patty breslin

I was interested in understanding the "do the math" methodologies and set up my own comparison of a small strip mall(with a popular taco restaurant in it) and indeed the tax values for these smaller more intensive sites is higher than "big box locations (and their PARKING LOTS!)  The thing that is at issue in our town (SF Bay Area) however, is that the sales tax the municipality gets is far higher from the big box stores because it's based on sales receipts.  Costco is our biggest revenue source.  It is hard to fight these developments because of this.  Any thoughts?


1 comment

  • Comment author
    Charles Marohn

    Any thoughts? Yes!

    It is important for a community to general wealth and productivity regardless of the form of taxation. From a pure numbers standpoint, the goal should be to generate the greatest community wealth with the least community cost -- to have the highest level of productivity -- understanding that a wealthy city will find a way to sustain itself. 

    In terms of sales tax specifically, it is important to think of sales tax in two parts. First is the part that comes from existing residents. Most often a big box store like a Costco merely shifts revenue from this internal source from one store to another. My wife buys milk, strawberries and huge boxes of crackers from Costco, but it's not like we didn't eat these things before Costco; we just got them someplace else. In terms of sales tax, this is neutral (or negative, depending on whether you want to account for the fact that Costco is sourcing their products from outside the community and the profit margin leaves the community immediately upon sale). When we did the analysis in Lafayette that I write about in my book, we attributed this portion of the sales tax to the residential homes as it really was captured income for the community.

    The second sales tax revenue stream is from people outside of the community who shop within the city limits. There is some displacement there -- some of those transactions would happen in the city regardless -- but the real value of a big box store (if we want to call it that) is to rob wealth creation from surrounding communities. So desiring the Costco is desiring to steal those transactions from your neighbors.

    If that is your strategy, you are still likely to find it's not that much revenue once you subtract out the captured income. 

    Then, as the productivity analysis you did suggests, there is tremendous cost associated with that big box store -- each of them requires a disproportionate amount of community infrastructure. What the low productivity is telling you is that, even though you might be cash flow positive now, you are losing money on this in accrual terms. In other words, you are taking on more long term liabilities than you are getting in cash, you're just getting the cash first.

    Finally, stepping back and looking at both sites, my guess is that you can envision other uses for the more intense site than what is there today -- when those things are gone, that site doesn't fail but finds a new set of uses -- but you will find it near impossible to identify new uses for the big box site. There really aren't any, and their leases generally prohibit any that aren't non-profit or some non-competing (read: non-commercial) use. So, long term, as those bills for infrastructure come due, you're going to be stuck with a site that is no longer paying any taxes.

    The trick to fighting these developments is to fully account for the long term liabilities, discount the captured sales tax revenue, and account for the short-term nature of the development. That is a strategy that requires a shift in culture. Far more than merely convincing council members and city staff who are focused on showing progress and balancing the next budget cycle, you need to convince your neighbors that this is a bad idea and join them in asking for a different result. 

    Thank you for taking this on, Patty. I love that you are doing the math!


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