The drive for increased property tax revenue, and in some cases sales tax revenue, can lead local governments to make land use decisions that conflict with other planning and economic development goals. A community might reject much needed affordable housing in favor of expensive homes, for example, or forgo office buildings with high-paying jobs in favor of big box retail stores with low-wage jobs, in anticipation of generating more tax revenue with a comparatively smaller burden on public services.
The quest for revenue-generating development creates competition among neighboring jurisdictions, which may engage in bidding wars to offer developers the biggest tax breaks or least stringent environmental regulations. From a regional perspective, providing subsidies for businesses that have already decided to locate in the area is unnecessary and even destructive. A big box store, for example, will cannibalize sales from existing local businesses and shopping centers and, for the region as a whole, there will be no net gain in economic activity.
In metro areas, the “fiscalization of land use” or “cash box zoning,” as this problem is known, fosters sprawl and polarization. Some jurisdictions are winners; others are losers. New suburbs on the urban fringe with extensive new commercial development and relatively affluent homes will have high quality public services with a relatively low tax rate. The central city and older suburbs, with declining commercial centers and lower-income families, will be forced to impose higher tax rates and deliver poorer quality services. This disparity tends to snowball and engender a cycle of sprawl as more middle-income families flee to the suburban fringe.
Regional tax-base sharing offers one way to alleviate this problem. Under tax-base sharing, all of the municipalities within a metropolitan area agree to share tax proceeds from new development. This eliminates inter-regional competition; facilitates other planning goals such as preserving open space or maintaining a vibrant downtown; encourages suburbs and central cities to cooperate on regional economic development goals; and leads to a more equitable distribution of tax burdens and public services.
State legislation is generally required to implement regional tax-base sharing. Two regions of the U.S. have adopted this approach: the Twin Cities metropolitan area in Minnesota and the Hackensack Meadowlands area in New Jersey. In 2002, the California state legislature considered a bill that would establish tax base sharing in the Sacramento metro area.