“Dark store theory,” a commonly used but disputed form of property tax evaluation for big box retailers, is being taken on again by an Upper Peninsula lawmaker who has been a champion of the issue in the past.
Sen. Ed McBroom, R-Waucedah Township, recently introduced legislation that would put into use an assessment standard called “highest and best use.”
The state’s current system allows big box stores like Walmart, Lowe’s and Meijer to appeal their property tax assessment, and the Michigan Tax Tribunal would then rule that a metric sometimes called “dark store theory” should be used in their case.
Dark store theory is the idea that vacant and dark stores are the yardstick by which an operational big box store should be measured when assessing property taxes, said Matt Gardner, a senior fellow at the Institute on Taxation and Economic Policy in Washington, D.C.
Gardner said the dark store metric often saves retailers money because it reduces their property taxes, which in turn reduces revenue to the city, township or other local government where a store is located.
“It blows a hole in municipal budgets,” Gardner said. “That hole can be filled in one of two ways.
“The two possibilities are municipalities can reduce their budgets or they can fill the property tax hole by increasing property taxes on everybody else. The second is far more likely,” he said.
Gardner said local governments cannot lower revenues easily because the taxes fund services like education and infrastructure in their communities.
“They have to find a way to pay to put textbooks in the school, they have to find a way to fill potholes,” Gardner said. “There’s no free lunch here.”
The city of Houghton announced Feb. 23 that it would be taking up an appeal by the city’s Walmart over its property taxes from 2018. City Manager Eric Waara told TV6 News that if the retail giant successfully appeals the assessment, the city would owe Walmart $1.2 million and lead to a reduction in future property taxes for the store.
Lansing Township also was hit with a $1.75 million debt to Walmart and Sam’s Club after a ruling from the Tax Tribunal that told the local government to correct for past taxes.
And officials in Big Rapids Township said their community could need to repay about $1 million in an adverse ruling by the Tax Tribunal.
The Michigan Municipal League, which advocates on behalf of cities and villages, describes dark store theory as a tax loophole.
“The political appointees on the Tax Tribunal have upheld this ‘dark store theory’ and cut property tax assessments, in some cases by as much as 50%,” the league’s website says. “These rulings have resulted in a loss of millions of dollars in tax revenue for local governments across Michigan.”
The Michigan Townships Association communications director, Jenn Fiedler, said in an email that the property tax assessment process should receive another look in the Legislature.
“The valuation process for big box properties needs to be addressed,” Fiedler said, referring to Senate bills that would create a mechanism to change the process and allow local review.
“More details are needed, and we welcome additional discussion on proposed solutions,” she said.
Andrea Bitley, the vice president of marketing and communications for the Michigan Retailers Association, said the reason big box retailers use dark store theory when appealing to the Tax Tribunal is because floor plans for a store are often made with the company’s branded layout in mind.
“These buildings are designed with a specific retailer in mind,” Bitely said. If a store closes, sometimes floor plans are easy to modify, but other times, it would be a large investment for another company to come in to change it for their own floor plan.
The proposed metric of highest and best use theory, Bitely said, could potentially adversely impact some homeowners.
“Think of a large farm home or expensive home in metro Detroit,” Bitely said. “Depending on how the property is classified, it could result in an increase in property tax.”
Gardner said he thinks highest and best use theory is a sensible method for assessing property taxes.
“It leaves open the possibility that a company like Lowe’s can look at an assessment that was made based on highest and best use and say, ‘Ah, here is why that’s wrong,’ and appeal it,” Gardner said. “It doesn’t rule that out. It just means that upfront, the local assessor, when they are assessing a property, needs to look at the highest and best use.”
McBroom’s proposal is pending in the Senate Finance, Insurance and Consumer Protection Committee, which is chaired by Sen. Mary Cavanagh, D-Redford Township.
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