Big Box Stores - Core Insights

Charles Marohn
Charles Marohn

Big box stores are the logical outcome of a centralized economy and regulatory environment that advantages the kind of efficiency that comes from scale. The outcome is reinforced locally by property tax and sales tax systems and a mindset that labels community members as "consumers" instead of "citizens."

Adding a big box store may be a transaction that, considered on its own, is cash flow positive for the community in the short-term. This is especially true if the store pays for the installation of its own infrastructure. The financial shortfall for the community may happen in the first life cycle, but it generally becomes most acute during the second life cycle, when infrastructure needs to be repaired and replaced and the tax base is not adequate to funding those improvements.

This is because, on a square foot basis, big box stores are inexpensive to build and operate compared to other styles of commercial development. Thus, the overall financial productivity (value per acre) of a big box store is low, while the costs for the community to provide ongoing service and infrastructure maintenance is comparatively high. The property tax system, which discounts investments in land development and taxes inexpensive buildings less than high-quality construction, encourages big box development.

Unlike traditional commercial development, big box stores lack adaptability; it is difficult to turn a big box store and site into another use. Big box stores are built to last 15 to 20 years before needing major renovations. The inexpensive construction, short lifespan, and lack of adaptability, often make it easier for the owner to abandon a big box store in favor of a new location than to undertake rehabilitation.

Local communities that pursue big box development often cite sales tax revenue and job creation as their primary motivation. Sales tax revenue and job creation come in two varieties: (1) those that are merely displaced from other businesses within the community, and (2) those that are displaced from other businesses within the region. The second may have some positive impact for the receiving community (though typically not enough to offset the community's costs), but the first merely moves transactions and jobs from one local business to the big box store.

The gains to local government tax revenue are negated, not only by the increase in long-term liabilities from the site and not only by the distress caused to native businesses, but by the velocity of money leaving the community through the big box store. Cities rely on money being circulated multiple times within an economic ecosystem in order to have a stable and prosperous local economy. Little of what is sold at a big box store, and none of the value added or the profit, creates financial flows within the community. Big box stores are an exit point for local capital.

Courts have upheld that once a big box store is closed, and sometimes even before activity has ceased, the owner can successfully argue that, since their buildings are cheap, difficult to reuse, and not generating any revenue, their property is worth far less than they are being taxed at. This is sometimes called a "dark store" approach. 

Cities concerned over big box stores can, among other things, choose to not zone properties for large lot commercial development, not extend utilities for negatively-returning investments, require form-based architecture that requires fragmented storefronts, require a restoration bond for rehabilitating the property once the store is closed, invest in walking and biking infrastructure that reinforces local economic ecosystems, and use a land tax to properly account for the value of land development.

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1 comment

  • Comment author
    Brian Skibo

    Hi Chuck

    Great article. I wanted to comment on this before I make a post laying out the state of my city (Hermitage, PA). But I'll give a brief review of Hermitage as to how it relates to this article. Unlike Brainerd and other cities that you look at Hermitage, unfortunately, relies heavily on income taxes for it's revenue. Income taxes account for 54% of our revenue. Whereas property taxes account for just 11% of our revenue. So, the argument from city leaders is any job is a good  job because the city relies on income taxes. Our city manager even said he didn't care if residents worked in the city because they still pay the same tax no matter where they work. Of course this this doesn't account for whether or not the taxes will cover the infrastructure required by big-box stores.

    So, my big question is this. Many residents want a Costco in the area. The reason is based on wages and benefits. Although it seems like most companies are catching up. So, when I explain the local multiplier effect people look past that because, one, even if money flows out of the community people have food on the table to eat due to higher wages and they don't care where the source is coming from. Two, from the city's perspective if most of the revenue is coming from income taxes and not property taxes they don't care if the building is cheap. So the wealth from property taxes isn't on their mind. Only wages. Now, granted, we have 4 Dollar Generals in a 5 mile radius so their standards of higher pay isn't great. They are "pro-development" and claim capitalism is letting DG on every street if they can afford it.

    But my point is how do I combat these arguments? I can see that displacement is one rebuke, but if the displaced businesses are paying less, than they would see that as a win. Also, would higher wages pay for the needed infrastructure for the store? I know that if there is a recession incomes taxes would plummet so the city would be in trouble. The trouble I have is our budget isn't online. It is at the municipal building in a 3 inch binder. I don't have the expertise to dissect it and see if we have having infrastructure problems. As well as to determine if our income taxes are adequate.  

    The final question I have is you state that, "Local communities pursue big-box stores." Do you mean through their zoning or do local officials actually contact big-box stores like Costco to build in their community?

    Thanks for all of your work.

    Brian

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