Costco in Elk Grove, CA Asking for Hidden Subsidy

An article in the May 24, 2016 Sacramento (CA) Bee outlines how Costco and Pappas Developments have created a new way to get the localities to subsidize the building of a new store so that the transaction is not apparent to the general public.

According to the article (see full text here),

Costco is known for requiring its development fees to be reimbursed through sales-tax sharing agreements with cities. In this case, Costco wants the city to give its landlord a subsidy while the company pays lower rent, he said.

Costco would still benefit financially, but in a less straightforward way that would avoid the public perceiving it as a tax kickback, Davis said.

“When I first met with Costco in 2008, they indicated very clearly that they only locate in cities where 100 percent of their impact fees are returned to them in terms of sales tax sharing,” the mayor said. “They didn’t want to do that directly (in Elk Grove). They said, ‘Work that through the lease with Pappas.’ ”

Local residents have raised objections to the store’s placement because of traffic concerns and its proximity to a residential neighborhood. But it appears that the Elk Grove City Council will be proceeding with approval using the developer subsidy approach. It has asked for design changes, which are due to be submitted by July 13.

Impact of Big Box Stores on Taxes and Public Costs

An analysis done by the Institute for Self Reliance (

Although many cities assume that the development of shopping centers and big-box stores will yield a financial windfall, the tax benefits often prove to be a mirage.

When evaluating a retail development proposal, developers and municipal officials often focus  on only one side of the equation: the amount of new tax revenue that the project will generate. It’s easy to overlook the fact that retail development also creates new costs and often leads to a decline in tax revenue from existing commercial districts.

In the case of big-box stores and strip malls, these costs and revenue losses can be so high that they reduce the overall tax benefit of the development to a negligible trickle or even result in a net loss for the city.

Overlooked Costs

Cities rely on different types of tax revenue. In some states, such as California and Arizona, cities are constrained in their ability to raise property  taxes and therefore depend  more heavily on local sales taxes and various fees. In other states, cities do not collect a local sales tax and raise more funds through property taxes. This is true in much of New England, where all sales tax revenue goes to the state.

How a particular development will affect a city’s finances depends on the local tax structure, as well as the characteristics of the project. In general, there are three main costs that cities commonly overlook in evaluating the financial impact of large-scale retail development:

1. Lost sales tax revenue from existing businesses Because consumers have  only so much money to spend, sales at a new shop- ping center are invariably mirrored by sales losses at other businesses in the region. The sales taxes generated by the new development are in turn matched by an equivalent drop in sales tax revenue from other retail areas.In California, for example, strict caps on property tax rates have forced cities to rely primarily on a local sales tax, sparking fierce competition to attract big-box stores and  shopping malls. But despite extensive retail development over the last twenty years, the amount of sales tax revenue that California cities are raising per capita has remained the same. (Public Policy Institute of California, “City Competition for Sales Taxes: Symptom of a Larger Problem?” Research Brief, Jul 1999.)

Some cities can become tax winners by playing host to a new shopping center that draws customers from nearby cities, but these gains are usually fleeting. It’s only a matter of time before that new shopping center is eclipsed by an even newer retail development that pulls shoppers to another town.

Some evidence suggests big-box stores may not even produce a temporary revenue gain. One study of 116 cities in California found that, in all but two cases, the presence of Wal-Mart,Target, Costco, Kmart, or Sam’s Club stores did not correspond to increased sales tax revenue. (Supercenters and the Transformation of the Bay Area Grocery Industry: Issues, Trends, and Impacts, Bay Area Economic Forum, 2004, 74-81)

2. Declining property tax revenue from existing business districts and shopping centers — Neighborhood and downtown business districts, as well as older strip malls and even big-box stores, are often harmed by new retail development on the outskirts. As these areas lose sales and experience growing vacancies, the value of the property declines and, with it, the tax revenue.

Allowing older commercial districts to deteriorate, while fostering retail development elsewhere, also wastes public resources.  Public investment in the roads, water lines, and utilities that serve older retail areas end up sitting idle or underutilized, while taxpayers foot the bill for new infrastructure to serve the new big-box store or shopping center.

3. New costs for providing public services to the development — Big-box development also creates substantial direct costs. Every time a corn field or a forest succumbs to a new shopping center, the local government incurs new expenses for maintaining roads, water and sewer lines, and police and fire services.

The more spread-out and auto-intensive the development, the more costly it will be. Traditional main-street business districts, because of their density and compactness, are very efficient users of public infrastructure and services. Sprawling big-box stores are not. They require longer roads, more road maintenance, additional miles of utilities, and more fire and police time.

One case study in Barnstable, Mass., found that the annual cost of providing city services to traditional downtown and neighborhood business districts (which the study labeled “specialty retail”) was $786 per 1,000 square feet of retail space. Big-box stores were 30% more costly, requiring $1,023 in services per 1,000 sq. ft., while strip malls where even more expensive at $1,248. (Tischler & Associates, Fiscal Impact Analysis of Residential and Nonresidential Land Use Prototypes, prepared for the Town of Barnstable, Jul. 1, 2002.)

Most of this difference is due to additional costs for road maintenance and police services. Because big-box stores generate substantial car traffic and typically increase the number of road miles that residents travel for shopping, cities end up having to spend more on road maintenance. Although developers may offer to pay  for new traffic infrastructure (turn lanes, signals, etc.), the real issue is ongoing operational costs.

Big-box stores also require substantial police services. This is partly because the added traffic generates more accidents and  necessitates more policing. It’s also due to the fact that big- box stores generate large numbers of police service calls — far more on average than local retailers do on a per square foot basis. Many of these calls are for shoplifting. (See our fact sheet, Wal-Mart’s Impact on Local Police Costs.)

bb costs & revenue chart

Source: Fiscal ImpactAnalysis of Residential and Nonresidential Land Use Prototypes preparedfor Barnstable, Mass, Tischler and Associates, 2002.

The Bottom Line for Cities

Once the full range of costs are factored in, retail development can end up being a net drain on city finances. The Barnstable case study found that not only did main-street retail produce lower services costs, it also generated more property tax revenue per square foot, because these retailers occupied higher-value, often historic, buildings. The net result was the main-street retail produced an annual tax surplus of $326 per 1,000 square feet, while big- box stores cost the city $468 more per 1000  sq. ft. than they contributed in tax revenue.

These findings are specific to Barnstable. Whether a particular big-box development will be a net loss or gain for a city depends on its tax structure and what services it has to provide. In areas where roads are maintained by the state, a big-box store might be a financial gain for a town, but only because the road costs are born by all of the state’s taxpayers. Cities that rely heavily on local sales taxes are more likely to find big-box stores a financial plus, but only in the short-term and only if the costs to the region as a whole are ignored.

In states where cities derive the majority of their revenue from property taxes, such as Massachusetts, shopping centers are more often a net financial loss. The same is true for cities that depend on local income taxes, as those in Ohio do. Studies in Ohio have found that big- box development is often a net drain, because its low-wage jobs produce little revenue relative to its high public costs. (Randall Gross, Under- standing the Fiscal Impacts of Land Use in Ohio, Development Economics,August 2004.)

Requiring a Fiscal Impact Analysis

Because the information supplied by developers is typically incomplete and may not represent  an unbiased analysis of the public costs and benefits of a project, a growing number of cities now require that retail development proposals undergo a comprehensive fiscal impact analysis conducted by an independent consultant  chosen by the city and paid for by a fee assessed to the developer. Such an analysis can provide city officials with a more complete picture of the impacts and help them determine whether to approve or reject a project. For more details, see our Guide to Retail Impact Analysis and our Community Impact Review Policy Kit.

Better Ways to Grow the Tax Base

A city’s long-term financial health hinges on creating high-quality jobs, protecting local as- sets, and fostering more efficient land use pat- terns. Here are three key strategies for ensuring that retail uses are a net financial benefit:

  1. Protect and strengthen established local business districts Limit retail sprawl  in outlying areas and foster new Pleasnton downtowninvestment, in- fill development, and small business growth in existing main-street business districts. This will maximize tax revenue from these districts, while minimizing new costs because the public infrastructure and services are already in place.
  2. Insist that new retail development mimic traditional Main Streets Compact, multi-story, walkable retail districts make far more efficient use of public infrastructure and services than sprawling, auto-oriented, single-story outlets do. To minimize the public costs of development, zoning should require new retail construction to be dense and multi- story, favoring pedestrians and accommodating office and residential uses on upper
  3. Preserve open space — Studies in more than 80 communities have found that farm land, forest, and open space generate more tax revenue than they cost in public services.

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