California’s tax code impedes its progress on climate change

The California Legislature is renowned for its courage in adopting bold climate and clean-energy initiatives that influence environmental policy around the globe. But it has hesitated to reform the state’s tax code, costing the state an opportunity to better support its climate goals.

Current tax policies encourage sprawl, increasing vehicle miles driven and threatening the goals to reduce greenhouse gas emissions.

On average, about 20 percent of a locality’s revenue comes from sales and property taxes. But the state’s major cities and their surrounding suburbs have differing views of the development that produces those taxes. Suburbs prefer development that generates sales taxes, which provide coveted “flexible revenue” with no strings attached.

Not so with cities. Pressed to encourage infill development, they are forced to rely more on property taxes, and plenty of strings are attached.

For example, all the sales tax revenue collected in a suburb such as Citrus Heights stays in the city, where it can be spent as city officials see fit. Property taxes, on the other hand, flow to Sacramento County, which uses various arcane formulas established by the state to redistribute that revenue to other, often independent government entities, including school districts. Citrus Heights receives only some of the property tax collected within its borders.

Cash-strapped local governments have long encouraged commercial development that produces sales taxes. My research conducted for a lecture at the University of California Center in Sacramento shows that the conversion of land from nontaxable to taxable use (from a park to an entertainment complex, for instance) tends to take place in suburban areas. The same tax policy also can discourage residential development, which generates property, not sales, taxes.

Moreover, as California struggles to build enough housing, my analysis shows that the cities and suburbs most likely to foster new development also generate the least amount of property tax revenue. Yet, greenhouse gases are most reduced by high-density residential development.

Balanced and efficient land-use patterns can reduce the amount of time vehicles spend on the road. But this means that housing must be built on underused land in core areas. Housing does not directly produce sales tax funds and, under current Proposition 13 limits, residential development does not provide much of an incentive for local governments.

But that attitude could change if the state reallocated taxes in a way that creates new incentives. This suggests three principles to help California cities make land-use decisions based on climate change goals rather than on fiscal criteria:

▪ Return more property taxes to municipalities based on their willingness to build high-density development;
▪ Share property and sales taxes regionally, rewarding jurisdictions that meet their regional housing obligations;
▪ Avoid penalizing new development, particularly on underused land near existing infrastructure.

Any tax legislation under consideration by the Legislature, such as a split-roll property tax reform that reassesses commercial and industrial property differently than residential property, should follow these principles.

Let’s be clear: These changes will not significantly reduce greenhouse gas emissions. They will, however, make a difference. California’s biggest impact isn’t its ability to reduce its own emissions, but rather to influence others through policy innovation.

California’s willingness to change some of its most sacred political totems, such as sales and property taxes, sends a powerful message that the state will use every means possible to achieve its climate-change goals.