O.C. Cities Rethink Heavy Reliance on Retailers for Tax Base

By SHELBY GRAD

May 26, 1998 12 AM PT

TIMES STAFF WRITER

Executives from Home Depot came to Brea last year with an offer that most cities could not refuse in the wake of Proposition 13.

Let us build a store on some vacant industrial land off Imperial Highway, the giant retailer said, and we will boost the city’s coffers with a steady supply of sales tax revenues.

But to the surprise of some, the Brea City Council turned down Home Depot’s proposal and decided to keep the land zoned for a manufacturing plant--despite the tax dollars the store would bring.

The move highlights the growing concern many city officials in Orange County and across the state have about how Proposition 13 has changed--and distorted--land-use decisions. Few have gone as far as Brea, but other communities are beginning to question whether the landmark 1978 tax-cutting law has resulted in an unhealthy “fiscalization” of city planning.

Proposition 13 severely limited the amount of property taxes received by cities, making them far more reliant on sales tax revenue to pay for such services as police, fire protection and park maintenance.

Critics complain that it forced cities to focus on retail development like Home Depot over offices and low-cost housing, which often don’t generate enough revenue to pay for the cost of providing services.

“You see a lot of decisions about development based on financial issues rather than solid analysis,” said Los Alamitos Mayor Ronald Bates, president of the League of California Cities. “When you focus on just retail, you bring a lot of minimum wage service jobs to the community, not the corporations and engineering firms that pay higher wages.”

Brea officials concluded that they had enough stores but could use a light-industrial plant at the site sought by Home Depot.

“It’s in our best interests to have a varied economic base,” said Mayor Lynn Doucher. “The tax revenues are one thing. But we want a balanced community with high-paying jobs, corporate headquarters and manufacturing.”

The passage of Proposition 13 began a 20-year quest by cities to lure auto dealerships, appliance stores as well as Home Depots, Ikeas and other “big box” retailers. At times, cities have “stolen” major tax generators like auto dealerships from each other by offering the businesses tax incentives and other perks.

But there are signs that the competition is cooling.

Orange County’s redevelopment agencies have an informal policy of encouraging companies that call about relocating to first check with their own city to see whether it can offer any suitable sites.

Anaheim and Fullerton decided a few years ago that instead of fighting over which city got a Price Club, the store would stay in Fullerton but both cities would share the tax revenues.

“It doesn’t make sense for cities to cut each others’ throats to get more sales taxes,” said Fullerton Councilman Chris Norby. “We spend more and more and get less and less.”

Despite such sentiments, the search for sales tax revenues continues. It can be seen from Huntington Beach, where a city-financed electronic sign advertises car dealerships to motorists on the San Diego Freeway, to Westminster, where Orange County’s last drive-in theater was razed last year to make way for a Walmart.

Sales tax revenues generated from retail stores in Orange County have doubled since 1980, to $19.4 million in 1996, according to the state Board of Equalization. The jump far outpaces population growth during this period.

Proposition 13 remains popular with voters, especially in conservative Orange County. The proposition capped property taxes at 1% of a home’s assessed value. Property taxes cannot increase more than 2% a year, regardless of the inflation rate.

Proposition 13 backers argue that more shopping centers is a small price to pay for the billions of dollars the law has save homeowners. And many city officials who turned to retail centers for cash after the initiative passed aren’t making any apologies.

In Fountain Valley, for example, the city now points with pride to the sprawling Southpark shopping center that was built a decade ago in an effort to boost sales tax revenues.

The center, anchored by a Costco, is at Newland Street and Talbert Avenue in what was Fountain Valley’s last major agricultural area.

Neighbors fought the proposal, urging a less “intense” development like housing. The issue was placed before the voters, who approve the plan.

“This development really turned us around financially,” said Elizabeth Fox, the city’s fiscal-services manager. “If we didn’t have it in place when the recession hit, the city would have suffered a major financial hardship. [The revenues] are essentially for providing services.”

Before Southpark, the city had no destination retail centers to draw customers from surrounding cities. Costco, then a Price Club, agreed to move its store from Santa Ana to Southpark--in part because of financial incentives offered by Fountain Valley’s redevelopment agency.

“When the city was laid out 40 years ago, it was supposed to be a residential community with some retail on the major streets,” said City Councilman John J. Collins. “We recognized after Prop. 13 that we had to secure new sources of revenue.”

Today, Fountain Valley generates about 40% of its revenues from sales tax and 23% from property tax. In 1978, property tax accounted for 36% of revenues while sales taxes accounted for 21%.

Collins said Southpark offers convenient shopping for residents and provides money for expanded police and fire services without raising taxes. “The money has to come from someplace,” he said.

Some Costco shoppers agree with Collins. But others, like Huntington Beach resident Gwen McNery, said they are growing weary of the big-box stores.

“They are popping up everywhere. I think it’s too much.” said McNery. “You drive down the street and you have a Price Club, then a Home Base, then a Home Depot. Enough is enough. I don’t like the look.”

Scott Bowlens, an associate professor of social ecology at UC Irvine, expressed a similar view. “These big boxes bring a blank facade to the street,” he said. “No matter how nicely they are designed, they still dominate the landscape.”

Because Proposition 13 is so popular, efforts to soften its effects have proven difficult.

The most significant reform occurred in 1994, when the Legislature overhauled the laws governing redeveloping agencies. The changes made it more difficult for agencies to offer tax breaks as a way of luring car dealers and department stores.

A few years ago, the state Constitution Revision Commission proposed sweeping changes in the way local governments are funded and made it possible for cities to get a bigger share of property taxes collections than they presently receive. But the group’s recommendation got little attention from lawmakers.

Last year, some legislators proposed that sales taxes generated in each county be distributed to cities on a per-capita basis. But communities that now receive healthy tax revenues oppose the idea, fearing they would get less under the proposal.

A few months ago, Lancaster and Palmdale held lengthy discussions about calling a truce in their legendary battle for retailers and sharing all future sales taxes revenues equally. The proposal generated attention across the state, but negotiators could never reach a deal.

“A lot of people realize this system is broken,” Los Alamitos’ Bates said. “But it’s so complicated and political that few people are willing to take it on.”

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Proposition 13’s Cut

Nearly a quarter of Orange County homes and other properties were purchased before the passage of Proposition 13 in 1978. These properties’ owners enjoy the greatest benefits of the measure, which capped property taxes at 1% of assessed value and limited increases to 2% per year.

Purchase date

Pre-1978: 24.47%

1979-85: 16.25

1986-90: 20.72

1991-95: 24.05

1996 and later: 14.51*

* Includes less than 1% “other”

Gross value (millions)

1996 and later: 34.6*

* Includes $7.4 million “other”

Most properties purchased before 1978

* Anaheim