Dark stores could mean huge property tax bills for Wisconsin homeowners

A consistent story that we have heard over the first 3 months of the year regards the troubles that brick-and-mortar retailers are having. Much of this is due to a structural shift where people are choosing to buy items online instead of going to a store to get their items, which likely saves consumers time and money, but also is leading to sizable job losses and store closings in traditional retail.

Among those recent announcements include JC Penney saying last week that it would shut the doors on 138 stores this year, and Sears/KMart announcing that 150 more of its stores were going away, and that it has had 6 straight years of losses. And just today, Payless Shoe Source indicated it may seek bankruptcy protection and close up to 500 stores.

It means that this scene will likely be a common one in many communities in 2017.

If you told me abandoned JCPenneys were the remnants of some failed military dictatorship I'd believe you pic.twitter.com/GnusQYNI1j

— David Huber (@davidhuber_) March 23, 2017

These retail closings include several locations around Wisconsin, and not only are those communities looking at damage from having a retail outlet and employer go away, but they may end up getting hurt even if they still have stores in their town. This is because of a strategy that large retailers have increasingly used known as the “dark store” loophole. The League of Wisconsin Municipalities explains how this works.

In essence, the Dark Store strategy is a tax loophole being used by Big Box retailers and other national chains to lower the amount they pay in property taxes. Retailers such as Lowe’s, Target, Meijer, Home Depot, and Menards are arguing that the market value of their thriving store should be based on the sales of similar size “comparable” properties that are vacant and abandoned.

What? You mean a fully operational store, like a new Target, gets to pay the same property taxes as a closed, empty and “dark” K-Mart down the street? Yes, that’s exactly what the retailers are fighting for and it’s what is starting to happen more and more frequently.

Courts in other states like Michigan have upheld this “Dark Store theory” and cut property tax assessments in some cases by as much as 50 percent – resulting in a tax shift to homeowners or a cut in local services. If this strategy becomes successful in Wisconsin it could result in a shift of millions of dollars in tax burden across Wisconsin unless the loop hole is closed by the Legislature.

Many Wisconsin communities have recently passed resolutions urging state action to fight the “dark store” strategy, including Manitowoc County and Fond du Lac County both passing resolutions yesterday, and the City of Milwaukee approving one last month.

These dark store loopholes have an interesting ramification for our state’s politics. One item that Governor Walker always tries to promote is the lowering of property taxes on the average state homeowner. And while the Legislative Fiscal Bureau says that the average homeowner is slated to pay $21 less in property taxes in 2018 than they did last winter (due to unfunded state giveaways at the state level which would lead to future budget deficits), those savings could well be offset by the effect of these store closings and the related “dark store”loophole.

Note this part of the LFB’s analysis on property tax bills.

Modest [property value] increases are also projected for existing commercial and manufacturing properties in 2017 and 2018, and the level of new construction is estimated to also increase each year. In combination, these factors are expected to result in increases in statewide equalized values estimated at 3.5% in 2017 and 3.3% in 2018.

Since total values are expected to increase faster than the median home value, the estimated tax change on a median-valued home is less than the estimated rate of change in statewide tax levies. Under the preceding assumptions, statewide net levies are estimated to increase by 0.2% in 2017(18) and by 1.3% in 2018(19). In comparison, the estimated tax bill on a median-valued home is estimated to decrease by 0.7% in 2017(18) and by less than 0.1% in 2018(19). Tax bills are estimated at $2,832(-$20) for 2017(18), and $2,831(-$1) for 2018(19) under the provisions proposed by the Governor in the biennial budget bills.

The flip side of that analysis is that if enough stores close and the dark store loophole is OK’d, then total commercial property values go down, then residential homes pay more. Which means they’d be likely to face property tax increases in the coming years.

This helps explain why legislators such as Sen. Duey Stroebel are taking the LWM’s advice and want to pass a bill to get rid of this “dark store” exemption, and use the property’s lease value should be the standard for assessment and taxation. I usually think Stroebel is a WOW County dingbat, but he’s got a point here, and it’s an idea that politicians of both parties should get behind, before more of these remaining retail stores get a friendly court to allow them skip out on taxes and make us pay the difference.

It also will be interesting to see where Governor Walker falls on these bills, because his puppetmasters at Wisconsin Manufacturers and Commerce want the dark store tax break (because those scumbags never pass up a tax break no matter how badly it screws the typical person). But allowing that loophole would likely raise property taxes on homeowners, and deprive Scotty of one of his favorite talking points heading into the 2018 election.

Keep an eye on this one, to see how it winds its way through the Legislature. With the news of more store closings seeming to come every day, and with property tax assessments and bills for 2017 coming sooner than we care to admit, this issue seems to be bubbling up very fast.