HomeMy WebLinkAbout05-01-2018 Item 12 San Luis Ranch Annexation Tax Sharing Agreement
Meeting Date: 5/1/2018
FROM: Michael Codron, Community Development Director
Prepared By: Tyler Corey, Principal Planner
SUBJECT: RESOLUTION ACCEPTING A TAX EXCHANGE AGREEMENT WITH THE
COUNTY OF SAN LUIS OBISPO TO ADDRESS TAX TRANSFERS FROM
THE SAN LUIS RANCH ANNEXATION AREA; ANNEXATION NO. 80.
RECOMMENDATION
Adopt a resolution accepting a tax exchange agreement with the County of San Luis Obispo
addressing tax transfers from the San Luis Ranch annexation area (Attachment A).
DISCUSSION
Background
On July 18, 2017, the Cit y Council approved the Specific Plan and related project entitlements
for the San Luis Ranch development, including initiation of annexation of the project site by
authorizing staff to submit an application for annexation to the Local Agency Formation
Commission (LAFCo). State law requires that jurisdictions affected by an annexation (in this
case, the County and the City of San Luis Obispo) negotiate an exchange of the taxes paid in the
annexation area prior to LAFCo approval of the jurisdictional change.
On October 3, 2017, the County Board of Supervisors (“the Board”) approved the
commencement of tax exchange negotiations with the City for the San Luis Ranch Annexation
area. The Revenue and Taxation Code requires that negotiations be concluded within 60 days,
unless extended by mutual agreement between the involved agencies for an additional 30 days.
County and City staff began a series of meetings on this negotiation in early October, and several
weeks later, determined that the negotiation would not be complete within the 60-90 day
timeframe. On March 6, 2018, the Board approved the re-initiation of the negotiation period for
this annexation. The Board is also scheduled to consider the agreement on May 1, 2018, within
the second 60-day timeframe.
Summary
In 1996, the City and County adopted a joint resolution, along with several other cities in the
County, to establish a county-wide policy regarding tax exchanges (Attachment b). The “master”
tax exchange agreement is based on two principles, (1) that the County should not “profit” from
annexations, nor should annexations result in a net fiscal loss to the County, and (2), that tax
exchange practices should not undermine good land use planning by discouraging cities from
pursuing logical and appropriate annexations.
With these principles as the base for discussions, City and County staff have negotiated an
agreement that is consistent with the “master” tax exchange agreement with the County.
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Specifically, the resolution recommended for adoption provides for the County to receive all
base (existing) taxes and two-thirds of all future tax increment. Separate from the tax exchange,
but related to the San Luis Ranch development and proposed annexation, the County has agreed
to contribute a one-time payment in the amount of $1,435,260 towards the City project to
construct the Prado Road/US Highway 101 Interchange.
Tax Exchange History
Prior to 1996, tax exchange negotiations between the County and cities were more contentious,
with the County “holding most of the cards.” This is because the negotiation process would not
commence until after the annexation applications had gone through a lengthy and complex city
development review process. According to the State Revenue and Taxation Code (Section 99),
exchange negotiations must be concluded within 60 days or the annexation application would
terminate.
Given this process, our city (like others) was under pressure to agree to high County expectations
for sharing tax revenue. Such expectations were increasing across the state, with counties
demanding not only existing revenue, but major shares of future revenue, including transient
occupancy tax and sales tax.
Counties have a need for revenue to support services to residents - even city residents - because
as cities grow, so does the demand for county services (e.g. court, health care, social services,
etc.). As a result, many cities and counties throughout California have become engaged in very
contentious tax negotiations, to the detriment of all involved.
To address this situation in San Luis Obispo County, the Mayors of the cities in the County
commissioned extensive study of the added burdens created for our County by development
within the boundaries of cities. As a result, several cities in San Luis Obispo County entered into
a “master” tax exchange agreement with the County in 1996 (Attachment b). This agreement
greatly reduces the uncertainty and conflict inherent in the previous annexation process,
especially relative to raw undeveloped land.
San Luis Ranch Tax Agreement
The negotiated agreement for the San Luis Ranch annexation area provides for the County to
receive all base tax and two-thirds of the future tax increment, consistent with the countywide
“master” tax exchange agreement.
County Contribution toward Prado Road/US Highway 101 Interchange
Separate from the property tax exchange, but related to the San Luis Ranch development, the
County has agreed to contribute a one-time payment in the amount of $1,435,260 towards the
construction of the Prado Road/US Highway 101 Interchange, which will have significant
regional benefits. The County’s contribution to the Prado Road Interchange was negotiated
outside of the property tax agreement, due to the one-time nature of the contribution, and
because the Prado Road Interchange is not expected to generate a need for additional County
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services. This one-time payment from the County is expected by the end of 2018.
FISCAL IMPACT
The “master” tax exchange agreement with the County has been in effect since 1996. The
negotiated agreement for the San Luis Ranch annexation area is consistent with the “master” tax
exchange agreement. When the “master” tax exchange agreement was proposed in 1996 it was
accompanied by a fiscal analysis that made two conclusions (Attachment c). First, that that loss
of property tax to the County through the agreement is recompensed many times over by sales
tax. Second, for residential properties, the shift of some property tax to the County from the City
is relatively small and that other variables would be much more important to the community’s
decision to move forward with a particular annexation (such as the creation of housing stock to
help the City achieve its Housing Element goals).
The other relevant analysis was prepared along with the City’s General Plan Land Use Element
(LUE). When the LUE was adopted, it was determined to have a neutral fiscal impact. In other
words, future expenditures associated with build-out of the land use plan are supported by future
revenues. Because development of the San Luis Ranch area is consistent with the General Plan,
annexation of the San Luis Ranch area is expected to have a neutral fiscal impact in the
aggregate.
ALTERNATIVES
1. If the City Council has specific concerns with the rationale for the 1996 Agreement, direct
staff to re-open negotiations with the County with specific negotiating parameters. This
alternative is not recommended because the negotiating period for this annexation will expire
on May 5, 2018. In addition, County staff is not receptive to negotiating an individual
agreement with the City that is substantially different than the “master” tax exchange
agreement.
2. Direct staff to work with the County, and other cities in the county, to update the “master”
tax exchange agreement before approving an agreement for the San Luis Ranch annexation
area. This alternative is not recommended because such an effort would involve a substantial
amount of time to accomplish and should be initiated outside of the negotiations of any
particular annexation. In addition, each annexation provides an opportunity for City staff to
discuss the fundamental principles of the 1996 Agreement and policy with County staff. The
underlying assumptions behind the tax exchange agreement are still valid and changes to the
policy are not warranted at this time.
Attachments:
a - Draft Resolution
b - Master Tax Sharing Agreement
c - Analysis of 1996 Tax Sharing Agreement
d - Vicinity Map
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R ______
RESOLUTION NO. _____ (2018 SERIES)
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SAN LUIS
OBISPO, CALIFORNIA, ACCEPTING A NEGOTIATED EXCHANGE OF
TAX REVENUE AND ANNUAL TAX INCREMENT BETWEEN THE
COUNTY OF SAN LUIS OBISPO AND THE CITY OF SAN LUIS OBISPO
FOR THE SAN LUIS RANCH ANNEXATION AREA, AS REPRESENTED
IN THE STAFF REPORT AND ATTACHMENTS DATED MAY 1, 2018
WHEREAS, the City of San Luis Obispo, a charter city and municipal corporation, wishes
to move forward with the annexation of the San Luis Ranch area; and
WHEREAS, the Revenue and Taxation Code Section 99(a)(1) requires that the amount of
tax revenue to be exchanged, if any, and the amount of annual tax increment to be exchanged
among the affected local agencies shall be determined by negotiation; and
WHEREAS, the Revenue and Taxation Code Section 99(b)(6) requires that each local
agency, upon completion of negotiations, adopt resolutions whereby said local agencies agree to
accept the negotiated exchange of property tax revenues, if any, and annual tax increment and
requires that each local agency transmit a copy of each such resolution to the Executive Officer of
the Local Agency Formation Commission; and
WHEREAS, no later than the date on which the certificate of completion of the
jurisdictional change is recorded with the County Recorder, the Executive Officer shall notify the
County Auditor of the exchange of tax revenues by transmitting a copy of said resolutions to him
and the County Auditor shall thereafter make the appropriate adjustments as required by law; and
WHEREAS, the negotiations have taken place concerning the transfer of tax revenues and
annual tax increments between the County of San Luis Obispo and the City of San Luis Obispo
pursuant to Section 99(a)(1) for the jurisdictional change designated as Annexation No. 80 to the
City of San Luis Obispo (San Luis Ranch); and
WHEREAS, the negotiating party, to wit: Emily Jackson, Division Manager, County of
San Luis Obispo, on behalf of the County and Michael Codron, Community Development
Director, City of San Luis Obispo, on behalf of the City have negotiated the exchange of tax
revenue and annual tax increments between such entities as hereinafter set forth; and
WHEREAS, it is in the public interest that such negotiated exchange of tax revenues and
annual tax increments be consummated.
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Resolution No. _____ (2018 Series) Page 2
R ______
NOW, THEREFORE, BE IT RESOLVED by the Council of the City of San Luis Obispo
as follows:
SECTION 1. Agreement. The City Council agrees to accept the following negotiated
exchange of base tax revenues and annual tax increment:
1. No base tax revenue shall be transferred from the County of San Luis Obispo to the City
of San Luis Obispo.
2. Annual tax increments shall be transferred from the County of San Luis Obispo to the City
of San Luis Obispo in fiscal year 2019-20 and each fiscal year thereafter in the amount of
one-third of the increment remaining after transfers to the Educational Revenue
Augmentation Fund (ERAF).
SECTION 2. Transmittal. The City Clerk is authorized and directed to transmit a certified
copy of the resolution to the Executive Officer of the San Luis Obispo Local Agency Formation
Commission, who shall then distribute copies in the manner prescribed by law.
Upon motion of _______________________, seconded by _______________________, and on
the following roll call vote:
AYES:
NOES:
ABSENT:
The foregoing resolution was adopted this _____ day of _____________________ 2018.
____________________________________
Mayor Heidi Harmon
ATTEST:
____________________________________
Teresa Purrington
City Clerk
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Item 12
Resolution No. _____ (2018 Series) Page 3
R ______
APPROVED AS TO FORM:
_____________________________________
J. Christine Dietrick
City Attorney
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the official seal of the City
of San Luis Obispo, California, this ______ day of ______________, _________.
____________________________________
Teresa Purrington
City Clerk
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Item 12
...
J<., ... T RESOLUTION NO. 01-96
A RESOLUTION OF THE CITIES
OF SAN LUIS OBISPO COUNTY ESTABLISHING A COUNTYWIDE POLICY FOR PROPERTY
·TAX EXCHANGE UPON ANNEXATION
WHEREAS, changing governmental fiscal relationships have required a modification to
the earlier approach to determining property tax exchange between cities and the County
upon annexation; and ·
WHEREAS, ttie extent and nature of this modification has been agreed upon through a
process of negotiation between the cities and the County based upon a shared goal of
producing a countywide tax exchange agreement that is fair to all parties; and
WHEREAS, a fair agreement is one that respects the following two principles: (1) that
the County should not "profit" from annexations, nor should annexations result In a net
fiscal loss to the County; (2) that tax exchange practices should not undermine good
land use planning by discouraging cities from pursuing logical and appropriate
annexations; and
WHEREAS, in order to provide objective data upon which to develop an equitable
agreement, the cities commissioned an independent fiscal study of the impact of
annexation and development of vacant lands around cities on County government; and
WHEREAS, the results of this study assisted in the development of a new countywide
tax exchange. agreement; and
WHEREAS, upon adoption· of the agreement, the County and the cities will continue to
collaborate on related matters of shared importance, including: (a) following adoption by
the Board of Supervisors, reconsidering a countywide development impact fee program, which may include appropriate city impact fees for county development occurring. in the unincorporated fringe of cities for which a clear City impact can be determined; and (b) support existing policies which encourage urban-like development within the boundariesof cities. · · ··
NOW, THEREFORE, BE IT RESOLVED by the City Councils ofthe Cities of San Luis Obispo County:
1.For "raw land" annexations prezoned commercial or industrial, the County. retains the existing proper ty tax base and all of the future property taxincrement. .
2.For annexations prezoned residential, the County retains theexisting property tax base and two-thirds (66%) of the future property taxincrement. ·
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Aftachffentl
3. For commercial and industrial annexation areas already substantially
developed, tax exchange will be negotiated on a case-by-case basis
between the annexing city and the County to determine an appropriate
property tax-sharing arrangement, based upon the principle of fiscal
neutrality for the County.
4. For annexations prezoned agricultural, the County retains the' existing
property tax base and all of the future property tax increment.
5. The County and the cities agree to re-examine the above policies at five-
year intervals to assure that they remain appropriate and current for all
parties.
PASSED AND ADOPTED by the City Councils of the Cities of San Luis Obispo County
at a special joint meeting thereof held on the 25th day of April, 1996.
MAYOR OF ARROYO G ND
ATTEST:
a
CI CLEAK
MAYOR OF ATASCADERO
ATTEST: Not adopted)
CITY CLERK
MAYOR OF GR VER BEACH
ATTEST:
r ,
CITY CLERK
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Item 12
i
nt Z.
Resolution No. J01-96 Macage 3
MAYOR OF MORRO BA
ATTEST:
CITY CLER
MAYOR OF PASO ROBLES
ATTEST:
Not participating)
CITY CLERK
MAYOR OF PISMO BEACH
ATTEST: Not participating)
CITY CLERK
MAYO OF SAN LUIS OBISPO
ATTEST:
CLE
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Item 12
Crawford Multari & Starr
planning • economics public policy ·
June IO, 1996
Mayors of the Cities of San Luis Obispo County
c/o Allen Settle, Mayor
City of San Luis Obispo
P.O. Box 8100
San Luis Obispo, CA 93403-8100
Dear Mayors,
Earlier this year! prepared an analysis of the fiscal effects on the county related to annexations.
This analysis was eventually used in the negotiation of a tax�sharing agreement between at least
some of the cities and the county. It seems that there is some confusion about the purpose ofmy
analysis and about the results. Perhaps this letter will help clarify the situation.
Our role in the tax sharing discussions. When representatives of the cities first engaged the
county's representatives regarding a standard tax sharing agreement for annexations, the coun · 's
ii:uti suggestion was that they s . ou retam · 1 property tax and should also receive a portion of
the sales tax, and perhaps even some of the TOT, as well. They argued tha:t With the reductions
in property tax revenues going to counties and mcreases in obligations, the county \vould
probably need that additional revenue just tQ "break even." I was contacted by Ken Hampian,
Bob Hunt and Rich Ramirez to analyze the actual effects of annexation on the county, to test
whether or not this assertion was valid. The county representatives agreed that some kind of
analysis of probable fiscal impacts would be valuable.
Our firm had recently developed a fiscal impact model for the county so that they could evaluate
different development proposals. \Ve modified that model so that we could look at the fiscal
effects on the county if the development occurred in an annexation area (rather than in the
unincorporated tenitory). The advantage of basing the analysis on the county's model was that
we could use many of the assumptions the county had already found reasonable. In this kind 9f
analysis, consensus on assumptions is an important starting point.
Please keep in mind that I was not part of the negotiation team, but I did have the interesting
experience of sitting in on several of the discussions that took place among representatives ofthe
cities and the county.
Our assignment was to determine how much property tax the county would need in order to
"break even", that is, so that the revenues coming to the county equaled the costs of providing
county services. We refered to that as "fiscal neutrality", that service costs would be just offset
by revenues. \Ve were asked to determine fiscal neutrality for the county, not for the cities.
641 Higuera St .. Suite 202 •· San Luis Obispo. CA 93401 . (805) 541-38.48 Fax .(805).fa;)Bi.1�9�· Packet Page 142
Item 12
ATTACHMENT?
Mayors
Annexation and tax sharing r
page 2
Statewide perspective. The League of California Cities retained our firm earlier this year to
survey cities throughout the state regarding issues related to annexations. We received responses
from 154 cities; 78 (51%)reported that they had encountered problems with tax sharing
agreements. In many cases, the county position is situp y that 100%of all property tax must go
to a counries after annexation. Examples where this is the case include San Joaquin,
Sacramento and Shasta counties.
Forty-four(29%) of our respondents stated that their county's position was not only that 100% of
the property tax should be passe .to the county but that a share of sales tax, as well. We
interviewed representatives of many of these cities to learn more about what kinds of tax sharing
agreements had been worked out. An example of how extreme these negotiations can go is the
City of Sonora. In a recent annexation there, the tax s wring agreement called for 10 percent of
the property tax increment, 8 percent of the sales tax; 72 percent o_the TOT, and development
impact fees averaging about S 1,000 per unit to go to the County of Tuolumne!
The results of our analysis of San Luis Obispo County. We found that in order for the county
to" break even,"they would need to continue to get all the property tax for non-residential
annexations (commercial and industrial) and about 2/3 of the tax for residential annexations.
Here's another way of looking at this. On average, in the unincorporated area, the county
receives only about 22%of the property tax. Our analysis found that for the county to break
even, they would need to get 22% after-annexation for commercial and industrial annexations
and about 14%for residential annexations.. (More precisely, the actual percentage was 13.5% --
a bit less than 2/3 of 22%.)
This also means that after annexation, the city would receive no property tax for commercial and
industrial annexations and about 7.4%of the property tax for residential annexations.
The commercial situation. At first blush, it may seem imbalanced that the county receives all
the property tax in the case of commercial annexations. However,the city has kept all the sales
tax. The sales tax income simply overwhelms the property tax. Consider a hypothetical case of
a 100,000 square foot shopping center.. In the analysis we assumed an assessed value of$80 per .
square foot. This is probably high for most modern tilt-up construction,but let's use it for our
example. If the county received its fu1122% of the property tax,that equals about$17,600 in
property tax. The projected sales tax from a retail center of that size is about$175,000 per year,
almost exactly 10 times as much.
Let's consider how much property tax the city actually"gives away"in this hypothetical case.
First of all, it is important to keep in mm at since ERAF and other property tax"grabs"by the
Crawford Multari&Starr planning economics._ public policy_
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Mayors
Annexation and tax sharing r
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state, the county's position in terms of property tax has significantly eroded. Within the cities,
the county receives on average about 18%of the property tax and cities, on average,receive
about 16%. Thus, a city and the county share about 34% of the property tax. In unincorporated
areas, as noted above, the county gets only about 22%of the property tax. Thus, the amount that
the city and county can share after annexation, the amount they can actually negotiate over, is
only 22%. Thus, it is entirely unrealistic for cities to expect to continue to receive as much as
16% of the property tax after annexation.
But let's assume that the current ratio of county to city shares is maintained in splitting up that
22%. That would work out to about 10.3% for the city and about 11.7% for the county(16:18
10.3:11.7, approximately). If we assumed this was the baseline,how much did.the city lose by
giving the county all the property tax? It works out to about$8,000. Again,the sales tax.is
estimated at $175,000-- almost 22 times as much. Thus, from the perspective of an overall fiscal
strategy, the trade-off of a small amount of property tax for much greater sales tax not to
mention business license taxes and other revenues like TOT) seems reasonable.
Another interesting point about property tax is that Proposition 13 limits re-assessments to only
2%per year. If inflation is above 2%, then the property tax income, in constant dollars, actually
declines each year. Sales tax,however, generally keeps pace with inflation as prices for goods
rise. For example, if inflation runs at 4%,that$8,000 that the city gave up will be worth less
than$6;500 ten years later even with.the annual maximum increases allowed by Proposition 13.
Thus, given the two income sources,the sales tax is by far the larger and more likely to keep up
with inflation.
The industrial picture. Here again, the city position was to give up the entire property tax to
the county. While the sales tax benefit from the commercial case was easy to illustrate, what
income accrues to the city in the case of industrial? While not as generous as in the case of a
retail center, industrial areas still produce significant sales tax. The examination of virtually any
industrial area reveals that there is considerable retailing going on.
For example,we were recently retained to assist with the annexation of an already developed
area in the city of Patterson. The subject properties were considered to be"industrial." The total
property tax that the city and county could negotiate over amounted to about$2,400. However,
e sales tax generated among the various uses was over$30,000. Clearly,the city was not so
concerned with property tax as with getting the sales tax.
Other examples may help illustrate the point that"industrial" areas actually contain activities that
generate substantial sales tax-- not nearly so significant as a retail center,but generally much
more than property tax.
Crawford Multari&Starr _ planning__economics public.,policy
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AT IACHMENT 3
Mayors
Annexation and tax sharing
r
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Consider the"Airport Area"south of San Luis Obispo. This has been zoned"industrial"for
decades. A study performed by Angus McDonald found that the area generated approximately
370,000 per year in sales tax. Keep in mind that this is an"industrial"district. Furthermore,
McDonald's report estimated that this area would generate a net revenue to the city(today,
without further development) of$570,000 per year without any property tax going to the city.
Another area presently in the City of San Luis Obispo is probably representative of the mix of
uses one might find in"industrial"districts. The area east of lower Higuera Street between Tank
Farm and Prado Roads includes Hind Performance, San Luis Sourdough,The Spice Hunter,JBL
Scientific and several other light industrial and"heavy"commercial land uses. In 1994-95 this
area generated over$160,000 in sales tax to San Luis Obispo. Interestingly,the amount of sales
tax produced by this area has been climbing throughout this decade, averaging an increase of
almost 15%per year, despite the recession.
The case of residential annexations. While one can easily demonstrate that commercial
annexations will be net revenue generators.for cities, and that this is also likely true for industrial
annexations --at least the way industrial areas actually are built out--one can not be so sanguine
about residential projects. The fiscal impacts of new residential growth is quite idiosyncratic
from place to place,varying with the amount and type of services provided by the city,
household size, the valuation of the units, local sales tax capture and other factors. .
However,with regard to the property tax, it should be kept in mind that the amount of money in
absolute dollars is quite small. Consider a hypothetical case of a single family house.
Fust of all, there is the question of the"base"before annexation. Tax sharing agreements
generally require that the existing base,that is, the amount the county presently receives in
property tax,continues to go to the county. It is just the increase, or increment, that is shared
after annexation. We assumed that to be true in our analysis. However, we also assumed that for
raw land, outside the city limits,with neither annexation nor entitlements,the value for property
tax purposes is generally quitelow. Discussions with some local developers suggested that the
assessed value of this land for tax purposes (again,prior to annexation or any entitlement)would
probably by less than$20,000 per acre. Let's double that for argument's sake to $40,000 per
acre. Thus, at a post-annexation density of four units per acre,the"base" for property tax
purposes for each unit would be$10,000. The county receives about$22 in property tax on that.
Now,after annexation the land is subdivided and approved. A house is built and sold for
150,000. The increment is$140,000. The total property tax from the increment is I%of that or
1400. The city and county get to split 22% of that, or about$308. If we assume the current
average ratio of county-city shares (see above),the city would get$144 and the county$164.
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ATTACHMENT 3- -
Mayors
Annexation and tax sharing
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The newly proposed tax sharing agreement would change these amounts to$103 for the city and
205 for the county. Thus,the city has given up $41 per house to the county.
In these difficult fiscal times, giving up any revenue is a problem. But one should keep in mind
e magnitu e of the issue at hand.
Conclusion. It is not my role to say whether the proposed agreement meets the needs of
individual cities. However, it appears to me that for any commercial annexation, and for most
industrial annexations that can be imagined,the loss of property tax is recompensed many times
over by sales tax(and perhaps other revenues as well). In the case of residential,there is a shift
of some property tax to the county from, at least, a theoretical baseline. However,the amount of
money involved is quite small; it seems other variables besides these small sums would be much
more important in a community's decision as to whether or not a particular annexation makes
sense.
I hope this is helpful. I would be pleased to attend one of your"Mayors' Group" meetings to
help answer questions and to discuss this interesting and difficult topic -- one that I can assure
you is being debated in many cities and counties throughout the state.
Thank you.
Sincerely,
6uzCCG 7
Michael Multari
cc: Councilmembers and City Managers
Crawford Multari&Starr planning economics public policy
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Vicinity Map
San Luis Ranch Annexation Area
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