Losing sales and property tax revenue as stores close

The difficulties facing retail stores also have an effect on local governments who rely on sales tax and property tax revenue:

Nationwide, sales taxes comprise nearly one-third of the taxes that state governments collect and about 12 percent of what local governments collect, according to Lucy Dadayan, a senior researcher at the Nelson A. Rockefeller Institute of Government, a New York-based research group. “The epic closures of the brick-and-mortar stores is troubling news for state and local government sales-tax collections,” she said. They’re already feeling the hit: States’ tax revenues grew just 1.9 percent between 2014 and 2015, after growing 5.8 percent in the previous four quarters, according to the Rockefeller Institute. Local-government sales-tax collections grew just 1.7 percent, after growing 7.5 percent in the previous four quarters. In Ohio, state tax revenues grew just 0.1 percent, when adjusted for inflation, between 2015 and 2016, according to Dadayan. When revenues don’t continue to grow, governments have to slow down spending and can’t readily invest in long-term projects…

Clark County is not alone. In the southeastern part of Ohio, near the border with West Virginia, Belmont County gets $17 million of its $22 million budget from sales-tax revenues, Mark Thomas, a county supervisor, told me. The county has lost a bevy of retailers of late, including Elder-Beerman, Hhgregg, MC Sports, and Radio Shack. A Kmart in St. Clairsville is expected to close soon, according to the company. The decline in sales tax isn’t the only thing that hurts revenues—abandoned malls mean less revenue from commercial property taxes too. Local governments also see lower income taxes and, when retail workers are unemployed, they spend less, creating a vicious cycle of less and less revenue. “That trickle-down effect is huge,” Thomas said…

States that have seen manufacturing companies depart are bearing much of the brunt of the retail closures, according to Dadayan’s research. She tabulated where Macys, Kmart, and Sears have announced in the past year that they are planning to close stores, and found that Pennsylvania will have the most of those total store closings, at 16. Ohio and Michigan have the second-highest number, at 15 each, alongside Florida. Other states that have bigger populations have much lower combined closings. California, for example, only has eight.

The closures raise the question of what state and local governments will do if retail continues to evaporate. Already, many local governments are attempting to raise taxes to make up for budget shortfalls. Springfield asked voters to approve an income tax in November; the measure failed. The sales-tax rate at both the local and state levels has been creeping up in Ohio as governments try to raise taxes to make up for declines, according to Jon Honeck, the acting director of the Greater Ohio Policy Center, a local think tank. Ohio has also cut back on revenue-sharing between states and local governments since the election of Governor John Kasich in 2010, making it more difficult for local governments to make ends meet. “Some have just cut services, since the state is not going to help them out,” Honeck said.

Two quick thoughts:

  1. Communities have competed for decades over shopping malls and retail establishments. This competition could only increase though it may be less about the opening of new stories (everyone wants replacements for old establishments – for example, see the fate of Dominick’s grocery stores in the Chicago region) and more about retaining existing stores and asking companies to close stores elsewhere.
  2. It is interesting to see which areas are experiencing closures. Not all malls or stores are doing poorly but the successful ones are likely in wealthier areas that will do even better comparatively with the ongoing tax revenues. It is very difficult to convince businesses to locate in communities with less income.

Four suburb annexation plans thrown out by a judge

Efforts to combine Warrenville, Woodridge, and Lisle with Naperville were derailed by a judge earlier this week:

Judge Paul M. Fullerton granted motions to dismiss the question filed by mayors of the three smaller communities, who oppose the idea of annexing their towns into their larger neighbor…

The question will not come before Warrenville and Woodridge voters because the idea’s originators — who have not come forward publicly — failed to gather enough signatures.

In Warrenville, 177 signatures are required to meet the threshold of 10 percent of the voters in the previous municipal election, but only 81 signatures were filed. In Woodridge, 235 signatures are necessary for ballot placement and 50 were filed…

The petitioners’ attorney Avila did not immediately return a call or email seeking comment. Avila previously said petitioners brought forward the idea as a way to decrease property taxes in Lisle, Warrenville and Woodridge, but mayors say there is no proof such a merger would have resulted in lower taxes.

An odd affair all around: not enough signatures, no public campaign to support the effort, the mayors of all four suburbs denounced the annexations, and the reason for the proposed changes has not been clearly explained.

Still, the idea raises interesting questions. In an era of tight budgets, it is worth it in American metropolitan regions to maintain separate communities and taxing bodies? Would there be advantages in some merging? In denouncing the idea of annexations, the mayors of these suburbs said it is not clear how the cost savings might happen (property taxes around here primarily support schools so merging municipal boundaries may have very little effect) and that residents of each community like their distinct characters. But, if voters were told that merging would reduce their tax burden at least $500 or $1,000 a year (particularly given the property tax burdens in Illinois), would that overcome an interest in local control and character?

American property taxes have feudal roots

American property taxes have a long history in English law:

The origins of the property tax aren’t American at all. It, instead, has roots that date back to Europe’s feudal system. First instituted in England by William the Conqueror in 1066, the early tax system worked this way: A king (or conqueror) took over all the land in a given territory. He would then divide it among his lieutenants and supporters, who would pay him (with money or services) in order to keep that land. In return, landholders enjoyed the king’s protection and were able to rent the property out to others—who would live and work the land—for a fee. The punishment for nonpayment was forfeiture of the land, which could result in a considerable loss of money and status. At the time, this system was called “free and common socage,” according to John Joseph Wallis, an economic historian at the University of Maryland. The person who held the land was called a socman, his taxes, socage. The arrangement created a way for people to own land while still having to remain loyal to the crown, which also had rights to the land.

After expansion across the Atlantic started, King James made sure that this system traveled overseas with the first settlers at Jamestown, so that he could partake in the profits of exploration of the new land. The charter of the Virginia Company held that—as in feudal times—the king would protect the lands in Jamestown, and in return, the people living on the land would pay him a share of their profits there. All land of the colony would be held in “free and common socage,” according to the Virginia Company charter. This meant that land could be bought and sold in the colonies, as long as the new holder of land continue to pay the king.

And why did the system persist even after the American Revolution?

It’s a peculiar note of history that the founding fathers, who spoke often of abolishing the feudal system, kept this remnant of the Old World. But the rationale is very simple: They needed the money. In fact, the federal government levied a national property tax in 1798, 1814, 1815, 1816, and 1861. The tax in 1798, for example, charged households for their slaves (50 cents), houses, and land. It raised $2 million, according to Wallis. These taxes usually outraged residents, who would often revolt, but the system of collecting property tax remained. That’s because property taxes were locally spent and collected in the beginning, and often paid for things like roads and canals that property owners would be able to see, and that increased the value of their property.

If indeed property taxes are the most hated tax for Americans, I wonder if residents would prefer the alternatives. One advantage of the property tax is that the monies are often spent closer to home, usually on local school districts and municipal services. Eliminate the property tax and taxes may be collected by governmental groups further way that have fewer responsibilities to local residents. Americans may not like property taxes but they do like local control.

 

Winfield, major hospital reach agreement for $900k annual grant

Winfield is a small suburb with money problems; the hospital in town is expanding and has money. Solution? A sizable annual grant from the hospital to the village:

Winfield will receive a $900,000 annual grant over each of the next five years from Northwestern Medicine Central DuPage Hospital as part of an agreement finalized Monday, officials said…

“We recognize the unique economic challenges facing Winfield,” CDH President Brian Lemon said in a statement released Monday afternoon. The hospital, he said, “is committed to working with the village to ensure Winfield remains a great place to live, raise families and receive high-quality health care. Our collaboration with the village of Winfield is designed to encourage economic development while stimulating the village’s economy.”…

CDH made the new offer after Winfield trustees rejected the hospital’s first proposal to give the village an annual $500,000 grant. The board was seeking roughly $1.4 million a year from CDH to help pay for the services Winfield provides to the hospital…

Winfield trustees even voted to put an advisory question on the March 15 primary election ballot that would ask voters if the village board should begin taxing CDH’s operations. The village clerk would have submitted that ballot question to DuPage County election officials had an agreement not been finalized Monday, but officials said it’s no longer necessary.

I wonder how common such agreements are. The hospital provides jobs and status yet is quite the growing facility exempt from the local property tax rolls. Here is how the Village of Winfield described the issue in October 2015:

CDH was established approximately 50 years ago as a small hospital in Winfield’s town center. In the 1990’s, the hospital began a series of major expansions of its campus through numerous property acquisitions. The majority of the purchases were commercial properties located in the town center.
The hospital now controls nearly 60% of the property in the Village ’s town center and has expanded its footprint across both of the downtown’s major arteries – Winfield and High Lake Roads.
CDH has benefited from the expansions. It is now a nationally-ranked hospital and by far the most profitable hospital in Illinois according to tax filings compiled by Crain’s Magazine. CDH has averaged a yearly profit of $160 million over the past five years with growing reserves of approximately $2 billion in cash and investments. Meanwhile the Village has continued cutting staff and services to cope with lean budgets and leaner forecasts.

Is this solely the case of the big non-profit hospital dwarfing the small village? However, Winfield has its own issues including very rancorous infighting among local political officials and candidates (I have not seen many suburb with such regular negative interactions) and a limited tax base (as the community debates whether to expand it).

Maybe this annual grant is a decent solution to the issue: the hospital is unlikely to move and the village needs money. I imagine hospital officials appreciate the village threatening to put something on the ballots unless money is provided and the village is probably not entirely happy with the amount of money. In the end, this seems like a payoff. Do these two parties really need each other and how much is this worth annually?

Chicago keeps a low residential property tax rate to keep residents?

As the Chicago Tribune highlights the low residential property tax in Chicago compared to nearby communities, could this be a tactic to stem the population decline of the city?

Chicago homeowners pay less in property taxes than the vast majority of their suburban neighbors, even with Mayor Rahm Emanuel’s record property tax increase applied. But business properties are taxed differently in Cook County, resulting in higher tax rates on those parcels in Chicago than nearly all collar county suburbs. Those conclusions emerge from a Tribune analysis of tax rates applied on 2015 bills in 388 city and suburban locations in Cook and the five collar counties.

While housing owners pay less, the business owners of Chicago pay more than their counterparts in the suburbs:

The story is different, however, for those who own city manufacturing plants, offices and shopping centers. They already pay more in property taxes than their counterparts in most suburbs outside Cook County. That gap will only become wider after Emanuel’s tax hike, with Chicago business property owners being taxed at higher rates than those in all but seven collar county towns…

There are plenty of collar county suburbs with room for all types of business development that start to look even more attractive than Chicago, at least in terms of property taxes. In places like Joliet, Downers Grove and Naperville, tax bills on business properties would be half that of equally priced parcels in the city…Deputy Mayor Steve Koch dismissed the business tax differences found in the KPMG study, saying they were not enough to sway business location decisions. He noted recent decisions by Motorola Solutions to move to the city from Schaumburg and ConAgra Foods to move to Chicago from Omaha, Neb., when everyone knew the big property tax hike was coming.

The Tribune suggests one reason for the low residential property tax rates is to not anger voters:

“Because we didn’t have in our leadership the political will to actually tell taxpayers and voters that (more money was needed), frankly folks were sold some snake oil, and they got to believe they could have very low taxes and still have adequate service, and after a while that doesn’t really work,” Martire said. “They should have been (raising property taxes) for a long time, and the pain would have been significantly lower.”

Politicians do need votes. But, to return to the suggestion I made in the opening sentence, I wonder if this is also about keeping residents in Chicago. City leaders argue that businesses are not going to avoid Chicago just because of higher taxes. Chicago has other benefits including other notable businesses, lots of office space, lots of human capital, and numerous attractive cultural and entertainment options. In other words, enough businesses will pay these higher property tax rates in Chicago because there is still money to be made in the city.

Yet, homeowners also consider property tax rates as they look for housing. While Chicago doesn’t suffer from the kind of affordable housing issues as San Francisco or Manhattan, it is still quite expensive in some neighborhoods while suburbs throughout the region provide all sorts of additional housing options as well as jobs and other amenities. Why should many residents stay? Lower property tax rates may just help. And for its international prestige – the seventh-rated global city – Chicago has lost plenty of people in recent decades with a peak of just over 3.6 million in 1950 to just over 2.7 million people today.

Votes and people staying could go together: residents who think the politicians are on their side and then show it by not raising their residential property taxes may be more likely to stay in Chicago.

The “Black Tax”: higher property taxes for black homeowners in order to eventually seize homes

A new study looks at a practice common in Chicago and other cities where raised property taxes for black residents helped others take their homes:

Kahrl’s case study, which was released this month by the Journal of Urban History, traces the practice of tax-lien speculation to a 1951 reform in Illinois state law called the Revenue Act. During the same years when “redlining” emerged as a severely racially discriminatory mortgage practice, assessors in cities such as Chicago systemically over-valued homes in black neighborhoods for property-tax purposes…

Tax-lien speculation proved to be one hell of a business. Over the course of six months in 1973, for example, Gray acquired the deeds to 93 homes in Chicago’s Woodlawn neighborhood for a total of $70,000. Each parcel was worth as much as $20,000 at the time—and potentially much, much more to speculators once all the neighborhood’s black residents had been evicted…

Not every tax-lien sale resulted in a transfer of deed, but they always resulted in a transfer of wealth. Many homeowners managed to pay off their liens at high interest rates—often 18 percent, the legal ceiling—along with a host of fees. Making real money depended on finding the poorest and most vulnerable owners in the poorest but most over-assessed neighborhoods. This practice was perfectly legal. The “Black Tax” was law…

The remarkably resilient predatory-tax-lien business continues to thrive, despite efforts at reform. The industry is enormous. Late in 2014, the Abell Foundation published a report on the state of the practice in Baltimore City. In 2013, the city sold tax liens for more than 2,000 owner-occupied homes. Almost one-tenth of these liens were attached to water bills. In 2014, of some 6,690 tax liens sold, 2,236 were for owner-occupied homes.

Given the interest, fees, and court costs, a homeowner’s $500 delinquent tax or water bill can mushroom to $3,000 over a two-year window—the time an owner has to pay down the lien. According to the report, there were 2,805 pending tax-lien foreclosure cases in Baltimore City in 2014. Noting the difficulty in tracking these tax-foreclosure evictions, the Abell Foundation report’s authors warn that in Baltimore, the “tax sale can lead to evictions, homelessness, and property vacancies and abandonment in a city already plagued by all three.”

More inequality via race and property in the United States. As if residential segregation wasn’t enough – ongoing lending practices and tax policies continue to make it difficult for blacks and other poor residents to build wealth over time.

When American communities try to limit the number of churches in city limits

This is a fascinating look at how American municipalities deal with the “problem” of too many churches. For example, here is the experience of Stafford, Texas which did not have a property tax and was located near highways outside Houston:

By 2006, there were 51 religious facilities in Stafford’s 7 square miles, according to city filings. And, at that time, the city had just a little over 300 acres that remained undeveloped.The costs in Stafford’s case were starting to outweigh the benefits…

Scarcella and city officials spent years poring through legal filings and spent a good dose of cash on attorneys to successfully craft a land use ordinance that would require a public hearing and process for new “places of assembly” — such as bowling alleys, dance halls, museums and religious facilities.To obtain a specific use permit under the regulation, applicants would have to address and adhere to a list of requirements related to elements such as acreage, parking and traffic mitigation.

The pushback was tremendous, Scarcella said, noting the town attracted national media and plenty of negative attention…

“I’m held in a fairly decent regard within my church, and I have a deep belief in Christ, and I believe in people’s right to worship, and I admire them for doing that,” he said. “But I also recognize that there needs to be a balance.”

 

Too many religious facilities that don’t pay property tax means that a community may not have a sufficient tax base to maintain all the infrastructure that religious facilities would use. One sociologist estimated that $71 billion in taxes is left on the table by religious institutions. Additionally, there is an opportunity cost involved where the land might have been used for purposes that would pay property taxes and perhaps even add sales tax revenues.

All of this could lead to a humorous situation: how about a suburban community near the nexus of multiple highways that zoned solely for industrial parks and churches/religious facilities? Given that many churches today have a tenuous connection to the community in which they are located, attendees don’t mind church shopping via car, and large churches want plenty of land and interior space for their campuses, this could minimize the pain for a number of other nearby communities.