IPTI | Update on U.S. & EU Property Tax Issues: January 2023

The EACC, in partnership with the International Property Tax Institute (IPTI), wants to keep its members up to date with the latest developments in property taxes in the USA and Europe. IPTI has put together below a selection of articles from IPTI Xtracts; more articles can be found on its website (www.ipti.org).

United States 

Lower Commercial Property Taxes: One Benefit of a Rocky Market

Lower commercial property taxes are a silver lining in an otherwise rocky market. The commercial real estate market is, to put it mildly, in a state of transition. Although vacancy rates are coming down as post-COVID America returns to the office, permanent work-from-home policies continue to negatively impact office square footage demand. Meanwhile, tech companies that went on a hiring spree during the pandemic are reducing their workforces and no longer filling up floor after floor of cube farms. Retail properties took perhaps the biggest hit during the pandemic as lockdowns caused shoppers to turn to the internet for just about everything and anything. Whether or not they will return to brick-and-mortar stores at sustainable levels remains to be seen.

Commercial property owners and managers, waiting and watching to see what happens next, are feeling powerless – consigned to the side-lines of a market that is struggling to sort itself out. But as they follow the daily headlines and try to read the price index and occupancy tea leaves, there is one thing they do have the power to do: lower their commercial property taxes. When vacancy rates go up, property values typically go down. Especially those in particularly hard-hit sectors such as office and retail. But there’s no rush by municipalities to re-calculate commercial property taxes when values are on the decline. Commercial owners and managers, however, can potentially reduce their commercial property taxes themselves simply by ordering a commercial property tax review.

Professional property tax experts perform reviews using online databases that quickly help them determine whether or not a property’s value has declined enough to warrant a tax appeal. If they do reach the conclusion that an appeal is appropriate, they file it on the property owner’s behalf. Only if the appeal is successful does the property tax review company get paid in the form of a onetime fee representing a percentage of one year’s tax savings.

For commercial property owners and managers, a successful appeal is manna from Heaven – annually delivering thousands of dollars back into their cash flow that otherwise would have gone into local tax coffers. This found money can be reinvested into property repairs and improvements for attracting new tenants, used to reduce rents during tenant negotiations and renewals, or to simply offset other rising costs such as utilities and maintenance labor.

Timing is key because the deadline for annual property tax reviews varies not only from state to state but from county to county. The earliest deadline for New Jersey and Pennsylvania is January 15th and the latest is October 1st.

New York: Will New York City’s Soccer Stadium Cost Taxpayers $0 or $516 Million?

An independent budget analysis suggests that the city will be losing $516 million in tax revenue from its deal to place a new soccer stadium in Queens.

New York City’s first professional soccer stadium supposedly carries no financial burden to New York City taxpayers — an assertion Mayor Eric Adams made repeatedly during a de facto victory tour this fall, after he announced the deal. As it turns out, the truth is more complicated and far more costly to New Yorkers.

In a new analysis, the city’s Independent Budget Office has concluded that the actual cost to taxpayers for the new soccer stadium in Queens will be at least $516 million, spread over the course of the 49-year term of the New York City Football Club’s lease.

Government subsidies for sports stadiums have long been a third-rail issue in New York City. Economists who study the use of public money for sports teams argue that the public costs generally exceed the public benefits. Yet political leaders continue to pony up, often because they do not want to alienate sports fans.

Following a record-setting public subsidy deal for a new Buffalo Bills stadium last year — including $850 million in direct construction subsidies — Mayor Adams characterized his agreement with the New York City Football Club as a different animal. The soccer team would pay for the 25,000-seat stadium’s $780 million construction cost without city money and without tax-exempt financing.

But there was a caveat. Because the city chose to lease the land in the Willets Point neighborhood to the developers rather than sell it, no property taxes will be generated. The Independent Budget Office’s calculation was based on what the city would have received in property taxes had it sold the land to the stadium’s developers. That figure — $1.7 billion — would be worth something more like $516 million today, when inflation and the uncertainty of the dollar’s worth in 49 years are factored in. “The claim that the city is not subsidizing the stadium doesn’t really hold,” said George Sweeting, the budget office’s acting director.

A typical workaround for economic development deals on city land is to levy a payment in lieu of taxes, or PILOT for short. In this instance, the developers will pay a PILOT on the land where the subsidized housing is being built by the stadium, but only $1 a year in rent, city officials said. The developers will also pay both rent and PILOT payments on the planned hotel.

But no PILOT payments will be required for the land under the stadium — it will only generate rent, which officials said would start at about $500,000 a year and escalate to $4 million by the end of the 49-year lease.

“Four million [dollars] in 49 years, that seems like a pretty low rent,” said Nathan Jensen, a professor of government at the University of Texas-Austin who focuses on state and local economic development. Mr. Adams set out to convey a different message: that the deal was unusual for sparing taxpayers any cost.

“The stadium that we’re building — that’s going to produce a substantial number of jobs — is 100 percent private funding,” the mayor told WCBS 880, a message he and his team would repeat over and again that mid-November day. “We’re not spending a dime of taxpayers’ dollars.”

Critics of the subsidy deal note the immense wealth of the soccer team, which is owned by Sheikh Mansour bin Zayed al Nahyan, the deputy prime minister of the United Arab Emirates and the brother of the country’s president, and the New York Yankees. The Bloomberg Billionaires Index recently estimated the Al Nahyan family has a net worth of at least $300 billion.

The stadium’s other developers, a joint venture of Related Companies and Sterling Equities, are also not without substantial resources. Stephen M. Ross, the founder and chairman of Related Companies, is worth nearly $12 billion, according to Forbes magazine. Sterling Equities was co-founded by Fred Wilpon and Saul Katz, who, with Jeff Wilpon sold the Mets to Steven A. Cohen, a hedge fund manager, for $2.4 billion in 2020.

Related Companies and Sterling Equities will sublease the stadium to the soccer team, a spokesman for the team said, but the terms of that economic agreement remain opaque. “What you’re doing in effect is redistributing income from the general taxpayer to the very wealthy,” said Dennis Coates, a professor of economics at the University of Maryland, Baltimore County, who focuses on sports economics.

Not only will the team’s owners not have to pay property taxes or payments in lieu of taxes, but the city is also kicking in an estimated $200 million to $300 million in infrastructure improvements for the entire project in Willets Point, which used to be home to the city’s largest collection of auto body repair and salvage shops before the city evicted them.

The Adams administration argues that this is an investment worth making. “This analysis is based on the fabricated premise that a contaminated, languishing site divided among several property owners could be set aside for some mysterious theoretical use while generating the property tax revenue of a project that will create $6 billion in economic activity, 14,000 construction jobs, and 2,500 affordable homes,” said Charles Lutvak, a spokesman for the mayor.

“To be clear, that scenario is entirely implausible, and Mayor Adams’s vision for Willets Point — which includes one of the most fiscally responsible stadium deals in recent history — will deliver substantial benefits while bringing in up to $4 million a year in rent for the city and critical infrastructure and resources to the entire Willets Point community.”

The plan has its supporters. James Patchett, the former president of the Economic Development Corporation who now works in real estate, noted that the Willets Point land has been contaminated by decades of use as a home for auto body shops, and he argued that the development options there were limited without some form of government subsidy.

“The notion that there is a real revenue generating, taxpaying use to be built at this site apart from a casino is just not realistic,” Mr. Patchett said. “It’s unusual also to see a stadium deal that is not being financed with tax-exempt bonds, which I think is something that is certainly in favor of this deal.”

A spokesman for the soccer team said the stadium would “bring record affordable housing, billions in economic activity, a public school and thousands of jobs to Queens.”

The city and state helped the Mets and Yankees build their current stadiums on city land, including via the use of tax-exempt bonds. In 2009, the Independent Budget Office calculated the value of city and state subsidies for both stadiums at a cumulative $762.3 million.

While the Bills secured nearly $1 billion in construction subsidies from the state and Erie County for their stadium project, New York and other major cities like Oakland and Los Angeles have pushed back against wealthy sports teams in recent years. “It seems that periodically there is a short-term blip where people recognize that this isn’t such a great use of tax dollars,” Professor Coates said.

In 2005, the Jets’ attempt to build a stadium on public land on the West Side of Manhattan with the backing of Mayor Michael R. Bloomberg ran into stiff opposition from James Dolan, the owner of the Knicks and Rangers. Lawmakers in Albany ultimately shot down the proposal.

Mr. Dolan, who also owns Madison Square Garden, has his own subsidies in the form of city property tax exemptions, passed by the state in 1982, that are now worth an estimated $43 million a year. Politicians have been trying to overturn the exemption for years. “It’s a 100 percent, 49-year subsidy; I mean, that’s big, that’s Amazon HQ 2 level subsidy,” said Professor Jensen, referring to the multicity competition to host Amazon’s second headquarters, which involved offers of substantial government subsidies. “A lot of communities didn’t even offer that large for thousands of jobs.”

Connecticut: CT property tax reform: If not now, when?

For the 2023 General Assembly, I can think of no better New Year’s resolution than to finally reform Connecticut’s unfair, inefficient and burdensome property tax system. Reform, not relief. Relief amounts to the adjustments and changes that occur from time to time — most of which, like those that were adopted during the 2022 legislative session with the PILOT program and the car tax, are positive — but they are not reform.

The Property Tax Working Group of 1,000 Friends of Connecticut, of which I am a member, has recently updated a comprehensive report on property tax reform — “Property Tax Reform: If Not Now When?” A major point in the report is that with the state’s unprecedented budget surplus, this is exactly the time to undertake fundamental reform through a rebalancing of the current system.

Rebalancing means reducing the burden of property taxes by changing the structure of the state-local fiscal relationship so that municipalities need to rely less on property taxes to fund essential needs. Our reform proposals would result in a reduction in property taxes for the vast majority of taxpayers and a fundamental rebalancing of the current system.

Connecticut consistently ranks in the top five property tax-dependent states in the nation. Moreover, our current system suffers from fundamental flaws that result in unneeded competition and fragmented service delivery between towns, flawed land use decisions, environmental compromises and a lack of equity that exacerbates economic, educational and racial divides.

Reform means that Connecticut must change a system where owners of property with similar values are taxed at different rates depending on which town they live in, and owners paying similar tax rates receive widely disparate services. In addition, low- and moderate-income households are subjected to far higher effective property tax rates than high-income households.

We further need to correct the needs-capacity gap for our municipalities and the cost-capacity gap for our schools. In both cases, it’s a question of a town’s ability to provide the general government operating costs and educational services that most people expect with the one revenue resource they have at their disposal — the property tax.

Making minor modifications to the state’s revenue stream while ignoring the failings in the property tax system is likely to undermine economic growth, worsen financial conditions and do nothing to lessen the fragmentation in the delivery of services. Rebalancing our tax system and ending our over-reliance on the property tax will encourage a robust economy fueled by increased demand for goods and services by low- and moderate-income families; effective local government; strong communities; quality education; and a healthy environment.

If Connecticut fails to address this all-important issue now — during a period of soaring budget surpluses — will it ever happen? Not likely.

John Filchak is Executive Director of the Northeastern Connecticut Council of Governments and a member of the Tax Policy Collaborative.

Iowa: Commercial property values expected to jump 20% in Polk County

Values of commercial properties in Polk County will likely grow an average of 20% in 2023, with increases varying across property type, Polk County assessor officials said. However, not all of 2022’s commercial sales have been researched, so the estimate could change, officials said. “Since our last re-assessment in January 2021, we have been in an appreciating market,” Bryon Tack, Polk County’s deputy assessor, said. “That means assessments are increasing.”

In Iowa, countywide reassessment of properties occurs each odd-numbered year. Around April 1, about 190,000 assessment notices will be mailed to Polk County property owners informing them of the new values of their commercial and residential properties, county officials said. Property values are part of the formula used to determine owners’ property tax bills. In Iowa, 90% of a commercial property’s value can be taxed after application of the state’s business property tax credit. With the growth in valuations, commercial property owners will likely see larger property tax bills, county officials said.

How much commercial property tax bills grow will also depend on tax rates set by taxing bodies such as cities, schools and counties. Those rates are expected to be set in late February or March.

In 2021, the overall value of the county’s 9,329 commercial properties rose an average of 9.2%. However, 2021’s assessed valuations varied widely between sectors. The values of warehouse properties grew an average of 35%. Hotel, theater, restaurant and bar, and health and recreation property values fell an average of 30%. Office, retail and grocery properties saw their property values increase an average of 3%.

Tack said he doesn’t expect to see as wide a difference in commercial valuation growth as occurred in 2021. Many of the properties that saw declines in valuations were adversely affected by the pandemic. Hotels, for example, saw dramatic drops in overnight stays because people stopped traveling for several months, both for pleasure and business.

Many of the county’s more than 120 hotel properties will likely see significant increases in their property values, Tack said. But the increases won’t bring valuations back to the levels they were at in 2019, he said.

“We’ve seen [hotels] come back quite a bit, but I don’t think they’ve come back all the way to where they were pre-pandemic,” Tack said. “But they are getting there.” Assessors will look at the sale of hotel properties and occupancy rates to help them determine values, Tack said. County assessor officials are grappling with valuations for downtown office buildings, said Randy Rippenger, the county’s assessor.

“I think office property is going to be a huge challenge for us,” he said. “The values may drop; I just don’t know by how much. … Part of the problem is that we don’t have any sales, and that’s the No. 1 thing we rely on.” Tack said he expects to have all the commercial sales data and research compiled by late February so that valuation notices can be mailed by April 1. Property owners will have until April 30 to appeal their assessments.

Michigan: Property tax reform is next frontier in Detroit’s turnaround.

A decade after Detroit plunged into bankruptcy, city leaders are still searching for the public policy change that will fix what the Chapter 9 case didn’t: Rebuilding and growing neighborhoods.

Despite major progress to rid the city of thousands of blighted homes, getting property owners — and perhaps more importantly, bankers — to invest in new construction has proved more difficult because of Detroit’s highest-in-the-nation property taxes on residential, commercial and industrial property.

The large-scale industrial and commercial developments like Stellantis’ Jeep plant on Mack Avenue, Ford Motor Co.’s train station rehab in Corktown and billionaire businessman Dan Gilbert’s Hudson’s site skyscraper get the big tax abatements, some lasting decades.

Residents in deteriorating neighborhoods get the full bill — and are penalized with a higher property tax bill if they build a new garage.

Detroit Future City CEO Anika Goss calls this property tax burden, coupled with auto insurance rates that remain among the nation’s highest, “the Detroit tax” — the higher cost of just living in Michigan’s most populous city that often doesn’t pencil out for middle-class families when compared with first-ring suburbs.

Detroit’s property taxes can reach 90 mills, nearly twice what the same property owner would pay in Plymouth. The high tax rate comes on top of the decades of problems Detroit has had with inflated valuations that lead to higher tax bills for homeowners who end up in foreclosure. A Detroit News investigation published in 2020 found Detroiters were overtaxed by $600 million over a seven-year period from 2010 to 2017 after the city failed to accurately lower property values in the years following the Great Recession.

One emerging idea for lowering the property tax burden in Detroit is taxing vacant land at a higher rate in order to replace revenue lost from slashing the number of mills levied on residential, commercial and industrial property.

The concept of a so-called split tax on property was floated at Tuesday’s Detroit Policy Conference at MotorCity Casino Hotel by Goss and other thought leaders as a way to draw new investment to the city’s neighborhoods, both by Detroiters and outsiders.

Goss said a land value tax would discourage long-term “land-banking” by speculators and eliminate “Band-Aid” tax breaks for homeowners who live in poverty. “That is really what’s holding back some of the neighborhoods,” she said.

Nick Allen, a doctoral candidate at Massachusetts Institute of Technology who has studied Detroit’s property tax system, said the existing tax system penalizes investment in existing properties while relying on a winners-and-losers system for doling out tax incentives to big projects.

Detroit Mayor Mike Duggan is sold on the concept of splitting the tax rate and has his administration’s top tax policy expert, Jay Rising, a former state treasurer, working to map out how it would work.

“It’s the most legally complicated thing I’ve ever seen,” Duggan said. “… We don’t have it figured out yet, but conceptually you would raise taxes on the vacant land and reduce taxes on the buildings.”

The mayor cautioned there would still be winners and losers with a split tax. “People who might own a small building in a wealthy area could see their taxes go up in an unfair way,” Duggan said. “So we’ve got to make sure there no inequities in it. We’re working hard at it. We’re 80% of the way to a solution.”

Any change to how property is taxed would require the Michigan Legislature to change the law for not just Detroit, but all cities. Then the issue of creating a higher tax rate for the vacant land would have to go on the ballot for Detroiters to approve raising property taxes above the Headlee Amendment’s constitutional limitations, Duggan said.

“Conceptually, people love the idea,” Duggan said. “But when you look at how it affects each individual person, you will see some that are treated really unfairly — and we can’t have that.”

Ten years ago this spring, as the city was defaulting on pension debt and pleading poverty with creditors, lowering property taxes for anyone seemed almost inconceivable. Now it looks like the next necessary step in the city’s upward trajectory. But as the mayor noted, it won’t be easy.

Allen, the MIT researcher, cautioned that taxing higher-value vacant land won’t necessarily end all big tax incentive deals. But it will give long-time Detroit residents and business owners tax relief after sticking out the tough years. “I think this is a step toward the equity that we’ve been talking about for a long time,” Allen said.

Florida: Disney is suing over its property tax assessments — again

Some things in this world are certain, like death and Disney fighting its taxes. Walt Disney Parks and Resorts recently filed a dozen lawsuits to appeal the 2022 property tax assessments done by the Orange County property appraiser.

It’s the second time this year Disney has turned to the courts to fight its tax bill. Disney, which has contested its property assessments in court for years, filed a series of lawsuits six months ago over the assessments for several resorts and administrative spaces.

In the newest round of Orange County lawsuits from this month, Disney argued against the property appraiser’s methodology for the assessments at the four theme parks, multiple resorts and some of Disney’s other buildings.

“The Appraiser failed to comply with … Florida Statutes and professionally accepted appraisal practices in assessing the Subject Property. … The Appraiser has included the value of certain intangible property in the Assessments,” Disney said in court documents which didn’t provide details about what The Mouse claimed was done improperly.

In 2022, Epcot was assessed at about $521 million, Hollywood Studios at $479 million, the Magic Kingdom at $467 million and Animal Kingdom at $387 million, according to court documents. Disney said it has fully paid the 2022 tax bills as it fights the assessments. Disney submitted its tax bills, which, for the No. 1 park in the world, the Magic Kingdom, was $12.8 million if paid by Nov. 30. Epcot’s tax bill was $14.3 million.

For Disney theme parks, 2022 was a banner year financially, with then-company CEO Bob Chapek praising the record financial results last month before he was ousted a short time later. The Disney Parks, Experiences and Products division reported $7.9 billion in revenue for the fourth quarter. Disney did not immediately respond to requests for comment for this story.

Orange County’s previous Property Appraiser, Rick Singh, had said Disney was historically undervalued. “It’s a matter of being fair and equitable,” Singh told the Associated Press in 2017. “If the single mother who is working two jobs has to be held accountable to pay her fair share, so should everybody else.” Singh, who also dealt with well-publicized scandals in office, was later voted out of office and Amy Mercado took over as the new Appraiser in 2021.

Mercado has shown a willingness to make deals with Disney. Last year, she reached a settlement with Disney that refunded the company about $9 million for the 2015-2020 tax bills for the four theme parks as well as several smaller properties including the Transportation and Ticket Center, the Wedding Pavilion at Disney’s Grand Floridian Resort & Spa and Fantasia Fairways Miniature Golf Course.

Mercado’s office declined to comment Friday, but she said last year, “The whole purpose of our office, regardless of who is in it, is fair, equitable and just values. It doesn’t matter who the owners are. What I believe we need to do is remove all the political noise that has occurred throughout the years and give everyone, every property owner, their fair shake.”

EUROPE

France: Property Tax – After Paris, Other Cities Do Not Rule Out An Increase

Are we on the eve of a property tax spike? The announcement, by Anne Hidalgo, mayor of Paris, on November 7, of an increase of almost 50% in local tax in the capital, which will go from 13.5% to 20.5% in 2023, has caused a sensation, and animated the municipal council of the capital, these last days. Mme Hidalgo had previously promised not to raise taxes.

Is this decision isolated or will other cities follow? In fact, this tax paid by the owners of real estate and allocated to the municipalities, has already increased significantly in 2022.

The first part of the increase (based on inflation) corresponds to an automatic revaluation of 3.4%, i.e. the “biggest revaluation since 1989”, assured the National Union of Property Owners (UNPI), in mid-October. The second part (local authorities can modify this rate) “jumped: + 1.3% in 2022”, again according to the UNPI. A few cases have caught the attention, such as Poissy (+ 23.9%), Mantes-la-Jolie (+ 22.2%) or Martigues (+ 19%), Marseille (+ 16.3%) or Tours (+ 16%).

For 2023, inflation requires, the mechanical revaluation should be “from 6% to 7%, which would represent 3 billion euros”, specifies Floriane Boulay, director general of Intercommunalities of France (the association of a thousand groupings of municipalities). The final figure will be known later.

As for the choice of mayors, if Paris has already made known its arbitration, it can wait until the adoption of municipal budgets in the spring. In Grenoble, the increase could be between 15% and 25%, the city has already leaked. But the investments linked to the ecological transition mean that “there is a chance, in fact, that it will continue to increase” believes M.me Boulay.

“The vast majority of the mayors have not made a decision, because they are in the fog”, observes Antoine Homé. In particular, they are waiting to know whether the European Union will agree to regulate energy prices. “But if the fundamentals don’t change by spring”, continues the mayor of Wittenheim (Haut-Rhin), “this may force mayors to act on taxation.”

Energy prices have become “completely crazy” gets carried away Mr. Homé, “It is a calamity that falls on the communities”. And there are other charges, such as the general increase in civil servants decided by the government, the interest rates which go up. So, raising the property tax might seem inevitable to many mayors.

UK: Almost 50 UK shops closed for good every day in 2022, says report

Last year was a “brutal” one for Britain’s retail sector, with more shops shutting down than at any other point in the last five years, and 2023 will be similarly challenging, according to industry groups.

About 47 shops on average pulled down their shutters for the final time every day last year, according to analysis from the Centre for Retail Research (CRR). It found a total of 17,145 shops on high streets and in other locations closed for good over 2022. This is up almost 50% on the 11,449 shops closed in 2021, during the Covid pandemic.

The CRR also said that 151,474 retail jobs across the UK were lost in 2022, including those from online retailers – up 43% on the 105,727 jobs lost in the previous year. It found 5,509 shops were closed because retailers went bust, entering some form of insolvency, while a further 11,636 were shut as part of cost-cutting programmes by large retailers, or independents simply shutting up shop for good.

However, the number of store closures caused by big chains, those with 10 or more outlets, was down by 56% because most of the poor performers already collapsed in previous years. Retailers that went into administration in 2022 included the clothing chain Joules and the McColl’s convenience store chain. Next ultimately teamed up with the founder of Joules to buy it out of administration and Morrisons bought McColl’s but there were store closures and job losses in both cases.

The CRR’s director, Prof Joshua Bamfield, said: “Rather than company failure, rationalisation now seems to be the main driver for closures as retailers continue to reduce their cost base at pace.” He expects this trend to continue in 2023 but added: “A few big hitters may well fail, too.” The research found 11,090 shops were shut by independents last year, while large retailers closed 6,055 shops.

The property adviser Altus Group estimates that retailers and landlords will have to pay close to £1.1bn from 1 April over the next tax year to cover the business rates on empty sites that have been vacant for three months. Robert Hayton, the UK president at Altus Group, said: “Rate-free periods need to be urgently extended to reflect the time that it actually takes to re-let vacant properties.

“The current woes facing the retail sector, driven by the war in Ukraine, mean that empty rates are ripe for modernisation.”

The British Retail Consortium said 2022 had been “an exceptionally difficult year for both consumers and retailers”, with sales volumes down compared with 2021.

At a time when many costs were already going up because of supply chain problems, the war in Ukraine pushed inflation into an upward spiral, with energy and food prices climbing by more than 10% year on year during the second half of 2022, the industry body said. Retail sales grew 2.3% during this period as the cost of living crisis unfolded. However, when inflation is taken into account, sales volumes declined for food and non-food items.

Sales are expected to grow between 2.3% and 3.5% this year, picking up in the second half (to between 3.6% and 4.7% from 1% to 2.3% in the first half), assuming inflation slows and consumer confidence improves.

Kris Hamer, the BRC’s director of insight, said: “The first half of the year is likely to be challenging for households and retailers. Ongoing inflation will make sales appear to be rising but we expect falling volumes as consumers continue to manage their spending. We also don’t see many signs at this stage of retailers’ input costs easing, with energy costs expected to rise by £7.5bn as the government’s energy bill relief scheme comes to an end in March, putting ongoing upwards pressure on prices.

“There is cause for optimism in the second half of 2023, when we expect inflation to ease and improving consumer confidence to result in an improvement to sales growth, and corresponding volumes.”

UK: Britain’s high streets are dying and nobody is doing anything about it

Retailers face a toxic mix of post-lockdown pressures, but ministers shelved the idea of an online sales tax

Has the Government given up trying to save the high street? Ten years ago, it was one of the Coalition’s big ideas, combining what they thought was community populism with economic pragmatism. At the time, the online trade was only just beginning to make its presence fully felt and seemed less of an obstacle to the survival of physical shops than it does now, especially post-lockdown.

Mary Portas, the retail consultant, carried out an inquiry that found the shops and small businesses which provided the vibrant heart of any town were struggling. “Unless urgent action is taken much of Britain will lose, irretrievably, something that is fundamental to our society,” she concluded. In response, the then government announced dedicated “town teams” to manage high streets and a £10 million innovation fund “to bring life back to empty shops.” Yet the decline continues and is reaching crisis proportions.

Last year, 50 shops a day closed down as retailers grappled with soaring energy costs, wider inflation and online shopping. Figures from the Centre for Retail Research showed that more than 17,000 sites across the UK shut their doors for the last time – almost 50 per cent higher than in 2021. Moreover, most of these were not businesses going bust. Just 32 per cent of the closures followed insolvency proceedings. The rest were larger retailers deciding to close some stores to cut costs or independents throwing in the towel, unable to compete with online sales.

One idea to create a level playing field between internet-based and high street retailers was an online sales tax (OST) on e-commerce goods and services. When he was chancellor, Rishi Sunak launched a consultation exercise with the aim of using the money raised to subsidise business rate cuts on the high street. Three models were reviewed: a turnover tax on e-commerce; a flat-rate levy per transaction; and a delivery surcharge of the sort that operates in other countries. In France, it is set at 0.42 per cent for platforms controlling deliveries and ride sharing services.

A two per cent online sales tax in the UK would raise about £4 billion but this is dwarfed by the £25 billion raised annually by business rates. Nonetheless it would make a contribution and the revenues could be targeted to the hardest hit areas.

Or, rather, they could be if the idea had not been quietly abandoned in the Autumn Statement in November. This was not actually mentioned by Jeremy Hunt, the Chancellor, in his speech to the Commons but unearthed from the documents accompanying his statement.

“The Government’s decision reflects concerns raised about an OST’s complexity and the risk of creating unintended distortion or unfair outcomes between different business models,” it said. But the point about this exercise was that online traders do not have to pay the business rates that are crippling high street shops and businesses.

The Tories have promised reform of business rates many times only to tinker at the edges. Rishi Sunak’s modernisation plan in 2021 amounted to more regular revaluations to make the rates “fairer and timelier for two million business properties”.

The first of those revaluations will be this spring to “reflect market values”. Hunt did announce transitional relief which, he said, meant two thirds of properties will not pay a penny more and thousands of pubs, restaurants and small high street shops will benefit. But clearly many will lose out at a time when customers are thinner on the ground and have less to spend. Big department stores will soon be a thing of the past – 80 per cent have closed in the past five years.

Furthermore, seemingly unconnected decisions such as increasing the living wage hit the hospitality and retail sectors hard because they employ so many people. There are a lot more problems they have to face. They include high energy costs, parking charges, congestion and emission zones putting off customers, burgeoning rents, anti-commerce local councils and, now, rail strikes stopping people coming into bigger towns and cities.

But business rates remain the biggest bugbear and need to be replaced with a more flexible system, something the Treasury is reluctant to countenance because they raise so much money.

The Retail Jobs Alliance, which represents firms that together employ over 1 million staff, argues that there is an “urgent” need to freeze rates, followed by “proper reform”. The CBI says business rates “stifle investment in the facilities and innovations needed for sustainable growth and exacerbate regional inequality.”

However, perhaps we should not be trying to save businesses from cultural and economic changes at all. Online sales are here to stay and deliveries will grow. Big stores closing down are arguably the victims of retail Darwinism while small businesses catering for a more discerning customer still perform well.

Towns left with empty properties or a string of charity shops are depressing places, but the answer may not be to try to resuscitate the past but convert them into something new, such as the homes that are needed in abundance. A paper from the Social Market Foundation a few years ago argued that a major programme of converting retail units for residential use could allow the creation of 800,000 new homes.

The fact is that the lockdowns and their aftermath have changed the way many people live and there is no sign that things will return to where they were any time soon. But while this has hit city centre trade particularly badly, it may have boosted local commerce elsewhere since more people now work from home instead of going into the office and are more likely to shop in their own towns.

The problems that the Portas report identified have not gone away, but part of the solution is to revive other aspects of the urban landscape, not just shops and restaurants. Business rates certainly need a complete overhaul, with places hardest hit by decline able to offer special tax incentives for new companies moving in. It will need innovative thinking and gumption, which are in short supply nowadays. But, let’s face it, we would all help if we supported our local shops instead of ordering so much online.

Authors:

• Paul Sanderson, President | psanderson[at]ipti.org
• Jerry Grad, Chief Executive Officer | jgrad[at]ipti.org
• Carlos Resendes, Director | cresendes[at]ipti.org

Compliments of the International Property Tax Institute (IPTI) – a member of the EACCNY.