Wednesday, February 11, 2015

The Sordid Story of Prop 13, TIF, and the Death of Redevelopment in California

Many argue that America’s tax revolt began with the election of Ronald Reagan in 1980, but the movement really began in California in 1978 with the passage of Proposition 13. The measure affected virtually every activity in the state, but decades later, it would fuel the demise of California's redevelopment agencies.

Redevelopment agencies in California had used tax-increment financing (TIF) as a tool since the 1950s. In the late 1970s, however, the tax landscape changed in two ways: federal funding for urban revitalization dried up and the voters passed Howard Jarvis’ Proposition 13 (or, the People’s Initiative to Limit Property Taxation), reluctantly accepted by Governor Jerry Brown.

Prop 13 proved to be a monumental shift in local government revenues and expenditures.  The measure rolled property tax assessment values back to 1976 levels, and capped the possible valuation growth at 2%. Moreover, the practice óf annually reassessing property was scrapped in favor of a system in which property was only reassessed on sale, where property taxes would begin at 1% of value and remain subject to the 2% valuation increase cap.

The measure sent shockwaves through local governments. Schools, which had been primarily funded by local property tax (and had been among the best in the nation) saw precipitous decline in spending per pupil. After Serrano v. Priest, the state was required to backfill all school funding that could not be met by local property tax.

In the world of redevelopment, local governments were forced to switch tactics. Suddenly, encouraging or subsidizing housing projects became cost inefficient. The use of TIF skyrocketed as cities engaged in bidding wars in pursuit of retail development and their now-juicy sales tax dollars. As tax revenue became scarcer, competition between state and local governments increased.

In the coming decades, cities turned to TIF to keep local tax dollars out of state hands. Redevelopment agencies drew more and more ambitious borders for their TIF districts and extended the lives of the districts about to expire – at one point, the entirety of downtown Los Angeles was placed in one of nine TIF districts. With all new property tax dollars going into the coffers of redevelopment agencies, even less local money was left to fund schools which left an even larger burden to fall on the state.

This shell game came to an end in 2011. In the midst of a budget crunch, lawmakers in Sacramento looked jealously at the massive war chests that redevelopment agencies had accrued. 33 years after Jerry Brown had watched voters pass Prop 13, he found himself in the governor’s office under pressure to right the sinking ship that was the California budget. He dissolved local redevelopment agencies and ordered their funds to be divided among a variety of successor agencies. TIF died along with them.

In September 2014, however, Governor Brown resuscitated TIF in the form of Enhanced Infrastructure Financing Districts, which are limited to explicitly public projects, infrastructure, and low-income housing rather than job or retail. Given that Proposition 13 is untouchable in California, creative financing tools like TIF – although they can be abused – are necessary to facilitate redevelopment throughout the state.

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