106 Iowa L. Rev. 2427 (2021)

Download PDF

Abstract

The role of federal policy in encouraging sprawl and segregation is well-known, as is the role of local zoning law. The role of state law in defining development patterns is less developed. In this Essay, we will use two sets of unique data to explore the role of state law in subsidizing unsustainable and inequitable development patterns.

While our focus is on California’s Community Facilities District (“CFD”), our research is generalizable because there are similar laws in many states. There are a number of different types of CFDs. For example, a local government at the behest of a developer can form a CFD in order to complete a greenfield development project. The new CFD imposes special taxes on the new residents of the development. In anticipation of the new residents and the new tax revenue, the CFD is able to borrow to build infrastructure for the new development, which is advantageous to developers for many reasons. First, these borrowings free up the developer’s own capital or credit by shifting risk to the public. Second, the interest on these borrowings are exempt from state and federal income taxes, thus reducing the costs of development. Third, the new residents likely do not fully take these future taxes into account when evaluating the price of the house they purchase.

We use property tax and the CFD tax burden of parcels in Sacramento County to examine spatial attributes of where these CFDs form and who pays for them. Although there are many variations of CFDs, our interest is in CFDs that provide significant infrastructure funding, either through developments or through school district capital projects. We also analyze data from securities documents to dive deeper into the financing and cost of CFD taxes.

Our preliminary findings are:

Substantial subsidy. Estimating the size of the subsidy is difficult, but the subsidy is likely enough to make the chance to setup a CFD for a project a significant boon, thus possible carrot, for developers.

Arbitrary tax burdens. Especially when combined with California’s Proposition 13, CFD taxes impose another level of unfairness on some taxpayers, as taxpayers in quite similar homes in similar neighborhoods can pay very different tax rates.

Sprawl. We find that there is nothing arbitrary about the kinds of projects these taxes subsidize. In fact, we recognize a sprawl pattern development: most of the infrastructure projects are located near urban fringe.

Segregation. We find, with some exceptions, that the developments subsidized with these special taxes are relatively segregated.