State lawmakers are trying for a third consecutive session to codify rules over property tax assessments that municipalities say have cost them millions of dollars in revenue.
The issue of big-box retailers challenging property taxes — and often winning lower assessments from the Michigan Tax Tribunal — has played out in Michigan courts, local municipalities and the Legislature for more than five years. The “dark store” theory bases property values on nearby closed or vacant stores because the retailers and others argue their facilities feature unique designs, rendering them functionally obsolete when they open.
As such, retailers such as Meijer Inc., Walmart Inc. and Home Depot Inc. have argued the assessed value of their properties should be based on comparable sales of similar and empty buildings. The most-watched case involves an appeal by Menard Inc. in Escanaba in which the Tax Tribunal sided with the retailer. The Michigan Court of Appeals disagreed, saying the Tax Tribunal should consider other factors in determining an assessed value.
The Tax Tribunal’s final decision in the Escanaba case is expected to set a precedent for how the five-member, governor-appointed board adjudicates assessed values.
Local government advocates and a bipartisan group of lawmakers want to take it a step further and codify the practice in law. House Bills 4025 and 4047 and Senate Bills 26 and 39 are sponsored by Democrats and Republicans with more than a dozen co-sponsors in the House.
“We really need to level the playing field so these big corporations don’t have an unfair advantage over individual mom-and-pop businesses,” said State Rep. Julie Brixie, D-Meridian Township.
Brixie’s district east of Lansing includes Okemos, a regional shopping center with several big-box stores and retailers.
Previous legislation was blocked by lawmakers who said the plans were “not pro-business.”
“They’re trying to force a decision out of the Tribunal that will be more in their favor,” said Dan Papineau, director of tax policy and regulatory affairs with the Michigan Chamber of Commerce, which is “strongly opposed” to the bills. “We’re justified in our right to appeal over-assessments, and that’s what’s happening — we’re winning.”
Dozens of appeals are pending in Kent County, including for banks, department stores, big-box retailers and health care facilities, according to the Tax Tribunal docket.
It’s difficult to determine the exact amount local governments have lost in revenue from the “dark store” theory. MiBiz reported in 2016 that it had cost municipalities about $100 million over the previous three years.
Brixie, formerly Meridian Township’s treasurer, watched the issue unfold more than five years ago. In one case, the township lost $1.2 million in tax revenue over two years based on one dark store assessment. She says the total statewide cost has likely passed $1 billion.
“This had a really big impact on not just Meridian Township local government, but also our school districts,” she said.
Local government advocates say property valuations can be assessed based on the cost to build, sales of similar vacant properties and income of a property. New buildings, they argue, should be based on the cost of new buildings.
“The Tax Tribunal has historically discounted other methods of valuation and only did sales,” said Chris Hackbarth, director of state and federal affairs for the Michigan Municipal League. “It has allowed for comparison of sites out of the state and in different economic conditions that were blighted and vacant for years.”
Additionally, the Tax Tribunal has allowed deed restrictions to factor into the value, which critics say can artificially lower the value of properties.
The Court of Appeals decision — and the proposed legislation — would clamp down on the tribunal’s consideration of deed restrictions, but not prevent it entirely, Hackbarth said.
“Deed restrictions are absolutely valuable and have an appropriate place,” Hackbarth said.
Bill opponents argue that legislation is unnecessary, and that the Escanaba case is evidence the process is playing out fairly.
Others have raised concerns that property valuation is already common law in Michigan, and that legislation effectively forces a panel of judges at the Tax Tribunal to rule in a certain way on the cases.
“If there are concerns to that effect, let’s address them,” Hackbarth said, suggesting amendments to the proposed legislation are likely. “The intent is to look at what the Court of Appeals said with three appropriate methods of valuation.”
Brixie added that going through the tribunal process is costly and burdensome for small townships or cities.
“The Legislature is going to take the next step and make sure everyone understands that the result of the Escanaba case should be codified into law,” she said.
However, the Michigan Chamber maintains that basing property values on sales of empty stores is appropriate.
“That’s how you have to value these properties — as vacant so a new large retailer can come in and occupy the space — or anyone else,” Papineau said.
He added that basing a property value on cost should also include functional obsolescence, or the cost of improvements a new buyer would make to customize a store. A Walmart may not have the same layout as a Meijer, for example.
“I say bunk,” Hackbarth said in response, citing a Home Depot that moved into a previous grocery store and an office supply store that located in a former Chuck E. Cheese restaurant in Meridian Township.
“There’s nothing unusable about a large, framed building that’s needed by others,” he said. “The benefit is it’s almost a blank slate.”
Bill opponents also accuse supporters of taking a backdoor approach to raising taxes on businesses, which are automatically capped under the Headlee Amendment, a state initiative passed in 1978.
“The opposition on this has consistently thrown smoke at this concept that it’s trying to raise taxes on retailers,” Hackbarth said. “There is nothing about this legislation that would allow taxes to increase. This is about how you treat appeals to lower taxes.”
He adds that it’s also about fairness: Lower tax assessments on large retailers end up being shifted to other taxpayers, while those entities that often appeal assessments usually need more public safety and road services.
“In Meridian Township, if you look at court proceedings and prosecutions of crimes, the vast majority of it is coming from these retail shopping areas for shoplifting,” she said. “It’s a real cost to the community to catch those people, prosecute them and pay for those services.”
‘Fixing a wrong’
Aside from the “dark store” legislation, lawmakers also have considered regulations involving the Tax Tribunal itself. The Michigan Municipal League has raised concerns about the reappointment of Judge Marcus Abood, who Hackbarth said was responsible for the original case “allowing the dark store theory to take root.” Abood was appointed to the Tax Tribunal in 2010.
A scaled-back version of H.B. 4412 that passed in the lame duck session late last year allows Tax Tribunal members to earn outside income, addressing concerns over attracting qualified applicants for the positions.
However, a previous version of the bill also would have addressed the type of appointees, continuing education and conflicts of interest. Papineau said the bill that passed — now Public Act 438 — was scaled back at the request of the Snyder administration. Gov. Gretchen Whitmer will be able to make appointments for all five Tax Tribunal positions during her first term.
Papineau at the Michigan Chamber said efforts will continue this year to block the proposed dark store bills. However, the issue has bipartisan support in both chambers with dozens of new legislators and committee chairs.
In 2016, similar legislation passed the House 97-11 but was blocked in the Senate. A bill introduced in 2017 in the Senate also stalled.
Hackbarth said certainty over the Escanaba case could give the bills more momentum this session.
“There is some energy and desire from the bill sponsors to really attack this issue this year,” Hackbarth said. “We’re more heavily engaged in this legislation than we have been the past two years.”
Brixie says she’s “very optimistic” about the bills.
“This is a bipartisan effort that really isn’t a partisan issue,” she said. “It’s a tax policy issue of fixing a wrong that’s out there and making sure we create a level playing field for all businesses.”