Big-box retailers are slashing their property taxes through a legal loophole
citylab.com
citylab.com
I mean, they're property taxes, not business taxes -- isn't it obvious that they should be based on the value of the property, not based on the success of the business which uses the property.
Edit: On skimming the article, the taxes are going down, but for the (justifiable) reason that their value is rightly being reassessed in light of the declining market.
So, no, it is not obvious that the success of the business that uses the property is an invalid means of assessing value.
The loophole is not so much the use of comparable sales, as the imbalance of legal resource between these large corporations and the small municipalities:
"Yet dark store theory appeals have been incessant, and small towns feel outgunned. Retailers come back, year after year, insisting on paying less, even after they’ve been granted reductions. For them, every demand brings the opportunity for a lower valuation, and there’s no real financial downside, with outside tax lawyers working for contingency fees. “They’re forcing the hands of municipalities to go to court, and then they keep bargaining it down,” said Krause, the assessor in Wauwatosa. Repeat appeals from Lowe’s, Best Buy, Meijer, and others dating back to 2013 have cost her city $2.4 million in legal fees."
As a thought experiment, consider a custom-made many-billion dollar chemical factory that (due to IP or somesuch) can only be utilized by the current owner. Should the town be required to charge property tax as if it was unimproved land, or worse, as an unsaleable cleanup site?
It's not that "nothing but resale" is obviously the wrong approach, but I don't see why "value to current owner" couldn't also play a role. Property tax on businesses feels like a negotiation to me, and I don't see why a town shouldn't be allowed to use whatever rules it wants.
We're not. The buyer values the property at $120,000 but has to pay $20,000 to relocate, so won't pay more than $100,000. The seller values the property at $80,000 but has to pay $20,000 to relocate, so won't accept less than $100,000. The market value is the $100,000 that actually gets paid. This also has the extremely strong virtue of being a known quantity.
> As a thought experiment, consider a custom-made many-billion dollar chemical factory that (due to IP or somesuch) can only be utilized by the current owner. Should the town be required to charge property tax as if it was unimproved land, or worse, as an unsaleable cleanup site?
What the state is obviously going to try to do in that case is use the market value of the property as it would be if it were alienable.
Try a different one. Suppose a communications company has built ground stations for a global communications network. The initial locations were somewhat arbitrary but had to be chosen specifically with respect to the other stations, so that once the network is built none of the locations can change. The value of each individual station is a million dollars but there are ten thousand stations and the overall network is worth billions. Selling off individual stations would compromise the entire network. Does that mean the operator has to pay property taxes on billions of dollars for every station across thousands of jurisdictions, because they wouldn't sell any of them individually?
You also get all the trouble with having to distinguish between having this property and having a property. A company might be able to make a billion dollars as long as they have somewhere to operate, even if it's not anywhere in particular. That doesn't make any particular property especially valuable if there are a large number to choose from and not a lot of competing buyers.
Suppose in your example that the billion dollar facility can operate out of the back of a large truck. The truck needs to be somewhere, but it doesn't need to be somewhere specific. And if you say the value inside the truck gets taxed, it's going to move down the road to where it isn't (or at least where the rate is lower). Which isn't what you wanted, because then you don't get anything.
> Property tax on businesses feels like a negotiation to me, and I don't see why a town shouldn't be allowed to use whatever rules it wants.
It seems like what you're after isn't really property tax. If you want to tax based on factory output or number of employees or sales within the jurisdiction, you can do that, but there is no need to pretend it's property tax.
The actual problem is that everybody wants tax revenue and nobody wants to discourage any specific activity by taxing it, but that's how it works. People will try to move the thing you tax out of your jurisdiction. This is why the better taxes are the really broad ones, like VAT, because the broader the base the lower the rate for the same revenue.
Imagine two lots right next to each other going for a million, but it takes another $100k to set up the store and move in everything.
Walmart moves into one of the lots, then someone offers them 1 million and $1. They could switch lots and make $1, but the switch would cost $100k.
Calculating the tax basis value based on what the owner would sell it for has numerous problems even outside that subjectivity. It penalizes businesses for success in a way that promotes looting the company to artificially lower the business value. Aside from the deadweight loss involved, it artificially promotes the type of behavior firms like Bain are already criticized for. Also, it's highly subject to system-gaming. What is the incentive of a firm to actually accurately value it at what they would sell for while it was open? The only way it works is to enforce some draconian policy that requires them to sell if someone ponies the cash (a la Posner and Weyl's proposition in Radical Markets).
If a business is sold as a going concern, it's still priced as property (or lease) + inventory + the business itself.
If you want to tax a business based on its sales, income, inventory, or whatever, then pass legislation to impose that tax, don't try to call it part of the assessed value of the property.
“As of 2017, the city had valued that store at $11 million, a number based on what the property had cost the owner to buy back in 2001, plus the added value of renovations over the years, adjusted at the going rate of depreciation.”
However, that’s not the way properties are supposed to be valued by state law - it is supposed to be based on the resale value. And there’s a terrible market for used big box stores.
When a home is assessed we look at similar houses (similar in size, number of bathrooms, garage, etc.) These are features that have teal and tangible value for people in the market for a home. People agree these are valuable things.
It sounds like much of the value of these properties isn't really part of the properties themselves. Instead we're seeing the value in the I improvements to the property _around_ the store: what was once empty land now has a four lane road, electric lines and other utilities constructed solely to support these stores. Is it fair to turn around and argue that this value isn't enjoyed by these big box stores?
That seems to be their logic: the Home Depot has value, but not much: it's a shoddy square box full of shelves. Yet the municipality spent a lot of money on infrastructure to support this store that they can't afford without these taxes.
Similar to the Amazon HQ2 saga, providing tax breaks to these companies isn't worth it in the long run; that practice should probably cease.
There is also a very small market for sales of big box stores. Their value is very location dependent in a way that is difficult to compare, and most of these 'dark stores' would require millions of dollars in renovations to be usable.
"in many states, including Wisconsin, sales are supposed to be the first variable in the valuation equation, whenever possible"
So no, resale value is not supposed to be based soley on resale value.
Can you clarify? This seems an odd statement.
It might not even cost the county tax assessors much, some of these abuses are so blatant that even a private citizen could buy out the building under that policy:
https://dailycaller.com/2018/08/14/apple-hq-200-dollars-sant...
> Apple, history’s first trillion-dollar company, is arguing that a cluster of new buildings at its headquarters is worth only $200 in order to lower its tax burden.
> The trillion-dollar tech giant claimed in an appeal the value of the “cluster of properties” is worth $200, not the $1 billion value given by the Santa Clara County’s tax assessor — elected officials who determine property value for tax purposes.
I'd call it "disruptive innovation" to buy out Apple's headquarters buildings for the $200 it thinks they're worth, rent them back to Apple at the maximum price the market will bear, and pay Santa Clara County it's fair share in taxes.
To be fair, another source says it’s unclear if that is $200 or $200M which is a big difference.
Apple does pay $56M in property taxes per year in Santa Clara county and is the largest property tax payer in a county that includes Google. If property taxes there are 1%, that would mean $5.6B in assessed value.
I'd vote for a system where the government was obliged to purchase property at a 25% discount to what they assessed it at, if the owner chooses to sell it.
In theory, this idea is really good, but I think it needs a certain amount of refinement.
The largest, obvious problem is that transaction costs are enormous.
That might be mitigated by adding a multiplier to the forced sale value: say 1.3 or 1.5. I have no idea what an appropriate value is, but it seems like the sort of thing that could be determined empirically.
On the commercial side, there's all sorts of complications (e.g. tenant improvements) that I just don't know enough about to even talk about intelligently.
Specifically, this would link a town's ability to raise taxes dependent on its existing financial situation: A poor town that would run into difficulty obtaining financing for multi-million $ purchases could easily be scared into undervaluing properties, further weakening its financial position.
While they could (in theory) flip the property and earn money, the market for large retail properties would seem to be at the rather illiquid end of the spectrum. And even with good prospects of selling, I wouldn't want to be the small-town mayor (who are, I believe, usually unpaid) suddenly shouldered with the responsibility for such a transaction.
What specifically? The store pays for water and electric. The only thing I can think of that the city supplies is the road network.
And restricting the road network would be a very foolish thing for the city to do - they would just be harming themself.
Communities vanish, big stores are destroyed, the old smaller outfits come back, Amazon takes over, whatever???
Seems to me that it might be a good idea to issue retroactive tax bills (or refunds!) based on the actual price when a property finally does sell. So if they're honestly right that these properties are worth less, then they'll see for less someday, and they don't need to worry about a retroactive bill. OTOH, if they're wrong — there'd be principal & interest to pay.
This might even help keep property prices low, which is (I think) generally a good thing, since there are so many forces acting to keep them high.
I dunno — maybe someone can point out the flaws.
Selling cheap stuff, however, doesn't actually build an area.
The poor today in the US are not saving anything. Money for infrastructure and other improvements to an area is not going to come from Wallmart's low prices.
However, trying to live without the moderating influence that Walmart has on the ravages of inequality is a worse problem than trying to figure out how to get infrastructure paid for.
The poor living without infrastructure actually keeps them poor (can't commute to work, say). The poor not being to buy at Wallmart leaves them with Amazon and with a corner store that might rip them off a bit but has some relation to their lives.
Edit: I mean, I live on a limited income and have plenty of friends as close to absolute poverty as it gets. None depend on Walmart in particular though some depend on Target, an equivalent. You can live even more cheaply buying from thrift stores than Walmart. Moreover, most people who can go to the giant big box stores have working cars which put them on a tier slightly above the very poorest.
Sure, broadly, the last thirty years of declining wages for the working class have been softened by the flood of cheap manufactured goods. But that's overall - Walmart is not the only conduit of this flood, though it's helped. And Walmart + other big box stores also benefit from economies of scale and dodging taxes for infrastructure. Of course, it's reasonable to say Walmart isn't a pure evil but touting it as a net good seems equally misguided. The despair of "Walmart-ized" small town American is well documented.
For example, It sounds impossible that lots of people today subsist out in the middle nowhere, where the bus services barely exist, without their cars. But this is what happens today and the cuts in infrastructure, no buses and etc, hurt this group a lot.
These store provide a lifeline for a certain segment of the population. Without these stores, one store in particular, there would be a lot of instability in society as we transition from a mostly middle class society to something a bit more bipolar.
Inequality is real, and these kinds of stores go a long way towards making it tolerable. Now I can't put a dollar value on that, but it has to be worth something.
Now what Walmart did do was to take advantage of the economic detritus left in flyover country as productivity gains and outsourcing started to eviscerate the jobs landscape. But Walmart was not the cause so much as they came along after and capitalized on the ruins.
When I graduated from college and had my first job and apartment, a relatively large amount of my income was spent at the local Walmart. It was a godsend for me at the time. What I didn't spend at all those too inefficient to compete mom and pop stores was money that I could use to pay off student loans, rent, utilities, and still have a little money left over to save up an emergency fund.
Its harder to invest in meaningful job creation when you are spending inordinate amounts of money keeping Walmarts employees fed and housed.
If the Walmart disappears, you don't end up with former Walmart employees with middle class jobs, you end up with former Walmart employees who are now unemployed, require even more government assistance, and have to spend more for staples along with everyone else in town.
Government subsidizing low wage workers is how redistribution of wealth works. That's its mechanism of operation. The rich pay taxes and the government gives the money to lower income people. It would be great if we could just stop having lower income people so we wouldn't need to subsidize them anymore, but where does that money come from? When the answer is higher unemployment and higher prices for other lower income customers, how is it better for the money to come from them instead of wealthier taxpayers?
Wealthy people benefit too. Just last week my water heater started leaking. My girlfriend turned it off but I wasn't able to get home and assess the situation until ~6pm. Well by then most traditional plumbing supply places are closed. Enter Home Depot. Long story short I was able to choose from 5+ models of water heater buy one that was almost a dimensional replica of my leaking one, everything I needed to install it at ~7pm on a weeknight. Your local plumbing supply store that caters to tradesmen probably isn't open past 6.
I'm fairly poor but the bread and the jean and what-not sold at Walmart is of the worst imaginable quality. Ross Dress-for-less and thrift stores offer deals. Walmart sells cheap stuff that's more or less worth what you pay for it.