Michigan lawmakers are taking another run at closing what they call a tax loophole that has allowed big-box retailers to lower their property tax assessments by comparing the value of their facilities to empty, shuttered stores.
Proponents of the so-called “dark stores” legislation, introduced in the early days of the new legislative term, say the bills are in response to a flurry of local property tax appeals between local governments and retailers that resulted in municipalities having to refund tax payments to companies, at the expense of using those tax payments to fund roads or expand public library hours.
Bipartisan breakthrough bills
With Michiganders clamoring for Lansing to set aside partisan differences, state lawmakers are speaking optimistically about finding bipartisan solutions in the new legislative session. Bridge Magazine is watchdogging those efforts by highlighting bills that died in past years but appear to have broader support in 2019. Please send Bridge reporters other suggestions for legislation we should be following. Related stories:
Local governments contend that’s because big-box stores have convinced state tax judges that the value of their properties can be decided by comparing them to stores that have closed, rather than to the cost to build a new one. They point to examples in Escanaba, which won a tax dispute with Eau Claire, Wis.-based Menard Inc. in the Michigan Court of Appeals, and in Kalamazoo County, where Oshtemo Township leaders and Issaquah, Wash.-based Costco disagreed on the value of a newly constructed store.
In the Escanaba case, which local government leaders across Michigan are watching, the city had to refund Menards $121,000, part of $421,000 the company won back from various government entities in Delta County.
Retailers counter that closed stores are a fair comparison because retail buildings are designed for a specific user and have a limited market for re-use, making them essentially obsolete once that retailer leaves.
Past legislative efforts have failed to advance to the governor’s desk. Retailers and other business groups oppose the proposal, and they have had support from Republican legislators who saw the measures as harmful to business.
This year’s bills, like one that made it through the House in 2016, have bipartisan support; the House version has a number of co-sponsors from both parties.
“I don’t blame any of the big stores who are doing this for doing this,” said state Sen. Ed McBroom, a Republican from Vulcan in the Upper Peninsula’s Dickinson County, who sponsored the new Senate bills.
But, McBroom added, big-box retailers use public services, from police and fire to wastewater management, and lowering their property tax obligations reduces the amount of revenue local governments have to provide those services.
“For (retailers) to not be fairly participating in the support of the community that they move into is just not right,” he said.
Tax Tribunal stirs action
Property in Michigan is assessed for tax purposes at 50 percent of its market value. Disputes over property tax assessments are handled by the Michigan Tax Tribunal, the state’s tax court, whose members are appointed by the governor. Property values are estimated using three standard models, including reviewing sales prices of comparable property, as well as estimating the cost of the building while accounting for depreciation.
“We have to base our assessment on market value,” or the selling price, said Dan Papineau, director of tax policy and regulatory affairs for the Michigan Chamber of Commerce, which opposes the bills.
“The comparable approach is the most likely to yield true market value,” Papineau said. “What something sells for is what it’s going to be worth.”
Yet retailers have been winning property tax appeals that base their property values on comparable properties that include deed restrictions prohibiting particular uses, including retail, said Rep. Beau LaFave, R-Iron Mountain, who sponsored one of the bills in the House.
That can artificially lower the property’s value, he said, because it limits potential buyers and does not reflect the highest and best use for the building.
The pending legislation generally would prevent the tribunal from considering comparable sales that include deed restrictions that would limit potential reuse or could contribute to the property sitting vacant.
“I’m certainly not outlawing deed restrictions,” LaFave said. “My legislation just says that if they are going to use properties as comparables that have deed restrictions, they cannot have significant impact on the valuation of a property.”
Amy Drumm, vice president of government affairs for the Michigan Retailers Association, said the legislation would create so many limitations on using comparable sales when determining property values that it essentially would no longer be an option.
“You’re going to be hard-pressed to find a lot of comparable sales that don’t have restrictions on them,” Drumm said. “Beyond that, we worry that it increases the cost and length of the appeals process.”
She said the association’s retail members believe their property tax assessments have been too high, and the current appeals process is working. The bigger problem in need of a solution, she said, is the revenue squeeze affecting local governments.
Drumm said new retail buildings are similar to new cars that depreciate in value once they’re driven off a sales lot. They’re built to suit a particular retailer with specific floor plans, she said, so a future buyer would have to spend money to renovate the building to meet its own specifications.
That idea doesn’t make sense to state Rep. Julie Brixie, D-Meridian Township, a former township treasurer and a bill sponsor in the House.
“It’s just patently ridiculous to think that a store that just opened is functionally obsolete,” said Brixie, who said local governments in Ingham County lost more than $1 million over a two-year period in reduced property taxes to retailers while she was a local treasurer.
In 2016, the Michigan Court of Appeals sided with Escanaba in its battle with Menards, ordering the Tax Tribunal to reconsider Menard Inc.’s tax assessment because it did not consider the highest and best use for its store. It ordered the tribunal to reconsider its earlier decision, which the tribunal is expected to release this year.
That means no new precedent will exist as to how big-box stores should be valued until the Tribunal’s decision comes back, or until the Legislature acts, said Chris Hackbarth, director of state and federal affairs for the Michigan Municipal League, which advocates primarily for cities and supports the legislation.
“You’ve got these (bill) sponsors who are saying, ‘It’s the Legislature’s job to create the laws. We’re not going to sit around and wait for the court to try to make laws,’” Hackbarth said.
The last serious effort was in 2016, when a Republican-sponsored bill with bipartisan backing passed the state House by a wide 97-11 margin. It stalled and later died in the Senate finance committee, led at the time by former state Sen. Jack Brandenburg, of Macomb County’s Harrison Township.
Brandenburg, who was term-limited out of the Legislature in 2018, told Bridge he prevented the bill from leaving his committee because he didn’t believe it would help retailers that employ thousands of Michiganders and inject millions of dollars into the state’s economy.
“When I came into the Senate, I made it very well known that I was very pro-business, and this legislation is not pro-business,” said Brandenburg, who owns a company in Fraser that sells fasteners and other industrial supplies. “That’s why I buried it.”
Proponents said they are optimistic the new bills could gain momentum this term. The Senate finance committee is now chaired by Sen. Jim Runestead, R-White Lake, who voted in favor of the 2016 effort while he was in the House.
Runestad said he has not yet read the new bills and doesn’t yet have a position on them, but said he will give them a thorough look as committees begin to meet.
McBroom and LaFave said they aren’t wedded to the language as written and hope to work with all interested groups, from municipalities to retailers, on a compromise.