MMC Policy Update
AB 1221 (amended 3/25/03) by Campbell & Steinberg
M M C CALIFORNIA
April 18, 2003
This communication is to inform you that much-anticipated public hearings on AB 1221 (Assembly Members
Steinberg and Campbell), California Balanced Communities Act of 2003, will take place before the Assembly
Local Government Committee on Wednesday, April 23, and the Assembly Revenue and Taxation
Committee on Monday, April 28 (tentative). Refer to www.leginfo.ca.gov for committee analyses. AB 1221 (as
amended 3/25/03), which swaps a half-cent of local government’s sales tax revenues with an equal amount of
property tax revenues, will be a major topic in this year’s discussions about local government finance reform. In
anticipation of the hearings, MMC is providing the following summary and an attached city evaluation calculator to
help evaluate the impact of AB 1221 (as amended 3/25/03) in your city.
• AB 1221 (AS AMENDED 3/25/03) BACKGROUND
• AUTHORS’ RATIONALE AND GOAL
• COMMENTS AND CONCERNS
• EVALUATION OF AB 1221
• AB 1221 CITY EVALUATION TOOL (SEE ATTACHMENT)
The attached “AB 1221 City Evaluation Tool” will determine city-specific impact. Because a “macro” security
must be set in MS Excel to use the tool, please refer to the “AB 1221 Installation Instructions” file to get started.
Please contact your MMC Client Services Representative or Fran Mancia, Director of Government Relations, at
559-271-6800 (ext. 5013) with any questions or comments. For technical support, please contact Doug Kitchen at
(800) 800-8181 (5512).
AB 1221 BACKGROUND
The implementation of AB 1221 (as amended 3/25/03) would:
• Reduce local governments’ share of the state-local Bradley-Burns sales tax by half (from 1 cent of each
sales dollar to a half-cent).
• Require an identical amount of property tax revenues from schools to local governments.
• Require the state to backfill the money to schools from its increased share of the sales tax.
• Refer to www.leginfo.ca.gov for committee analyses and legislation.
AUTHORS’ RATIONAL AND GOALS
Assembly Members Steinberg and Campbell’s stated purpose in introducing AB 1221 is twofold:
1. Obtain statutory language that would provide cities with revenue protection, along with an incentive that
would discourage cities from “negotiating” with retailers to locate in particular jurisdictions.
2. Provide a financing mechanism that would eliminate the disincentives associated with building homes.
The authors report that AB 1221 attempts to address current fiscal incentives in local land use decisions that often
prevent local governments from making responsible land-use planning decisions. Some lawmakers, including the
authors, claim that it is a reality that “California is a state full of unbalanced communities.” The authors ultimately
want to make cities less reliant on sales taxes. To some extent, the same rationale was behind Assembly Member
Steinberg’s AB 680 from the 2001-02 Legislative Session.
The following excerpts are taken from an author’s fact sheet on AB 1221 (as amended March 25):
• AB 1221 diversifies and stabilizes local government revenue. By receiving less of the highly volatile
sales tax revenue and more of the stable property tax revenue, local governments would be cushioned
against the ups and downs of the economy.
• Property tax is a much more stable and robust revenue source. As depicted below, property tax has
been, and continues to be, a much more stable and consistent source of revenue than sales tax. Currently,
sales tax revenues are stagnant while property tax revenue continues to grow at a steady rate of 8 to 9%.
• AB 1221 does not create winners and losers. The base year under AB 1221 would be 2004. Since sales
tax is simply swapped for property tax in the base year, the process is entirely revenue neutral and will not
impact any current revenue generated by past development decisions. Future years’ revenue, however,
would be based upon development decisions made by local governments. If a community builds a balance
of retail, jobs, & housing within their community plan, they will obtain the maximum revenue under AB
• AB 1221 provides protection against future legislatures taking more property tax. Understanding
that the state-local relationship is rocky at best, AB 1221 provides a reversal mechanism so that if a future
legislature reduces the property tax allocated to local governments in this bill, the sales tax rate would be
reinstated to compensate.
• AB 1221 would remove disincentives to approve housing and corporate job centers. Under current
law, there is very little fiscal incentive to approve housing and other non-sales tax generating developments.
Housing is often referred to as a "black hole" in community development. By increasing the percentage of
property tax retained by property tax generating land uses, housing developments will begin to pencil out.
COMMENTS AND CONCERNS
Constitutional protection for local government
• As reported in the March 21st edition of Priority Focus, the League of California Cities, in initial discussions
with the author, indicated that its member cities were concerned with granting state control of local sales
taxes. The league reported that “for the bill to be taken seriously by the League membership, it [has] to be
coupled with constitutional protection for local government revenue sources.” Further, “without this
stability and predictability in local government revenues, why would city officials be willing to give up local
control over the Bradley-Burns sales tax to the state?”
• MMC understands that League representatives met with Senate Republican Leader Jim Brulte, who
indicated that he would favor constitutional protection for local governments. This would likely be part of
the final state budget package.
“AB 1221: Fiscal and Policy Implications for Cities” March 17, 2003 memorandum analysis from Michael Coleman to the League
of California Cities
• This analysis recommends a “trade of city and county sales and use tax for greater property tax, property
tax return to cities, counties, and special districts, and constitutional protection of local revenues.”
• The memorandum is thorough in describing 1) how the sales and use tax / property tax swap in AB 1221
would work, and 2) the estimated individual city impacts and how the bill would affect the finances of
• At the League’s Revenue and Taxation Committee, a primary point of concern raised by Committee
members included speculation as to what will happen after the first year of the bill’s implementation.
Because the first year is proposed to be revenue neutral (an equal swap of property tax for sales tax) there
is no clear answer as to what is expected in year two and beyond. At the meeting, Mr. Coleman warned
that careful fiscal analysis is essential, as each city will be affected differently.
• In the analysis, Coleman reported that “to reasonably estimate the budgetary impacts of AB 1221 on any
particular (jurisdiction) one must consider: 1) local long-term economic trends in the context of statewide
trends; 2) future land use and economic plans for the city; 3) the existence and plan for completion of
redevelopment project areas; and 4) a range of possibilities.”
EVALUATION OF AB 1221’S GOALS
As reported in the “Authors Rationale” section, AB 1221 attempts to provide cities with revenue protection, to
discourage cities from “negotiating” with retailers to locate in particular jurisdictions, and to provide a financing
mechanism that would eliminate the disincentives associated with building homes. The following are
considerations in accomplishing the intended goals:
Goal: Provide cities with revenue protection along with an incentive that would discourage cities from “negotiating” with retailers to
locate in their respective jurisdictions.
• As reported in the Sacramento Bee the swapping of revenue streams at the local level will only work if it is part of
a bigger, long-term reform of state and local finances. The larger reform would also need to be completely
divorced from the current State budget crisis.
• Local governments need to be full partners in any overhaul, as this is the wrong time to make a switch of sales
taxes for property taxes due to a probable real estate bubble: although property tax rates have recently increased,
the rates are varying overall and may quickly flatten or drop.
• Using past actual statewide local revenues be shifted and net assessed values as a guide to possible future
results, the following depicts the combined impact on local governments if AB 1221 had been implemented in
• The left column represents the implementation year and the top row represents the resulting years.
Therefore, if AB 1221 had been implemented in 1993, in the year 2000 the local government would receive
an amount of traded property tax equal to 72% of what it actually received in traded sales tax or a 28%
reduction in revenue for its ½% sales use tax.
• While property tax has increased at a higher rate than sales tax over the last 25 years, there have been
periods such as the early 90’s that would, if the transition had taken place at that time, would have resulted
in a decade long revenue shortage for local governments.
• The economic conditions that result in negative local government revenues require property net
assessed value to be at a point of flattening or negative growth with concurrent sales and use tax growth.
• This situation occurred in the early 90’s and many people believe that it is likely to be the case in 2004-
05, the proposed AB 1221 implementation period.
1990 100% 102% 129% 131% 126% 123% 116% 108% 105% 103% 94% 107% 118% 114%
1991 100% 126% 129% 124% 121% 114% 106% 102% 100% 92% 105% 115% 112%
1992 100% 102% 98% 96% 90% 84% 81% 80% 73% 83% 91% 89%
1993 100% 96% 94% 89% 82% 80% 78% 72% 82% 90% 87%
1994 100% 98% 92% 86% 83% 81% 75% 85% 93% 91%
1995 100% 94% 88% 85% 83% 76% 87% 95% 93%
1996 100% 93% 90% 88% 81% 92% 101% 98%
1997 100% 97% 95% 87% 99% 109% 106%
1998 100% 98% 90% 103% 113% 109%
1999 100% 92% 105% 115% 111%
2000 100% 114% 125% 121%
2001 100% 110% 107%
2002 100% 97%
• In addition to the economic timing of the implementation of AB 1221 there are two other timing factors that
would impact local governments future revenues. This would include the timing of the implementation of 1)
commercial property split roll, and 2) the potential of taxation on services. In the event that SB 17 (Senator
Escutia) is implemented prior to AB 1221, there would be a negative impact on the future of local government
revenues because the bill attempts to redefine transfer of property ownership. In the event that a proposal for
taxation on services (SB 400 by Senator Florez) is implemented after AB 1221, there would also be a negative effect
on future local government revenues. Keeping in mind the following is based on the current versions of proposed
legislation, the following matrix depicts the goals and effects for the scenarios described above. Also included is an
analysis of how the authors’ intended AB 1221 goals would be impacted should AB 1690 (Leno) providing for a
local income would be implemented.
See Exhibit A Page 1 & 2
Goal: Provide a financing mechanism that would eliminate the disincentives associated with building homes.
• An increased amount of housing costs cities more than increased retail in terms of the services provided; thus,
local governments will need subsidies to cover the costs of increased housing.
• Due to current state and local budget crises the State of California and local governments cannot afford to
provide housing subsidies, nor has the federal government demonstrated a willingness to help.
MMC utilized financial data from 48 of its client cities to calculate the resulting economic revenue results from AB
1221, demonstrating that direct general fund revenues from residential properties will increase by 24% if AB 1221
Current Tax Current Adjustment of Current Tax
Revenue with AB 1221 Revenue
Business to business 345,937,538 308,837,205 89%
Commercial/industrial property 163,679,178 256,167,954 157%
Financial institutions 6,343,954 7,665,949 121%
Governmental 34,295,284 33,271,344 97%
Hospitality 336,004,770 294,415,737 88%
Miscellaneous 42,729,849 45,514,585 107%
Residential property 1,285,342,174 1,595,424,181 124%
Retail businesses 814,399,787 478,905,353 59%
Service industry 158,261,839 157,010,431 99%
Vacant land 8,520,176 14,440,725 169%
Unable to classify 18,885,815 22,746,901 120%
Total 3,214,400,364 3,214,400,364 100%
TRA Factor 169%
• Generally MMC has observed that cities spend approximately 70% of the general fund budget providing
services to residential properties. Using the above calculated residential revenue amount, the residential economic
sector is still seriously under funded.
Residential 1,595,424,181 2,250,080,255 70% (654,656,074)
Non-Residential 1,618,976,183 964,320,109 30% 654,656,074
Total 3,214,400,364 3,214,400,364 100%
AB 1221 CITY EVALUATION TOOL
Refer to the attached “AB 1221 City Evaluation Tool” to determine city-specific impact.
Because a “macro” security must be set in MS Excel to use the tool, please refer to the “AB 1221 Installation
Instructions” file to get started. For technical support, please contact your MMC representative or Doug Kitchen
at (800) 800-8181 (5512).
The following resources were used in preparing this update:
Coleman Advisory Services
League of California Cities
Office of Assembly Member Steinberg
Speaker’s Commission of State and Local Governments Finance
Exhibit A Page 1
Goals & Effects
0% Short Term
Prevents Sales Promote Low / Moderate Promotes Local Gov't
Promote Housing Revenue Impact On RDA Impact Local Gov’t Control
Tax Negotiation Income Housing Revenue Stability
cities are not Yes, Yes,
Yes, government from
allowed to rebate Tax revenue cannot be Tax revenue cannot be
Prohibits rebates to N/A N/A N/A attracting businesses
any sales / use diverted to the private diverted to the private
private sector with rebates of sales /
tax directly or sector sector
use tax either directly
Retail businesses Very Little, Variable, Negative,
would still be an Low / moderate housing is The first year of This would
Only in a few cities will the Some,
attractive generally rental housing with a implementation would be increase the Some,
Trade of sales & housing revenues exceed the Over the long term (10 to
acquisition relatively low "market value.” revenue neutral, while the general fund cost to Broadens the potential
use tax for cost to provide services. 20 years) property tax is a
opportunity The market value for rental following years could local government land uses that provide
property tax These Cities would likely more stable & consistent
because they property is based on the result in a positive or with an operational positive net revenue
revenues. have currently high TRA rates revenue source as
provide more property's profitability; low / negative revenue impact RDA by decreasing scenarios.
and/or a residentially based compared to sales tax.
revenue than cost moderate rental properties depending on the the State’s revenue
UUT with a high rate and cap.
to the local generate small net revenues. indexing year. contribution.
The implementation under
Requires under current economic No,
implementation & conditions, with sales tax The long term
conditions, with sales tax
indexing of sales revenues at a low and reduction of net
N/A N/A N/A revenues at a low and N/A
tax to property peaking property tax revenue will reduce
peaking property tax
tax in fiscal year values, will result in a local governments'
values, will result in a long
2004-05. severe short term (2 to 9 future fiscal options.
term negative revenue
years) negative revenue
Because housing Currently the state
Because housing development
development is a long term legislature can unilaterally No,
is a long term process and the
process and the current revert back to the existing Unless the RDA No,
Protects local current legislation provides for
legislation provides for a tax structure. However, increment was Unless the proposed
government a reversal of this tax structure
reversal of this tax structure there is a current included as one of constitutional
revenues from N/A at the discretion of the N/A
at the discretion of the consideration of promoting the protected amendment protecting
State Legislature legislature, the above stated
legislature, the above stated a constitutional revenue sources in local government
modifications. advantages will not exist
advantages will not exist amendment, which would the constitutional revenues is passed.
without a constitutional
without a constitutional stabilize local government amendment.
amendment guaranteeing local
amendment guaranteeing revenues by preventing
local revenue stability. future state intervention.
Exhibit A Page 2
Goals & Effects
0% Short Term
Prevents Sales Promote Low / Moderate Promotes Local Gov't Local Gov’t
Promote Housing Revenue Impact On RDA Impact
Tax Negotiation Income Housing Revenue Stability Control
property to be This will produce
reassessed at No, No, a more rapid Some,
The higher non-residential The higher non-residential increase and a This would provide a
This would provide a more This will increase local
value, while N/A rate would increase the rate would increase the larger amount of more diverse revenue
diverse revenue base for taxes and increase
residential desirability of non- desirability of non-residential increment, base for local
local government. municipal revenues
property residential over residential over residential resulting in a government.
remains under shorter life of
Prop 13. RDA projects.
Yes, No, Yes,
residence No, Some,
Particularly with move-up This will increase local Locally imposed and
within This group pays an If implemented,
N/A housing and higher quality taxes on individuals and N/A monitored revenue
jurisdiction. insignificant portion of State there is always a threat of
single family detached increase municipal sources allow for
Tax could be Income Taxes a referendum repeal.
homes. revenues fiscal self-reliance.
up to 10% of
No, No, No, Yes,
This could The additional non- The additional non- No, Includes some or all
Sales & use tax Includes some or all
increase the residential revenue would residential revenue would This will increase local of the service industry
on some of the service industry N/A
number of firms increase the desirability of increase the desirability of taxes and increase segments (broadening
services. segments (broadening /
that cities could non-residential over non-residential over municipal revenues / diversifying the tax
diversifying the tax base).
solicit residential residential base).