California tax law has a perverse incentive that has led local governments to give away billions of dollars in tax revenue to private corporations. These deals siphon money from every city in the state and give it away to some of the richest corporations in the world.
Under Bradley-Burns Local Sales Tax Law, sales tax revenue is allocated to the point of sale. For brick-and-mortar stores this means allocating the revenue to the jurisdiction the store is located in. We’re all familiar with that.
Online retailers, however, have the ability to choose where they allocate sales tax revenue, be that a warehouse, a distribution center or even a sales office. This allows corporations to direct revenue to a single jurisdiction in the state. Corporations use this leverage when negotiating to locate their business some place in California.
This results in a rigged process. It drives cities to accept increasingly onerous tax sharing agreements, as was written about by Fresno Mayor Lee Brand (July 14, The Bee), in exchange for online retailers building or relocating in their jurisdiction. Under these agreements, private companies profit from both their online sales and from these sales tax rebates.
Often cities will give these corporations more than half the sales tax revenues allocated to their jurisdiction. These companies benefit at the expense of the public. At a time when our cities are struggling to fund public programs, companies are skimming billions in taxpayer dollars through these agreements.
The current law effectively allows cities to take from one another to lure corporations to their jurisdiction, and decreases the total amount of sales tax revenue available for everyone. Ending these deals will prevent this practice, resulting in a net benefit of public services for everyone in California.
These deals siphon money away from cities across the state — including those who struggle economically. While cities like Fresno may benefit, towns like Chowchilla and Porterville, only miles away, suffer the impacts of increased warehouse traffic and pollution. Meanwhile, they lose sales tax revenues that could mitigate these effects to neighboring cities that have tax sharing deals. These deals are made without any input from cities’ whose own revenue is being given away.
In a single deal, the city of Fresno gives Ulta Corporation a 75% kickback of all sales tax revenues generated in online purchases each year. Though less than 10% of California cities have these deals, they cost cities across the state a startling $1 billion in taxpayer dollars each year. Instead of funding local services, these deals give available funds away. This unfair practice has to stop. That is why I have authored Senate Bill 531 to stop any new tax sharing deals by cities.
Preventing future deals will not make poor cities become poorer. In fact, it would allow these cities to keep 100% of the revenues allocated to their jurisdiction.
A small handful of cities opposing SB 531 argue that without tax rebates, companies would move out of state.
The nonpartisan Legislative Analyst’s Office looked at these claims and found that these deals do not actually increase jobs. Instead, they just shift jobs from one place to another.
Additionally, economists argue that companies consider a variety of factors before locating in California. This includes site location, and proximity to transportation. Companies need distribution centers in close proximity to their customers to meet two-day or less shipping demands. They have to locate within the state.
SB 531 is supported by California Labor Federation. The League of California Cities, which fiercely defends the prerogatives of local government, has endorsed this bill and said it would be good for cities and their residents across California.
That is why my bill passed off the Senate floor with a two-third majority, and has received bipartisan support in the Senate and Assembly.
California cities should not be giving away money to online retailers at the expense of our communities, residents and local business owners. We shouldn’t continue allowing a handful of cities to make these deals at the expense of all other cities in the state. SB 531 would end the perverse incentive, and stop this insidious form of corporate welfare.
Steve Glazer, D-Contra Costa, represents the 7th District in the state Senate.