August 1, 2002 - From the August, 2002 issue

Larry Kosmont On The Perilous Trade-off By Cities Of Housing For 'Big-Box' Development

The outgrowth of Proposition 13 has been municipal reliance on sales taxes as a source of new revenue, resulting in greater demand for siting commercial projects over housing developments. Reflecting upon the economic development challenges cities face, TPR spoke with Larry Kosmont, a former city manager and current President and CEO of Kosmont Partners, specializing in matching private sector real estate opportunities with public sector land use policies, regulations, and financing/incentive programs.

Larry Kosmont

Why is a trade-off the appropriate term to describe the policy choices local governments have when pressed to support more housing in their jurisdictions?

Well, the cities have traded off sales tax for residential development over the last 20 years. They've done that because they are left with little choice for raising new revenues other than pushing for new commercial taxes, which has really made sales taxes the king of the highway. So city managers, redevelopment and economic development administrators have been very focused on getting sales tax in the community at the sacrifice of housing.

In the roughly 25 years since the passage of Prop 13, cities have pursued sales tax cash registers at the expense of creating new housing. One stark legacy of Propositions 13, 62, and 218 is that we have a critical housing shortage. And the irony for California is that without work force housing, we can't sustain economic growth.

One of the most essential elements in a comprehensive economic development program is housing of all quality and pricing categories, because our work force is diverse. So much of the housing stock reflects the workforce. Corporate leaders, in terms of facility investments and relocation decisions, typically look at quality of life issues in communities as one of their highest priority issues. And within the category of quality of life is housing, schools, and of course, safety, all priorities.

So, the reality for cities in California is that if they're going to continue to expand their tax base, they need to increase their housing supply. Most importantly, cities need work force housing for those folks who are out there making a living; they need and deserve a good place to live and raise a family.

If you were a city manager in a small city, particularly within a large metropolitan area like Los Angeles, how would you evaluate the decision of siting a Home Depot, per se, against the development of affordable housing?

There are two perspectives that need to change. One is that cities have to look at their tax structure realistically. Many smaller cities do not, in fact, tax businesses or industry very heavily. And since most cities don't tax their industries very heavily, cities need to do recognize that sales tax generators, such as a Home Depot, cannot perform well without residential rooftops.


Take a city like Glendale; there is no business license tax, yet the city is in good financial shape. A lot of it is because the affluent and middle class families that live there shop in their community. Glendale's amenities also serve as an attraction for residents from other communities to spend money in Glendale. What also needs to change is how cities evaluate the financial impact of housing on their budget and operations. I think there is a high level of confusion as to what households really cost a community, especially when it comes to high quality, or ‘top tier priced housing product.' Million dollar homes, which many communities have today, probably pay their way, given that these homeowners are paying such high property taxes, especially if it's a purchase that has occurred in the last 10 years. Those homes also tend to house families that spend a lot of money locally.

The medium to upper level households in some of these communities, are contributing their fair share when you look at what they actually pay in property tax, and the kind of local spending/shopping habits they have.

As far as affordable housing, that's really much more of a social policy objective, because it's clear to me that in most cases, affordable housing units will not carry the kind of economic impact that medium and upper level housing will. Affordable housing will never compare to a sales tax generator, but you still need the rooftops and you clearly need the diversity in housing to provide a balanced work force base for local business operations.

In my estimation, the fiscal impact models that are being used by the economists for local government need to be reconfigured for housing and residential fiscal impacts. They have a tendency to really focus on sales tax and commercial users and I'm not sure that that's highly appropriate today, given the cost of housing and the amount of property tax and family spending that is generated by these households.

AB 680 proposes pooling local tax revenues in order to alleviate the pressure to favor large commercial tax generators over housing. Is AB 680 an appropriate, effective mechanism to create more regional distribution of housing and commercial uses across an area?

My take on this bill is that it is a band-aid approach to a system that needs to be completely restructured from bottom up. On the face of it, the sales tax sharing solution discussion in AB680 has merit. But it is a spot bill that does not treat the broader issue of local taxation and distribution the way it deserves. Any solution must bring about long-term fiscal responsibility. What I'm really looking for is the state and local government to collaborate on an economic development plan that resolves property tax, sales tax, and state reimbursements in a format that supports consistent economic development and quality of life objectives. Unless we do that, this State will become impractical for major corporate investment.


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