As is usually the case with these things, Tatooine was going downhill when Lucas decided to put Jabba's palace there, instead of on an interesting or exotic planet like a rich gangster would want. That always bugged me. Why not have our heroes go to some surreal underwater fortress that was actually dangerous and difficult to escape from, instead of a place that Luke and the droids simply walk into without any trouble?

As for the idea that Tatooine was turned into a dump when the Empire took control, it doesn't square with what we know. I could buy that there used to be more going on there twenty or thirty years ago, as evidenced by all of the derelict equipment just sitting there in the desert waiting to be picked up by Jawas, but none of those trashed droids were in service in the prequels, so it's anyone's guess how they wound up in the desert.