Unveiling Hidden Districts: Assessing The Adoption Patterns Of Business Improvement Districts In California

A wealth of anecdotal evidence suggests that, in the wake of tax revolts, cities have responded with a proliferation of special assessment districts which directly link taxes and their local public good beneficiaries. Despite this, there is no systematic evidence on the adoption patterns of these districts, likely because they are not surveyed by the U.S. Census of Governments. This paper begins to fill this gap by reporting the results of a survey on the adoption patterns of one class of special assessment districts, Business Improvement Districts (BIDs), in the state of California. A BID is formed when a majority of merchants or property owners in a commercial neighborhood vote in favor of a package of local taxes and expenditures; once passed, assessments are legally binding on all members of the commercial neighborhood. I find that roughly half of all larger cities in California have at least one BID; among the universe of cities in four Southern California counties, that figure falls to about one-fifth. On the demand side, theory and evidence suggest that BIDs should be adopted in heterogeneous cities to supplement local public goods to neighborhood taste. On the supply side, theory argues that BIDs solve the collective action problem arising in the provision of public goods when the number of group members is large. In particular, older commercial neighborhoods have many landowners who may have trouble coordinating the provision of local public goods, in contrast to the single mall developer who can write contracts to internalize externalities. Combining the survey data with demographic, institutional and political data, I find strong support for the supply-side story, and some evidence that the interaction of supply and demand explain BID adoption.