27 Pages Posted: 26 Apr 2014 Last revised: 2 Aug 2014
Date Written: August 1, 2014
California was the first state to embrace the use of tax increment financing (TIF) for redevelopment, and the first state to abandon it. Both the rise and fall of redevelopment are attributable to the fact that cities and counties sponsoring redevelopment could pledge not just their own share of the property tax increments from redevelopment project areas but also those of the other taxing entities including schools and special districts.
By voter initiative in 1978, California enacted significant limitations on the property tax, cutting property tax revenues by half. The property tax had been the most important revenue source for local governments and education. But Proposition 13 barred local governments and school boards from raising tax rates to cover their budget needs. Many cities and a few counties realized that through redevelopment, they could capture tax increments from other taxing entities including schools.
At about the same time, a landmark court decision and a voter initiative imposed upon the state the legal obligation to back fill school budgets. To fund schools, the state siphoned property tax and other traditionally local revenue sources away from local governments and their redevelopment agencies.
Local governments and redevelopment agencies pushed back and launched a successful ballot box measure known as Proposition 22 to prohibit further state raids on redevelopment agency TIF. In 2011-12, during a declared fiscal emergency, facing a 25 billion dollar deficit, Governor Brown seized the political moment to put an end to redevelopment which had been diverting $5 billion a year in property tax revenues he felt would be put to better use for education and other public needs. Proposition 22 precluded the state clawing back TIF revenues from redevelopment agencies as long as they existed.
Governor Brown championed RDA dissolution, and the state legislature eventually agreed after they enacted a companion measure offering RDAs a chance to survive but only by forgoing most of the TIF that would have gone to schools and special districts.
RDAs and the League of California Cities sued, contending that this “pay to stay” option violated Proposition 22. When the California Supreme Court agreed with them, RDAs had foreclosed their only option to dissolution. They could accept this outcome because cities were once limited to accessing only their own tax money, they could achieve much of what redevelopment had allowed, free of the cumbersome costs and constraints of state redevelopment law.
Keywords: tax increment financing, redevelopment areas, property taxes
JEL Classification: H1, H2, H7
Suggested Citation: Suggested Citation
Lefcoe, George and Swenson, Charles W., Redevelopment in California: The Demise of TIF-Funded Redevelopment in California and Its Aftermath (August 1, 2014). National Tax Journal, Vol. 67, September 2014; USC Law Legal Studies Paper No. 14-18. Available at SSRN: https://ssrn.com/abstract=2428347