The newspapers have been duly reporting the imminent calamity that is about to befall car dealerships. Chrysler and General Motors face bankruptcy, and as part of their shrinkage, both are in the process of terminating a bunch of car dealerships to reflect the reality of drastically lower car sales. But there is more to this problem than just car dealerships. Over the years, many cities got the bright idea that if they created what around here is known as “auto malls,” they would get to collect gobs of sales taxes charged on car sales — a big deal when cars sell for tens of thousands of dollars each. With sales taxes of around 8%, each car sale can generate sales taxes in the thousands of dollars, with cities pocketing one percent out of each 8% collected for sales taxes (that’s 12.5% of all sales taxes collected). So when you have a car mall within city limits, it’s sort of like having a municipal money printing machine. At least, that’s the way it was.
This is of special interest to us because in the olden days, say about 20 years ago, more that 20% of auto malls were in California, and most of those were in the Los Angeles basin, accounting for 20% to as much as 40% of municipal sales tax revenues. You can read all about it in a Los Angeles Times article by Frank Clifford, entitled Pirating the Auto Retailers, November 9, 1990 (you can get it on Lexis – go to news, click on Los Angeles Times, and type in “Frank Clifford” and “auto malls”).
A fascinating feature of Clifford’s article is that it correctly foreshadowed the hazards of a declining economy and its consequent impact on car sales and sales tax revenues:
“Because of the region’s booming economy, the last decade produced more winners than losers among auto mall combatants. But experts warn that that the auto mall business is on the verge of a shakeout that could reduce the number of dealers nationwide by as much as 60% by the end of the decade. A steep recession could accelerate the process and spell trouble for cities that have entrusted much of their financial health to auto dealers.
“A downturn in the economy of 15% to 20% is going to create real stress. The impact could be enormous,” said William Carlson, executive director of the California Redevelopment Assn.” (emphasis added).
And so it came to pass. Enter the Great Recession with its drastically diminished car sales, and as of today, a drastically reduced number of car dealers. California cities are now discovering that they are facing a dramatic decline in their sales tax revenues. Thus, the L.A. Times reports that the city of Cerritos whose auto mall boasts of being the largest in the world, used to get over $30 million per year from those sales taxes – a third of its budget — but is now looking at a sales drop of 21%. Roger Vincent, Cities Brace for Shutdown of Dealerships, L.A. Times, May 14, 2009, at p. B1.
So what does all that have to do with this blog that is primarily concerned with eminent domain? As it turns out, quite a lot. Many of the malls (some general shopping malls and some auto malls) were created by cities as redevelopment projects – the cities took land from the indigenous owners and turned it over to car mall owners for a fraction of the acquisition cost. Such a bargain! They did that in the name of clearing “blight” but actually with an eye on those lush sales tax revenues, even though in California redevelopment takings for the purpose of increasing municipal revenues are illegal. But like all money making schemes, this one too carried with it the familiar risk of failure, which is why such schemes should not be undertaken by placing public funds at risk.
And thus we come to our familiar concluding refrain: he who lives by the sword dies by it. It looks like all those cities that profited from their [mis]use of eminent domain to create auto malls will now have to face economic reality. Like the Bible says, after seven fat years come seven lean ones, and he who disregards that verity winds up having to eat the green weenie. But maybe, just maybe, this harsh lesson will bring home the need for responsible civic governance which requires that those who would govern us have to face up to their responsibility and make it clear to the voters that sound governance is not cost-free, that there is no such thing as a free lunch and that he who thinks otherwise is setting himself up for a fall.