by Gary H. London
If redevelopment law in California is eliminated, as Gov. Jerry Brown has proposed, it would send an estimated $450 million in local property tax dollars to the state coffers. Under the governor’s proposal, more than 90 percent of this money would stay at the state level rather than being disbursed back to local school districts and other agencies as is the case with all other property taxes. The governor’s proposal to shut down redevelopment as we know it would be permanent. The tax transfer proposal would last for one year, presumably just to get the state over the fiscal hump.
Why would we want the redevelopment tax money to go directly to the state, when our local agencies are also suffering?
If the focus is to be on property taxes, why is the governor thinking exclusively about eliminating current fiscal deficit through a more expedient, short-term approach of eliminating redevelopment agencies, rather than tackling the bigger, more difficult issues of reforming antiquated property tax laws?
One such example is that over the past two years the County of San Diego has reduced the property taxes it collects annually by $100 million — and counting — due to the reduced value associated with property transactions (aka, foreclosures) and because of a law known as “Proposition 8.” These practices haven’t even been scrutinized in the debate over how to use property taxing to solve the state’s fiscal woes.
A Primer on Property Taxes
California property tax reductions go back to a 32-year-old twin set of laws that the voters approved by initiative. When the infamous Proposition 13 property tax reduction was passed by California voters in 1978, a (then) little known taxing nugget was also passed as Proposition 8. Proposition 8 is, in effect, a “recession adjuster” that requires the County Assessor to annually adjust a property’s base year value (Proposition 13 value) or its current market value, whichever is less.
Although the annual increase for a Proposition 13 value is limited to no more than 2 percent, the same restriction does not apply to values downwardly adjusted under Proposition 8. The market value of a Proposition 8 property is reviewed annually; the current market value remains the taxable value as long as the Proposition 8 value still falls below the Proposition 13 value. When the current market value of a Proposition 8 property exceeds its Proposition 13 value (adjusted for inflation), a county assessor reinstates the Proposition 13 value.
The impact of this could last years, ensuring that local property tax collection will remain at its lower base, affecting the fiscal condition of schools and other local agencies. The $100 million lost so far, a big portion of which stems from tax losses due to distressed sales, will last until those properties transact again. The Proposition 13 and Proposition 8 adjustments combined could easily mushroom to a much higher number than the redevelopment property “give back” if property valuations remain low for an extended time.
While the governor is proposing an elimination of redevelopment agencies, he has completely ignored the insipient Proposition 8 reductions. If the process is to be transparent and legitimate, one would think that he would be addressing that. And perhaps the state could take a share of that revenue.
I am not advocating new taxes. Many California homeowners have benefited from the recent Proposition 8 reductions at a time when some property owners have been financially strapped.
However, taxing should not be subject to the cycles of the market. While property values have declined, this decline was owed to a bad economy. There has been a marked reduction in property transactions, almost all of which have been distressed over the better part of the past five years.
Based on this spurious valuation base, the County Assessor has had to reduce the property valuation in the county.
Redevelopment at Work
Let me briefly explain how redevelopment dollars work. When an area is designated to be “blighted” — the definition of which has been subject to controversy when it is broadly applied — the assessed property values are frozen at current levels and only increase at a maximum of 2 percent per year. This means that the current fair share tax allocations to local public agencies are frozen as well. However, when new development occurs, a higher assessed value is achieved. The difference between the base (frozen) value and the new higher value is called the “increment” in assessed value. The property tax revenue generated from the “increment,” or difference, stays within the redevelopment area. This money is used to fund the kinds of things necessary to encourage and get the new projects built — such as infrastructure, fire services and affordable housing.
Redevelopment agencies work as a tool to “fast track” new development, at the very least compressing the time period by which projects might otherwise be built if incremental development did it on its own. At the very most, redevelopment promotes economic development, which in turn highly benefits other aspects of the public treasury such as taxes on new hotels, and sales and business taxes collected from new retail and restaurant revenues.
In San Diego, redevelopment has helped the region, particularly as it has been applied downtown.
I know why the governor is doing this. It is much easier to eliminate redevelopment agencies. They are just not popular to a significant segment of the electorate or the Legislature because people often object to eminent domain, government involvement or see some agency mismanagement. All of this does exist, to some extent.
Obviously, I believe that segment is wrong. But it is an easy political target.
In contrast the effort to repeal a 32-year-old proposition — resulting in property tax increases — is a political nonstarter. I don’t expect it to happen. I am also acutely aware that there are few easy targets for either temporary or permanent revenue enhancers for the state.
Challenging Proposition 8
But why hasn’t the basis of Proposition 8 been challenged? Why are we adjusting property taxes downward based on a theoretical appraisal of value? There is already an adjustment downward of properties that have actually transacted — the distressed and foreclosed inventory which have made up the vast majority of all property transactions in the county during the past five years. Why, on the basis of a market tilted toward distress, is the county bound to slash all property taxes? It makes no sense.
Conversely, redevelopment is one of those tools that make things work. It is important to communities. In the long run, communities are enriched through the redevelopment process because it improves the quality of life for residents while adding to the property tax base once the redevelopment is completed. It is important to the state because thriving communities increase sales tax revenue, which aids the state budget.
What also doesn’t seem to be part of this discussion is the fact that ultimately redevelopment areas expire. The lost taxes from the increment are returned to the normal tax base at much higher revenues than would certainly have been possible without redevelopment, plus there’s the added benefit of the retail and restaurant sales taxes, business and hotel taxes, all of which represent new revenue sources for various government sectors!
So it comes down to short term versus long term. Surely we can find other short-term solutions to cut expenses at the state level. I have my own list, and our elected representatives ought to take on the mantra “a crisis is an awful thing to waste” by re-examining the size and purpose of state government.
But pitting short-term gains against long-term benefits is a terrible way to get started.