chairman of the Appropriations Committee and Campbell vice chairman of the Budget Committee.

"This is an idea that's been talked about for many years," Steinberg said. "In a time like this, when there's lots of talk about the need for structural reform, here's an opportunity to get something done."

The bill already has support from builders and housing advocates. Cities that have been chasing sales tax will probably oppose it, because the future growth of property tax in their cities might still be less than the anticipated increase in sales tax revenue. Other cities that might support the shift in concept are already voicing fears that the state will come back later and re-direct some of the property tax they would be giving cities under this swap.

But all local finance is a creation of state government to begin with, and the state, if it wanted to, could strip local governments of sales tax today without replacing the lost money with anything. So that fear, while justified, is a separate issue that shouldn't color the debate over this proposal.

Steinberg and Campbell are offering the most significant reform of local government finance in at least a generation. It's the rare proposal with hardly any downside, and it's an idea that in the long run would benefit even the cities that are tempted to oppose it today.