Here is my full column that ran in the Washington County Daily News yesterday.
If you are voting in West Bend, be sure to turn over your ballot. Like many municipalities in Wisconsin, West Bend’s voters are being asked to weigh in on whether or not the state Legislature should close the so-called “dark store loophole” in the property tax laws. The question is: “Should the state Legislature enact proposed legislation that closes the Dark Store loopholes, which currently allow commercial retail properties to significantly reduce the assessed valuation and property tax of such properties, resulting in a substantial shift in taxes levied against other tax paying entities, such as residential home owners, and/or cuts in essential services provided by an affected municipality?”
At issue is how commercial properties are valued for the purposes of property taxes. In a pure sense, the value of anything is the price that a willing buyer is willing to pay to a willing seller. For tax purposes, the government must assess what that price might be.
Residential properties are relatively easy to assess. Based on the condition, size and location of a house, the assessor can compare it to similar houses that have recently sold and come up with a reasonable price. Assessing the value of commercial properties is far more difficult and much more subjective than residential properties. There are at least five common, but different, ways to calculate the value of commercial property for tax and accounting purposes.
In Wisconsin, government assessors have generally set the value of commercial real estate based on how much the property is worth based on the property being occupied and generating revenue for the owners. For example, a retail store in a great location that generates millions of dollars for the owners is worth quite a bit to the owner — even if the property would not be worth as much to a different owner.
In recent years, several of Wisconsin’s largest commercial property owners like Walmart, Menards, Walgreens, etc. have been suing municipalities to have the value of their properties lowered based on the “dark store” method of valuation. Under this method, the value of the property is calculated based on what it would be if the store were empty. In other words, the companies want the value of the property to be set at what that they think they could sell it for if they closed up shop and left. Commercial property owners have been winning appeals of their property assessments under this theory across Wisconsin and drastically lowering their property tax bills.
Both valuation methods are equally valid, in an economic sense, but have vastly different outcomes for Wisconsin. As more commercial properties are valued under the dark store valuation method, they are paying far less in property taxes. The result is that local governments must either reduce spending to account for the reduction in taxes being collected, or shift the property tax burden to residential propertyowners.
Let’s look at one small example. In West Bend, Walgreens’ two stores were once valued at $14 million. Last year, Walgreens appealed under the dark store theory and won, thus reducing the combined assessed value of the two properties to $4.8 million. That change in value reduced Walgreens property tax obligation by a whopping $180,000 per year. Each of the local governments that rely on property taxes for funding now have to find a way to fill that hole. Multiply this equation by dozens or hundreds of commercial properties in each municipality in Wisconsin and the hole becomes impossible to fill.
While there are several perfectly rational and valid ways to determine the value of commercial properties, Wisconsin needs to determine a uniform and fair way that will be used for the purpose of property taxes. Closing the dark store loophole is a good step toward that goal.