The Dubious Relationship Between Big Box Stores and Sales Tax

There is a theory – perhaps even a common belief – in America that cities compete with each other. We want them to compete with each other because we believe that competition drives innovation and makes cities stronger. In a Darwinian sense, the competition is supposed to toughen them up, produce better outcomes. This is totally wrong.

It’s wrong because, for competition to result in innovation, there needs to be failure. Losers need to die off. Go away. Become, in a Darwinian sense, future fossil fuels. Homo Sapiens don’t sit atop the food chain because Neanderthals became second tier primates. We won. They lost. Their genetic code – the knowledge of their evolution – ceases to be passed on while ours does.

Cities don’t fail in a way that would provide a learning opportunity for others. We don’t let them.

This doesn’t happen to cities. Detroit has not been forced to sell off its sewage treatment plant to the city that would pay their creditors the most for it. We didn’t forcibly relocate the residents of San Bernardino because their city ran out of money, selling their liberty to the competing municipality that would make the highest bid. To suggest that is absurd. Cities don’t fail in a way that would provide a learning opportunity for others. We don’t let them.

It’s also wrong to believe that competition between cities results in innovation because, in a true competitive market, there aren't overwhelming constraints like we see with governments today. The peacock evolving the optimum-sized tail wasn’t commanded by Mother Nature to not eat certain foods that it was perfectly capable of digesting. It was fully free to experiment until it found – or didn’t find – what worked best.

Yet, states mandate an endless number of constraints on cities. In my home state of Minnesota, the state doesn’t care if your economy is based on tourism, manufacturing, agriculture, logging, services, manufacturing or government handouts, you are allowed only one type of local tax: the property tax. It doesn’t matter the structure of your economy, whether a different set of taxes would be more optimum for your place, you get the same tax as everyone else. So go ahead and innovate, just not in any way that substantively matters.

In today’s America, cities can’t fail and they’re not allowed to truly innovate, so why do we pretend that they benefit from fierce competition with their neighbors?

The problem with big box stores and states that force their cities to rely on sales tax is well known. To briefly review: Big box stores are a winner-take-all kind of proposition for cities reliant on the sales tax. If City A gets the big box and City B loses out, City A will entice the consumers from City B to shop in their jurisdiction and will, thus, be the recipient of those sales tax dollars. City B will get nothing.

This creates a “competitive” marketplace where it is in every city’s interest to subsidize the big box store to the point where they can beat the neighboring city’s subsidy, yet still, at least in the short term, come out cash flow positive (they also take on long term liabilities but, really, they never bother to do the math and so really don’t care – next generation’s problem). This actually hurts both cities. City A has huge liabilities, massive handouts and a little bit of cash flow in the short term. City B doesn’t have the liabilities but also loses the cash flow.

Photo by  Michael Kappel

In the short term, you don’t want to lose the big box war. In the long term, the only thing worse than losing the big box war is winning it.

These policies benefit two entities. First, they benefit the big box corporations whose bottom line is enhanced with every project. Second, they benefit the state governments who get their revenue from the transaction of building the store, operating the store and all of the induced consumption through increased sales and income taxes. The state takes on none of the long term liabilities and, in this competitive game, can never lose.

Big government and big corporations collude to screw cities over, pitting one against the other in a race to the bottom. It really disgusts me.

I see a couple of approaches to address this, although I am sure there are more.

The first, which is the one I prefer, would be for states to stop being helicopter parents and actually grant cities the autonomy to set their own tax policy. Cities could develop their own taxing approach based on the nuances of their local economy. Yes, Walmart, McDonald's and the like aren’t going to like it much because they will have to deal with a different approach in each city. Who cares? The playing field is already tilted so far in their direction anyway. Local businesses will benefit from a set of policies adapted to their own local ecosystem.

Another option – one that would probably be easier because it challenges the central authority less – would be for the state to collect sales tax and then distribute it back to cities, not by geography but by something akin to population. From a sales tax revenue standpoint, it wouldn’t then matter where the store located and thus cities would feel a lot less pressure to make irrational decisions in order to land one.

These ideas are worth a try. Anything would be better than our current system where big corporations and big government collude with a series of rules that restrict competition while simultaneously promoting it. Under these conditions, towns are unable to truly thrive. They don't fail per se—the system we've set up doesn't really allow for that—but they prop up their decline with an ever-increasing amount of debt and future obligations.

We need to change the rules of the game and start building Strong Towns.

Related stories