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It’s time to end the retail RDA racket

Politically powerful real estate developers and retailers have been taking advantage of taxpayers and school districts through Redevelopment Agency (RDA) schemes, and legislators are determined to put an end to this racket. The Utah Taxpayers Association is supporting two bills that will end RDA abuses and while opposing an effort by Sandy City politicians to expand RDA abuses.

Every year, more than $70 million are diverted from school districts, counties, and other local governments to subsidize RDAs, and this diversion has been increasing at a 10.2% annual rate for the past ten years. Nearly $40 million of this would go to school districts annually, and most of the $70 million is being used to subsidize retail businesses that would have located in Utah anyway.

What are RDAs, what was their original purpose, and how do they “work”?
RDAs were originally intended to address inner city blight, particularly the kind that was commonly found in decaying northeastern U.S. cities in the 1960s and 1970s but is thankfully rare in Utah. RDAs are incentives to developers in which property tax increments are partially or totally kicked back to cover some of the developer’s cost to develop the property. The property tax increment is defined as the increase in property taxes owed on the property due to the development of the property. In other words, if an existing property generates $1 million in property taxes and a developer builds a grocery store which causes the property tax to increase to $5 million, all or part of the $4 million increment is diverted to pay the cost of development instead of being paid to school districts, counties, and other local governments.

City governments are usually the drivers behind RDAs as they use property taxes, most of which would have gone to local school districts, to take retail sales tax dollars from other cities. By attracting retailers to locate within their city boundaries, one city grows its retail sales tax base at the expense of neighboring cities.

Cities are driven to take retail sales tax dollars from each other because 50% of the 1% municipal sales tax revenue is distributed to cities based on point of sale.

Cities are more interested in attracting retail than they are attracting high wage manufacturing or IT jobs. High wage jobs benefit Utah families’ bottom line but also benefit education since 100% of state income tax revenue is dedicated to public and higher education. However, since cities are reliant on local sales tax revenue but receive no income tax revenue, cities are more inclined to offer deals to retail businesses that generate local sales tax revenue than to seek high wage jobs that generate high income tax revenues.

In addition to offering higher wages, most manufacturers and IT companies export their products out of state which allows wealth to be imported into Utah.

Who loses and why should taxpayers and school districts insist on RDA reform?
RDAs are eroding the property tax base, which causes school districts and other local governments to raise property taxes to make up for some or most of this lost revenue. Diversions of property tax dollars to RDAs are increasing at a rate that is nearly double the rate of real and personal property taxes as shown in the chart below.

Property Taxes and RDA Diversions:
Amounts and Growth Rates***

* most of these amounts are used to subsidize retail

** excludes RDA diversions and automobile fee-in-lieu

*** See Utah Taxpayers Association’s August 2004 newsletter about legislative impacts on property tax revenue growth

Local taxpayers are not the only losers when an RDA is approved in one city. State income taxpayers and all 40 school districts are losers due to funding shifts in the Minimum School Program, the primary mechanism for funding public education in Utah. A major component of this program is the statewide basic levy for education which is intended to equalize education spending between school districts. This levy is applied uniformly statewide and generates $220 million dollars for education. As a result of the basic levy, districts with more property tax base per student receive less state income tax dollars, and districts with less property tax base per student receive more state income tax dollars. When an RDA is approved in one school district, that school district receives fewer property taxes from the statewide basic levy for education than it otherwise would have. This means that this school district receives more state income taxes dollars than it otherwise would have, leaving less income tax dollars for other school districts. An RDA in Salt Lake City reduces income tax dollars for school districts statewide.

A similar program exists for counties to cover the costs of assessment and collection of property taxes. Therefore, when an RDA is approved in one location, property taxpayers in every county lose.

Do retail RDAs create jobs, increase tax revenues, and promote economic growth?
Absolutely not. Subsidizing retail through RDAs simply shifts jobs and tax revenues from one location in Utah to another location in Utah. No net jobs are created in Utah, and no net tax revenues are generated that would not have otherwise been generated without the RDA subsidy.

The United States has the lowest personal savings rate of any industrialized nation, and Utah has the highest bankruptcy rate in the nation. Since individuals and households in Utah are already spending more than they ought to be, RDAs do not add one additional dollar of consumption to the economy. Not one additional pair of shoes or loaf of bread has been sold in Utah due to an RDA subsidy of a retailer.

Retail is driven by location and customer demand. Retail does not need to be subsidized or incentivized.

Are RDAs needed to solve blight?
RDAs are rarely used to address blight as evidenced by RDAs that have been authorized in recent years for open fields and middle class neighborhoods in Sandy, Draper, South Jordan, and West Valley City. Besides, if blight is really a problem, cities should use their own tax base – not the school district’s and the county’s tax base – to address this issue. If an area is truly blighted, the city should either use existing revenues to eliminate the blight or ask its voters to approve bonds that will generate the revenue needed to clean up the blight instead of forcing school districts to raise their taxes as a result of RDA diversions. If cities are forced to ask their own taxpayers to for more tax dollars to fight “blight”, city leaders will finally acknowledge that their cities really don’t have a lot of blight after all.

Retail is not the only cure for “blight”. Other options include manufacturing and IT or simply converting the blighted areas to open space and parks.

In reality, RDAs cause blight, or at least cause commercial areas that are already struggling economically to struggle even more. Since RDAs distort the market by subsidizing retail supply, excess retail capacity is created and exceeds the demand for retail. Consequently, the retail market becomes oversaturated and existing retailers lose money and go out of business.

Are property tax “increments” really new money that school districts aren’t currently getting?
RDA proponents falsely claim that the property tax “increment” is new money that schools are not currently getting. In a school district with little or no growth, the so-called “increment” is simply a diversion from the existing tax base. In a school district with enrollment growth, the school district needs the “increment” to cover the costs associated with enrollment growth. Population growth entails new costs, and these new costs are covered by new property development.

What about RDAs for Transit Oriented Development (TOD)?
Sandy City is proposing legislation this year that will allow property tax dollars to be kicked back to developers to subsidize transit-oriented development (TOD). TOD is intended to encourage people and businesses to locate around TRAX stations. While TOD may have its benefits, using RDAs to subsidize TOD raises two issues. First, since TOD is designed to bring thousands of people to a concentrated area, shouldn’t retailers already have an incentive to locate near a TRAX station just as retailers already have an incentive to locate near an Interstate off ramp or at the intersection of major roads? Second, what is the rational basis for diverting property tax dollars from school districts to subsidize TOD? If cities believe that retailers need to be subsidized to locate near a TRAX station – and the need for this is certainly questionable -- then cities should use their own sources to fund the project.

Good news, bad news.
First, the good news. Sen. Curt Bramble (R-Provo) is sponsoring legislation that will prohibit RDAs for retail projects. This includes but is not limited to big box stores, strip malls, car dealerships, stadiums, and movie theatres. Sen. Karen Hale ( D-Salt Lake) and Rep. John Dougall (R- Utah County) are also sponsoring an RDA reform bill that will prevent the school district’s portion of the RDA from being diverted to developers unless the school districts grant approval for the diversion.

Now, the bad news. Sandy City has hired a stable of powerful lobbyists – your tax dollars at work -- to persuade legislators to allow RDAs to do even more damage to taxpayers and school districts than they are doing right now. Sandy City is one of the worst abusers of RDAs, and Jordan School District property taxpayers, including those who live outside of Sandy, as well as state income taxpayers statewide are the victims. The Sandy City proposal would allow RDAs to subsidize retail development for gravel pits and TOD (see above). Instead of curtailing RDA abuses, Sandy City is proposing to extend RDA abuses to areas that are currently not eligible for RDAs. Sandy City also lobbied the legislature last year to expand RDAs, but the proposal was defeated just minutes before the session ended.

What’s next?
Taxpayers need to contact their legislators and ask them to support the Bramble bill and the Dougall-Hale bill and to oppose the Sandy City RDA bill.

Find out how to contact your legislator by clicking here.

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