Can Residential Development Solve the Fiscal Ills of California Local Governments?

Illustration by Peter Bennett

Proposition 13 hit local governments hard. No longer could local governments, unlike private businesses, formulate their budgets by working backwards--first determining costs and then setting revenues via imposition of taxes to balance their budgets. Although Proposition 13 was the primary villain leading to their depleted revenues, its perceived partner-in-crime was residential development. It was felt that residential development only generated property tax revenues, which were slashed by Proposition 13 and even further reduced due to state government acts in 1992 and 1993. The conclusion was that approving such development would only further impoverish local governments.

Local governments and redevelopment agencies thus turned their attention to commercial development--to generate sales tax revenues and hotel bed taxes that would directly flow into the coffers of local governments. Merely approving commercial development soon evolved into providing gigantic subsidies to insure that the commercial development went forward in one city (as opposed to a neighboring jurisdiction). This led to fierce competition among cities for valuable sales tax and bed tax revenues. However, dissatisfaction with this war, both locally and in Sacramento, is compelling local governments to once again re-evaluate the fiscal impacts of residential development. This re-evaluation, along with assistance from developers and affiliated lobbying groups, may possibly level the playing field for residential developers.

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