Fresno grew to be California’s fifth largest city by structuring itself as a hub for delivering the Central Valley’s bounty to dinner tables across the country. The same transportation infrastructure has propelled an e-commerce surge in recent years, which has diversified the economy but has left communities without commensurate tax revenue.
Similar situations are found throughout rural cities as well as communities on the fringe of major urban centers.
A growing energy for major policy changes to confront the issue has put a spotlight on California’s complex sales tax system. Voters will decide next year on one proposal to allow local governments to raise taxes more easily. Others are calling for more transparency and for limits on secretive agreements that online retailers like Amazon and Walmart broker with cities.
At the heart of the issue is the Bradley-Burns law, which caps the local sales tax at 1.25%. The state passed the law in 1955 to standardize tax collection and stem an explosion of local sales and use tax ordinances in cities and counties.
Last year, the sales tax generated $11.8 billion in revenue, according to the California Department of Tax and Fee Administration (CDTFA). The Legislative Analyst’s Office has calculated that the average city gets about $225 per resident each year from the tax. Yet the top 5% of cities get more than $700 per resident and the bottom 5% get less than $45, said Seth Kerstein, an economist at the office.
The law has not aged well in the era of e-commerce. Major online retailers often relocate sales offices to communities that promise sweeping tax breaks but do not house the bulk of the warehouses. That results in an enormous concentration of sales tax revenue in very small jurisdictions, said CDTFA Director Nicolas Maduros.
Assemblymember Jacqui Irwin of Camarillo was concerned about the escalating competition between cities to recruit these companies and described it as a race to the bottom.
In the case of Fresno, the city council and administration in 2018 approved revenue sharing agreements with Amazon, Gap Inc. and Ulta Beauty. The city waived millions of dollars in development impact fees in the contracts, according to Fresno Councilmember Miguel Arias.
The city wanted to attract retailers, and the deals offered an opportunity to diversify an economy that relied primarily on agriculture. He said Long Beach, a city with 100,000 fewer people, generates tax revenues that are four times larger than Fresno’s.
“The infrastructure that we had built over generations to get food products across the country allowed us to engage in same-day delivery from the Canadian border to Mexican border,” Arias told state lawmakers at recent hearing of the Assembly Revenue and Taxation Committee. “A geographic advantage—and one that had a system of freeways and infrastructure built for exactly that model.”
Tracy Mayor Nancy YoungAgricultural fields were paved over and turned into distribution facilities, a freeway system built for shipping food now channeled consumer goods to other cities, and many agricultural workers left the fields to work in the distribution centers. When the pandemic shut down most of the state, Fresno and its many essential workers stayed open.
But much of the sales tax revenue went to other parts of the city and county. At the same time, Fresno realized it no longer needed the agreements with retail companies.
“We have the workforce, we have the public infrastructure, and we have a great location,” said Arias. “There was no need for us to engage in giving away the future house anymore for a short-term gain in employment that was going to come naturally to us either way.”
But the city council has been in the dark on the details of the existing contracts. Arias does not know the sales tax revenue the companies generate or how many employees work in each center. While the contract was required to be publicly available, many of the provisions were classified as proprietary.
The city of Tracy has faced similar issues, but Mayor Nancy Young has taken the opposite stance from Arias’ push to redistribute tax revenue. Like Fresno, Tracy was built on agriculture and has benefited from the infrastructure. It houses the central pump intake for delivering vital irrigation and drinking water through the State Water Project. It also delivers e-commerce goods to nearby Bay Area cities.
Young, who is running for state office in the seat that Sen. Susan Eggman vacated this year, warned that redirecting the sales tax would threaten the vitality of her communities. The city has worked hard to attract and retain its businesses, investing in the necessary logistics and infrastructure.
“The economic benefits that are generated through the potential Bradley-Burns sales tax do not serve as a windfall for the city,” said Young. “They are vital to offset the direct impacts generated by the economic activity.”
Assistant City Manager Karen Schneider said Tracy faces a revenue loss of up to $50 million for its $130 million general fund due to lagging tax revenues.
The issue drove Assemblymember Cecilia Aguiar-Curry of Winters to author one of the most controversial bills of the legislative session this year. With the backing of Speaker Robert Rivas in his new leadership role, Assembly Constitutional Amendment 1 moved through both houses along party lines and eventually gained Gov. Gavin Newsom’s signature.
ACA 1 would lower the bar for cities and counties to impose new property and sales taxes and fund local housing and infrastructure projects by reducing the voter threshold from two-thirds to 55%. The tax proposal will go before voters as a ballot initiative in the November 2024 election.
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Aguiar-Curry said ACA 1 would “empower local communities to take action at the local level.” While her Yolo County district houses some of the nation’s most productive ricelands and almond orchards, the cities have become exurbs and distribution centers for the Bay Area and Sacramento region, adding pressure on local leaders to raise revenues for better roads, schools and other community needs.
Republicans blasted her measure for attempting to weaken Proposition 13, which capped property taxes in 1978. Anti-tax groups led the charge, with Jon Coupal, president of the Howard Jarvis Taxpayers Association, calling it a perverse twist to claim ACA 1 would benefit housing, when voters passed Prop. 13 to keep homes affordable.
The California Cattlemen’s Association registered its opposition to the measure as well. And in 2020, several agriculture groups joined a business coalition to successfully defeat a ballot measure that proposed similar changes to Prop. 13.
In hearings, the California Chamber of Commerce said businesses in agriculture and other sectors already face significant sales and use taxes in California. It railed against ACA 1 for allowing localities to modify their Bradley-Burns sales tax rates and for lifting the cap, warning that businesses and residents would face excessive sales taxes and increased costs.
The League of California Cities put its support behind ACA 1. And it is in the process of crafting separate policy proposals to more specifically tackle issues around sales tax agreements and associated tax rebates that cities broker with retailers.
At the committee hearing, Ben Triffo, a lobbyist for the advocacy group, shared insights from a statewide working group that is comprised of city managers from a mix of urban and rural regions throughout the state. The group hopes to issue policy recommendations soonthat will likely include term limits and rebate caps on the agreements along with enhanced public transparency through a statewide dashboard.
Yet, as many of the policymakers in the room have experienced, building consensus around any solution is challenging.
“It is a very complex situation,” said Triffo.
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