Legislation May Lower Cities’ Revenues

State legislation intended to address California’s housing shortage may have the unintended effect of reducing the tax revenue of the state’s hard-pressed cities, according to a survey of business costs to be released today.

The 2002 Kosmont Cost of Doing Business Survey also found that taxes, fees and other costs levied on business in California have stabilized after years of increases. And Los Angeles and San Francisco impose lower costs on business than a wide range of cities nationwide, including Tucson, Reno, Miami and Houston.

Worries about California’s competitiveness in attracting or retaining industry have abated somewhat.

“As a result of Proposition 13, business taxes are lower in California than in neighboring states,” said Larry Kosmont, a real estate consultant and president of Kosmont Cos., which publishes the annual survey. “But the state has other charges that hurt it with business, such as workers’ compensation insurance costs that have risen 30% a year for the last two years.”

Still, there is little of the concern of the early ‘90s that businesses would leave California, he said.

Kosmont’s survey, however, noted two pieces of legislation that could have unintended consequences for cities.

One is the pending AB 680, which could shift portions of sales taxes that cities use to finance police, fire and other municipal services to help finance affordable housing projects.

Such a diversion of sales taxes is “a good move in principle,” Kosmont said, because it can help relieve the state’s housing shortage. But he added that many cities depend heavily on sales tax revenue and would have to raise fees if such legislation is approved.

The bill, which has been approved by the Assembly and sent to the Senate for consideration, would apportion one-third of future sales tax gains to affordable-housing projects in the Sacramento area. But if the concept were broadened, it would hit fast-growing cities such as Irvine, Temecula and Victorville, which depend on sales taxes for more than half of their municipal revenues, according to the survey.

The result “definitely would be that local fees would go up,” Kosmont said, unless the state, which took property tax revenues from cities in the early ‘90s recession, finds a way to remedy the taxation structure for local government.

Kosmont’s report also raised a warning flag over recently enacted SB 975, which expands the number of real estate developments qualifying as public works. Such a designation would help affordable housing and other projects become eligible for state funds but would require that project workers receive “prevailing wages.” Such wages are typically above the minimum wage, Kosmont said.

“So, in effect, Senate Bill 975 is a state-mandated fee on public-private development deals,” which could render them infeasible, Kosmont said.