Target Competition:
How local government competition for retail sales can lead to sprawl

Brooke Myers
Bachelor's of Arts in Environmental Studies
May 2002

Within the last ten years, experts throughout California have raised concerns about what they call the "fiscalization of land use." As a result of the passage of Proposition 13 in 1978, urban and environmental policy experts in California are concerned that land use decisions at the local level have been skewed towards retail as a result of the competition for retail sales and sales tax revenues between cities. As an example of an externality, it seems likely that this "fiscalization of land use" may be perpetuating urban sprawl. In this paper, I have attempted to explain population growth as a function of a city's expenditures and revenues and the average expenditures or revenues of their neighbors.

Despite the fact my regressions were not successful in modeling the complex relationships between communities and retail establishments like Wal-Mart, Home Depot and Target, anecdotal evidence and studies performed by the Public Policy Institute of California suggests that community planners in California do favor retail development over all other types. In order to continue to deal with the problem of urban sprawl in California, it seems safe to assume policy needs to be created in order to account for the "free-rider" phenomenon between cities and their neighbors' retail development decisions, and thus decrease the amount of potential competition between communities for retail uses. For example, California Assembly Bill 680 (AB 680), passed in February 2002, is one example of an attempt to create a system in which cities share future sales tax revenue so the incentive to develop retail over residential or light industrial uses will be less strong in the future.

While the first-difference model I used has not helped me to explain the effect of retail sales and sales tax revenue on population growth for cities or their neighbors, it has indicated average neighborhood highway expenditures have a positive and significant effect on a city's population growth. This supports the hypothesis that decreased commuting costs will perpetuate suburbanization, but also adds to economic literature the effect of neighbors' spending behavior has on population growth in the region. To make my model more sophisticated, I would include all cities in California, as opposed to including only those cities which had populations greater than 25,000 in 1980. After analyzing the data, it seems likely that many of the people who are moving to the suburbs and fringe areas in California are moving to those jurisdictions that are much smaller than those included in this original study. Furthermore, I would try to deal with the neighborhood effect in a more sophisticated manner: perhaps, with the use of additional or alternative geographical models and by ensuring that neighborhood designations were appropriate given their topographical locations. For further changes, please see Chapter 5.

Despite the lack of significant estimators of the neighborhood effect, I believe that my model and anecdotal evidence does suggest that it does exist. I believe future, more sophisticated analyses will find that competition between jurisdictions for sales tax revenue, causing the "fiscalization of land use," does perpetuate urban sprawl at the city level. It is thus apparent to me that this issue is an interesting one, and one worth spending additional time and resources studying.