How Big-Box Stores Bilk Local Governments

They lower their property taxes through a surreal trick called “dark store theory.” States are finally fighting back.

At left, an empty Walmart. At right, a thriving Walmart.
An empty Walmart isn’t worth much. Photo illustration by Slate. Photos by Karen Derrick-Davis/Flickr and Kevork Djansezian/Reuters.

A multibillion-dollar philosophy question is rippling through small-town America. If you build something that is fundamentally useless to anyone but you, should you have to pay property taxes on it?

Dozens of big-box stores are arguing the answer is, essentially, no. As the country confronts an epidemic of retail closures, spurred by e-commerce, obsolescence, changing economic geography, and corporate mismanagement, mega-stores are using their shuttered rivals as “comps” in fights with local appraisers in order to reduce their tax bills.

In Escanaba, Michigan, for example, the Wisconsin-based home improvement store Menards has spent half a decade fighting the city’s property tax assessment—by comparing its shop there to, among other sites, two shuttered Michigan Walmarts that were sold as industrial properties. You can see why the Michigan Tax Tribunal bought that argument, knocking the assessed value of the (operating) Menards down from $8.21 million to $3.66 million. The concept is called “dark store theory,” because working stores are compared to closed ones, and it makes a kind of intuitive sense: How do you measure value except by what someone else will pay?

That seems like a fine standard for tax assessments until you look at big-box retailers. The unwieldy, windowless hangars are ill-suited for adaptive reuse. Thousands of them lie vacant in malls around the country, depressing the resale market. To make matters more complicated, many big-box companies will not sell their vacant properties without an anti-competitive deed restriction. One reason the Michigan Walmarts ended up as low-rent industrial properties was because the chain had a stipulation in the deed of sale: no big groceries or discount stores allowed.

It’s a bit like if I hired the Kool-Aid Man School of Door Frame Design to design my house with cookie-cutter apertures of my own body between rooms—then forbid the sale to anyone my height. Even though I had spent a bunch of money on those kooky doorways, the low resale value could be used to justify a low tax bill on all my me-shaped projects.

City and state governments see dark store theory as a huge threat—and are beginning to push back against the scheme. In Wisconsin, new Gov. Tony Evers says his budget proposal will close the dark stores loophole in the state, where the practice was discussed during the campaign. Lawmakers in Indiana are debating a bill on the subject this month. Their peers in Michigan are trying to settle the matter too, based in part on the success of Escanaba in challenging the practice—and convincing a state appeals court to overturn the decision of the Michigan Tax Tribunal.

They are chipping away at what chain store influence has made a massive problem. In City Lab, Laura Bliss reports that the strategy has been deployed in more than 20 states. There are 300 big-box appeals underway in Indiana alone. In Texas, the state comptroller says the state could lose $2.6 billion a year if the model catches on. Hundreds of millions of dollars have already been shaved from the tax rolls nationwide, according to Standard & Poor’s, forcing cities to raise residential property taxes or cut back on public services. Marquette, Michigan, had to close its library on Sundays to pay Lowe’s back $755,000 after a successful “dark store” challenge to its tax bill.

Elise Nieshalla, a council member in Boone County, Indiana, argues that her county’s dispute with the store Meijer—which is asking for $250,000 in tax refunds—has bigger implications, because dark store theory is contagious. “The impact is not just the impact of Meijer,” she says. “It’s the impact of all the other stores that are going to be at our doorstep seeking a significantly reduced assessed value based on the application of dark store theory to their situation. The time to close this loophole is now.”

Dark store theory is an economic affirmation of architects’ long-held view that big-box stores represent throwaway design, as unappealing after use as an old pair of sneakers. Some empty big boxes have evolved into churches, city halls, data centers, and even a shelter for migrant children. But most are worse than useless: With deed restrictions, outgoing retailers salt the earth, banishing prime commercial land to low-rent uses.

“We’re seeing this theory spread all over the United States,” says Larry Clark at the International Association of Assessing Officers in Kansas City, Missouri. “Especially in a small town where they have one Walmart and that’s their entire retail, if the value is significantly reduced”—decimating the town’s property tax revenue—“they may have to think long and hard before giving incentives to big-box stores.”

Escanaba is a city of 12,500 people in the Upper Peninsula, with a pretty downtown that opens onto Lake Michigan. “It’s such a huge fight, and we’re a small town,” says Patrick Jordan, the city manager. “But we are fighting this fight on behalf of every Michigan municipality, and we’ve passed the hat around and they’re sending money to help us fight.” After victory in a Michigan appeals court, Escanaba and Menards will conclude their five-year battle in front of a three-judge panel this spring, with implications for the rest of the state.

For small towns where property taxes make up most of the budget, the dark store theory challenges conventional assumptions about city planning, in which the attraction of a mall or mega-retailer is seen as a tax base anchor. It’s especially damaging in places like Michigan, where a 1994 constitutional amendment ensures that taxable value can’t rise by more than 5 percent a year. Under the dark store theory, it would take 16 years for Escanaba to bring Menards’ assessed value back to its former levels.*

In cities where property taxes can be raised, a bigger burden is on the way for homeowners and owners of the locally owned, mixed-use properties downtown that have been put out of business by big-box stores. In Escanaba, some of those buildings date from the 19th century and have happily cycled through dozens of uses. (Ironically, the highway subsidies that made big-box commerce viable in the first place were proposed by planners who had declared the older urban environment obsolete and therefore worthless.)

The dark store argument is a reminder of the structural power that the country’s consolidated retail giants have over local politics and finances. Real estate developers have been captivated by the idea of obsolescence for more than a century, in part to provide a tax break in addition to run-of-the-mill depreciation. That’s one reason they think it makes sense to preclude future competition at a site, even it means losing money on the property sale.

In 2015, the city of Cottage Grove, Minnesota, sought to buy a vacated Home Depot at the mall. The company would only agree to sell if the city committed to ban any nearby rivals—extending a noncompete clause from Home Depot’s mall tenure (standard operating procedure) well past the store’s demise, ensuring a hardware desert. In response, Cottage Grove Mayor Myron Bailey encouraged residents not to shop at Home Depot. “Menards is in my community,” he told the Pioneer Press. “I am going to shop at Menards.”

Over in Escanaba, the roles are reversed. “I talk smack about them whatever chance I get,” Patrick Jordan, the city manager, says of Menards. “I’ll drive 50 miles to shop at Home Depot before I spend money at Menards.”

Correction, Feb. 12, 2019: This piece initially miscalculated the effects of compound interest, misstating that it would take centuries for Michigan to legally restore the taxable value of the Escanaba Menards. It would actually only take 16 years.