I wouldn't call this a "loophole"; I'd call it property taxes working exactly the way they're supposed to work.
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.
Yeah, that's not even "slashing", that's "never being related to profit to begin with".
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.
Why do you feel that that the "value of the property" should be defined by what another party is willing buy it for after it has closed rather than than the amount the current owner is willing to sell it for while it is open? Both strike me as reasonable positions, and thus a compromise value between the two seems like it might be most fair.
My parents love their home. They wouldn't sell it at 30% above market value. Should their property taxes be based on what it's worth to them, or what it's worth on the market? What it's worth on the market is a semi-objective measure, while worth to the owner is highly subjective.
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).
the fa makes the point that what makes a store successful it's location in the flow of a city's life and so the boarded up ones are going to be least productive junctions. The property is worth more because it's the property that is there and NOT the one that is 5 miles further in the under occupied suburbs.
It's not that big a problem. You can let everyone designate one primary residence, and exempt the first $X of asserted value from taxation. People are entitled some sentimentality exemption, but (like today) not an unbounded one.
Glen Weyl of Microsoft Research suggests property tax should be charged on self-assessed value -- but the owner can be forced to sell at their assessment. It was an interesting econtalk episode. [0]
Property is generally priced and sold vacant, so a property tax should be based on a fair market value of the real estate + improvements in a vacant state.
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.
Because the price the current owner would demand isn't just the inherent value of the property -- it's that plus the cost of relocating their business.
Yes, but symmetrically, the amount that a third party is willing to pay presumably has already subtracted their expected cost of relocating into the new space. Why should we privilege one valuation over the other?
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.
> Yes, but symmetrically, the amount that a third party is willing to pay presumably has already subtracted their expected cost of relocating into the new space. Why should we privilege one valuation over the other?
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.
But if everyone is pricing that in, it scales all values by roughly the same factor and doesn't change the appropriate mode of taxation -- x% is still appropriate, for some value of x.
The value of the property can be assessed using a number of means: comparable sales, cost or income. In wisconsen, comparable sales is supposed to be the first (but not the only) criteria applied.
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."
The value of commercial property is tied to how much money you can expect to make setting up shop in that location. Property with a more successful business is generally going to have more value.
Now there’s plenty of room to argue that the stores are asking for too much now, but fundamentally the towns have been breaking the law, which is why the stores are winning the court cases.
“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.
I have to disagree that the town's have been breaking the law. You can criticize their choice of comparable properties but it doesn't strike me as illegal or necessarily dishonest. However it seems like maybe we need an entirely new way to valuate these properties...
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.
Surely the resale value of the property takes into account the level of infrastructure surrounding the property, which would mean that a valuation based on resale value prices in those improvements at their market value.
After reading the article, the impression I came away with was that they were choosing "comparable properties" that were recently re-sold big box sites. It seems that the municipality's appraisers take the infrastructure around the site into account whereas the appraisers for the big box stores are not.
I think it's weird in this case that the methodology on each side is so drastically different. IMHO, the missing piece is clear rules on how to compare large crappy properties that only warehouse stores are interested in... Everyone used to agree on methodology but now the large chains are changing their minds.
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.
The cost of the increased infrastructure should be charged during construction and capitalized by the owner. The on-going operational costs by the city should be covered by service rates. Property taxes should go into the general fund to support police, fire, schools
> 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
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.
There's a simple solution here. You tell me what you think your property is worth. And I can force you to move out today for that price. This might still be a loss for the county tax assessors, but it will at least keep these stores honest. Maybe we even include all the inventory and fixtures in that deal to keep the companies even more honest, since a competitor can almost turnkey the operation at that point (though the logistics of resupply can't be understated).
I've suggested to the tax assessor that I'd be happy to sell my property to him at significantly less than the value he assessed it at. He was not amused, but I did get the assessed value lowered.
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.
I've suggested that before as well. I think the figure should be more like 10-15%, but otherwise agree that keeps a town assessor honest in a more straightforward manner than the current "appeal to the same board that originally assessed you too high" tends to.
> You tell me what you think your property is worth. And I can force you to move out today for that price.
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.
I think there would be a big problem with sentimental value also. For example, the old local store that is family owned or the house that you built with a family member who is now deceased.
> There's a simple solution here. You tell me what you think your property is worth. And I can force you to move out today for that price. This might still be a loss for the county tax assessors, but it will at least keep these stores honest.
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:
> 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.
Also fundamentally tyrannical and inhuman, but at least "old" is correct. Posner and Weyl's work is fascinating as thought experiment, but even they admit that a system like that poses massive problems and questions of morality.
The shotgun clause has its problems even in contracts among equals. Those are even more relevant here.
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.
It sounds like the big box stores themselves are validating the Strong Towns interpretation that towns have invested far too much public infrastructure compared to the property value of the big box stores (https://www.strongtowns.org/journal/2017/11/3/big-box-stores...). Perhaps these towns could zone every big box store for subdivision and redevelopment so that the stores will have to pay taxes based on the upzoned value. As an added benefit, the stores will be encouraged to use the land more productively.
Indeed, a possible compromise is that if the property is to be taxed as an empty store with no customers, then it should be supported by the infrastructure needed for an empty store with no customers.
Maybe toll roads or an extra tax for these types of properties if they're active rather than derelict. Price them so that the companies will choose to pay tax instead.
This american system of paying for city services via property taxes instead of consumption or equal share is very strange when looking from abroad. If the city needs policemen, firefighters and teachers, as the article describes, then the city should split the bill to the number of citizens and not to how much they can rip off them. The property is not a city investment, so the city does not deserve any revenue from it. If the city did some investment, that is a cost to reimburse, of course, but not milking the property.
If 8 people live in a 1500 ft^2 house and 1 person lives in a 10,000 ft^2 mansion, is the city really providing 8x the value to the former for police and fire protection?
I heard that in real estate it is location, location and location. In most cases a bad neighborhood requires more police force and still has a worse value, so the correlation of services provided versus tax raised is inverse. Still does not make sense.
It's not the cloud that'll save theses 8, there's no on demand scaling for the fire department. On both situation, there'll be enough staff there to save at least 8 peoples, thus incurring the same cost. It's probably much quicker too to secure a 1500 ft house than a 10 000 one. I remember once we got a fire alarm at my job once and it took quite a bit of time for them to make sure everything was alright.
It is incredibly naive to think any major retail center exists without substantial investment by local and state governments. In many places Walmart made money just building their supercenters in many dying towns across the country.
This is perhaps another argument in favor of a land value tax. The value assessment can still be disputed, but at least it is on the unimproved value of the land.
I live hear in Wisconsin. I tend to side with the big box stores. Lots of empty space around that indicates their store properties are not that valuable on the open market. As for the municipalities, they are in way too many things that they should not be into. Like running the electric and gas utilities, water utilities etc. Civic centers and so called industrial parks that turn them into real estate developers. Scores of government employees trying to attract businesses by handing out freebies to companies that would have come to their town anyway. Stick to doing street repair and snowplowing and quit your bitching.
Nothing comes back. You are left with a husk where anyone still living there travels dozens of miles to get groceries. Its becoming a legitimate problem across the country, especially when the population that often chooses to stay are retirees who often shouldn't even be driving.
It's astounding that you wind-up with stores which seem to intend to give nothing what-so-ever back to their communities. What is the long term plan here?
They help distribute low-priced goods. Lower priced goods broaden accessibility and thus help the poor. If you're not poor or don't interact with the poor much that might be easy to miss.
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.
Box stores do indeed help distribute goods at a reasonable price to those hurting but they also tend to break neighborhood cohesion and growth. This is entirely opinionated but I think the loss of neighborhood cohesion is greatly contributing to the growth in wealth inequality.
Not really. Walmart did not make the factories go away for instance.
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.
I disagree. It's a cliche at this point that when Wal-Mart enters a town, all the mom and pop stores close up. The profit margins from distributing these goods now contributes to $WMT rather than staying in the local economy.
The presence of Walmart also helps the low-income members of a community by providing a one-stop shop for low priced, generally acceptable quality goods.
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.
Walmart alone doesn't constitute a significant enough employee base to influence the national economy but I'm pretty sure the behavior of retail in general, where you exploit unskilled labor and the welfare system to use public benefits as an employee subsidy absolutely contribute to the decline.
Its harder to invest in meaningful job creation when you are spending inordinate amounts of money keeping Walmarts employees fed and housed.
> 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?
That's like saying the jackals nipping at your flanks are just responding to drought conditions but but bear no responsibility for the bites they're taking out of you. I get the point you're making but it seems a mite disingenuous.
Sure, let's say I'm pretty aware of the habits of the poor.
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.
It is a quandary, I'll concede that. It's a tough problem, and we need to come up with a solution.
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.
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.
Simultaneously, they undercut local merchants and annihilate the local/municipal economy. They are able to utilize profit extracted elsewhere to decrease the activity of the local economy for their benefit, and they should be taxed by the local community on this differential. Here's a good read on the topic: https://www.theguardian.com/business/2018/aug/13/dollar-gene...
Yeah that's the theory, but they also hurt the poor by driving competitors out of business in the name of 'efficiency' and lowering wages in the area. Locally owned businesses don't employ money as efficiently but they also cause it to keep circulating within the same community for longer. Price theory is wildly overrated because it trets a theoretical optimum as a real-world desideratum while ignoring other market signals.
This. Walmart might be evil but it's a godsend if you're poor. $1.28 bread. $16.97 jeans. A lot of people wouldn't have the standard of living they do if it weren't for the big box stores using economics of scale to make goods available at razor thin margins.
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.
This. Walmart might be evil but it's a godsend if you're poor. $1.28 bread. $16.97 jeans.
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.
I think part of the problem is how the current debt-based economy works. Many of the goods big box stores sell are often imported, and these stores often look for the cheapest imported good they can sell. You can also see this with Amazon today.
The foot traffic is an intangible benefit. All else being equal, a franchisee is more likely to open a new Buffalo Wild Wings or SuperCuts in a plaza headlined by Wal-Mart or Costco rather than middle of nowhere.
Why would they pay more tax than they are required to? Why would they not argue that their properties are overvalued if they believe them to be?
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 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.