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Corporate welfare, alive and well

Big, wealthy mall developer Westfield Group is typical of businesses that get tax breaks by the boatload from L.A. County. That means millions in foregone revenue that could pay for schools and parks.

August 13, 2013|Michael Hiltzik
  • Nate Greely, left, and James Banks, members of a coalition of community, education and labor unions called Refund L.A., protest at Westfield Century City Mall in Los Angeles last month to demand that Westfield pay more in property taxes.
Nate Greely, left, and James Banks, members of a coalition of community,… (Anne Cusack, Los Angeles…)

As a developer of shopping malls, including 22 in California, Westfield Group clearly takes its responsibilities to the consumer economy seriously.

The Australian company's malls are typically well-designed and anchored by the finest department stores, such as Bloomingdale's and Nordstrom. The firm spends gobs of money to refurbish its older malls.

As a California taxpayer, you should be proud of Westfield's efforts. That's because you're paying through the nose for them.

Over the years the company has reaped hundreds of millions of dollars in favorable tax assessments, as a recent study documents. That means millions in foregone revenue that could pay for schools and parks.

And this summer, the Los Angeles City Council granted Westfield a special tax break of up to $59 million on a new mall in Woodland Hills it probably would have built anyway.

Westfield's position is that it receives nothing it's not legally entitled to. "Westfield has paid all real property taxes that have been assessed in accordance with applicable law, like every other taxpayer," its spokeswoman, Katy Dickey, told me by email. As for the new tax abatement, "we worked with the city through the review/approval process and followed the rules," she said. 

Yes, they probably did — and that's the problem.

Westfield is a perfect example of what's wrong with California's system of business incentives. Corporate welfare has been baked into the rules for so long that state and municipal leaders don't think twice about it anymore. No one asks whether these breaks serve their purpose. No one asks for evidence of a compelling need.

"Westfield is a high-profile example," says Peter Kuhns, the Los Angeles director of the Alliance of Californians for Community Empowerment, one of the community groups that sponsored the property tax study. "But there are thousands of commercial property owners in California" getting a similar break on assessments. "That's why our schools are falling apart."

Let's see how this works for Westfield.

On June 28, the City Council voted to grant an exemption of up to 42% of the net new tax revenue generated over 25 years by Westfield's planned Village at Topanga mall. The mall will feature a Costco warehouse store, an extended-stay hotel, restaurants and smaller shops, adding up to 1 million square feet.

The giveaway was sponsored by then-Councilman Dennis Zine and was based on a consultant's report that a "feasibility gap" of $49 million faced the project. That's the difference between Westfield's development costs and the value it could pocket over the 25-year period. The city is empowered to cover up to half of that with tax breaks; to reach $25 million in present value you have to exempt $59 million over the whole period.

How much debate did this get from the council? If you guessed "none," have a cookie. The vote came one week after the deal's details were unveiled. They weren't reviewed by a single council committee. Council President Herb Wesson allowed 10 minutes for comments from the floor, pro and con, rudely hastening the speakers along as though he was facing an urgent call of nature. The council approved the deal 10 to 0.

Was there some reason that taxpayers needed to cover the "feasibility gap"? No. The site is located between two existing Westfield malls, so its development is likely to enhance their value too. Westfield already owns the property and had poured $18 million into pre-development costs before coming to the council with upturned palms.

"It was not at all clear that this project would not have happened without the tax subvention," says City Controller Ron Galperin, who came out against the deal during his successful campaign against Zine for that post.

The firm hardly needs the money. Westfield manages assets worth nearly $60 billion and recorded a profit last year of more than $1.5 billion (U.S.).

The city says it's making an investment to allow Westfield to build the Village over a shorter time frame, producing more tax revenue faster. But although the city's consultants projected that the new mall would generate a goodly volume of business, it's unclear how much would be new business, as opposed to sales cannibalized from other locations. This is important, because cities love to use tax breaks to poach developments from neighboring counties and cities. It's a vast zero-sum game, except for the taxpayer, who loses.

In this case, the Costco slated for the Village will be relocated from just a few miles up the street. The city's consultants at Santa Ana-based Rosenow Spevacek Group didn't count most of the revenue from the Costco in calculating the value of the new mall. But estimating how much other spending will be new is something of a black art.

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