California Cities and the Local Sales Tax

Research publications reflect the views of the authors and do not necessarily reflect the views of the staff, officers, or Board of Directors of the Public Policy Institute of California. Short sections of text, not to exceed three paragraphs, may be quoted without written permission provided that full attribution is given to the source and the above copyright notice is included. iii Foreword As visitors are quick to learn, California's sales tax rate is higher than average. Very few residents, let alone visitors, are aware that the rate varies throughout the state, depending on local preferences. Nor are they aware that 1 percent of the overall rate of 7.25 to 8.5 percent is allocated to local governments on a point-of-sale basis. This 1 percent rate is a " diamond in the rough " for cities and counties. It is particularly a " diamond " for cities because it is a major source of their discretionary revenues. Moreover, sales tax revenues have the potential to grow as a city expands and its commercial land uses generate more sales. The " rough " is the restricted arena for raising local revenues after the passage of Proposition 13 in 1978. thoughtful look at the consequences of a sales tax regime that is so important to local governments. They address two key questions: What are the effects of the point-of-sale or situs-based sales tax on land-use iv decisions? and How do California cities vary in the benefits they receive from the tax? In conducting this study, the authors first surveyed top administrative officials in 330 cities throughout the state. They then integrated their findings with a thorough analysis of recorded revenue distributions over a 24 year period from 1971 to 1995. Their survey supports the argument, advanced by Dean Misczynski in the mid-1980s, that there has been a " fiscalization" of land-use decisions: Retail land uses are preferred over residential and heavy industrial uses by a substantial margin. City policymakers pursue land uses that generate high levels of sales tax revenues—shopping centers and auto malls. At the same time, the authors demonstrate that despite all the competition for revenue-generating retail businesses, the hierarchy among cities in their sales tax success has changed little over the study period. In other words, the competition is intense and the incentives offered to developers can be substantial, but the pattern of winners and losers remains largely the same. …