Time to put an end to the corporate welfare

Desperate for jobs and revenue, cities have long offered tax breaks to lure companies to set up shop inside their borders or to stop employers from leaving. But in recent years, municipalities have increasingly been getting caught in tax-break bidding wars over the firms they’re trying to woo, as online companies take advantage of California’s arcane sales tax rules to extract ever more lucrative deals. Those arrangements shortchange local residents $1 billion in tax revenue a year.

Here’s typically how the game has been played: Cities agree to generous tax-sharing agreements to persuade companies to build warehouses or sales offices in their jurisdictions, rather than locating somewhere else. These agreements allow companies to keep a sizable chunk — in some cases more than half — of the local portion of the sales tax revenue attributed to the facility. That’s money that could have been spent on public safety, street repairs, affordable housing and other government services.

Why would local governments agree to forfeit so much money? Because California law allows retailers to attribute the sales taxes they collect from online purchasers anywhere in the state to the jurisdiction where their warehouse or sales office is located, not to the cities where the buyers live. A warehouse for a big online retailer can thus bring with it not just jobs, but also far more sales tax revenue than a brick-andmortar retailer that’s just selling locally.

That makes these warehouses tremendously valuable for the host cities, and online retail companies are using their leverage to play cities against each other to score the biggest tax break.

Proposals to change California’s sales tax law to reflect the shift in consumer behavior have gone nowhere. But Gov. Gavin Newsom could still help stop the taxbreak arms race by signing Senate Bill 531, which would ban new tax-sharing agreements between local governments and companies.

The bill, by Sen. Steve Glazer (D-Orinda), has faced pushback from cities that use tax-sharing agreements. They argue the ban on new deals would hurt their ability to draw jobs and private investment to economically challenged communities. Proponents argue that receiving 50% of something is better than 100% of nothing.

But that assumes companies wouldn’t come without the tax break, which is far from certain — after all, for many of these retailers, the main point of building fulfillment centers is to put their products closer to their customers in California. It also assumes the kickbacks are creating new economic activity, rather than just moving it from one California city to another.