(April 21, 2017) Brick-and-mortar stores are falling by the thousands, but don’t blame Amazon — it’s municipalities that are wielding the wrecking ball.
Brick-and-mortar stores are falling by the thousands across the continent as online retailers steal their customers. Statistics Canada reports that retail sectors such as clothing and home furnishings, which are especially subject to online competition, are suffering, with year-over-year sales down substantially. Many retailers have gone out of business and many others — including household names — have long been in decline: Sears’ market value is down by 96 per cent over the last decade, Macy’s by 55 per cent, Best Buy’s by 54 per cent, Nordstrom’s by 33 per cent, Target’s by 21 per cent.
But don’t blame the likes of Amazon, or the free market, for the destruction. Governments are wielding the wrecking ball, threatening to destroy downtowns and shopping areas in the process, and ultimately harming neighbouring residential areas too.
Online shopping has some obvious advantages over traditional stores, but it’s the unobvious ones that are the real killers, particularly when online is in competition with stores located in high-value urban centres. Pedestrian traffic would normally give brick-and-mortar stores an overwhelming advantage — most people actually enjoy shopping — but government penalizes great locations through property taxes that rise in direct proportion to their popularity.
Online operations typically pay little in property or other municipal taxes — they sensibly locate their warehouses in non-descript, low-cost locations from which they can easily move if a municipality raises taxes. Not so a brick-and-mortar establishment — say a family-owned hardware store or a shoe store that has built up a loyal local clientele over many years in a downtown or a neighbourhood shopping district. These are captive to rapacious governments that exact taxes that bear no relationship to the cost of the services that the stores receive.
As an example, shops along Toronto’s eclectic Bloor Street, alongside its tony Annex district, often go out of business due to ever-rising property taxes. A two-storey Bloor building can pay $80,000 a year in property taxes — no trifling amount for a small-business owner — while a two-storey residential property a five-minute walk away, sitting on an equal-sized plot of land, would pay one-tenth as much. Yet unlike the homeowner, who in exchange for his taxes receives services such as schools, the business benefits from few city services paid for through the property tax. In fact, a hefty part of the Bloor Street business’s property tax bizarrely pays for schools throughout Ontario, a levy that online competitors typically don’t face.
To make matters worse, property taxes in Toronto, Vancouver and other cities often don’t even relate to the value of the enterprises being taxed. Under the cities’ HUBA (highest and best use) appraisal system, some properties will be taxed on the basis of their perceived potential rather than their actual use. City planners might scoff at an old building’s use as a funky store for vintage clothing, deciding instead that the site would be better suited as a modern condo building servicing a higher-brow clientele — and netting for the city a tax take several times higher. To help the vintage clothing store owner see things the city’s way, the city will at its discretion apply HUBA to tax the clothing store as if it were a condo building, often forcing it out of business, since relocating to a new location represents a cost and risk a storeowner might be unwilling to take. Even when cities don’t impose HUBA, its spectre discourages local businesses from needed investments, since the day after a costly renovation, a city could decide that the building should be HUBAed.
If cities saw their brick-and-mortar retailers as indispensable parts of the city’s fabric, rather than as plunder, they would replace the punishing business property tax with user fees, to ensure that retailers paid a fair share — and no more — into the city’s coffers. Doing so would help level the playing field between the online retailer and the city store, instantly strengthening hundreds of thousands of brick-and-mortar establishments.
One user fee — for the use of roads — would be particularly decisive in enabling fair competition. Under the current property tax regime, city businesses pay heavily for the upkeep of the city’s roads; their out-of-town online competitors, meanwhile, use those same roads for free to deliver goods to customers who would otherwise have purchased a locally sold product.
If roads were tolled on a free-market basis, so that commercial road users fairly paid for road use, the boon that many online merchants now enjoy would become a burden, especially when delivering packages to urban markets where traffic crawls much of the day — peak charges along congested routes, akin to the peak-period fares levied on airline passengers or the surge fares paid by Uber customers, would render many deliveries unaffordable.
Years from now, cities may operate on a rational, user-pay and free-market basis that respects property rights. Brick-and-mortar establishments will then be able to outcompete their online rivals in most retail sectors. Until that day, city politicians — flattering themselves that they know better than business owners the “highest and best use” of business properties — will be stripping cities of much of their retail sector, and much of the diversity and vitality that brings cities to life.
Lawrence Solomon is executive director of Urban Renaissance Institute and the author of Toronto Sprawls (University of Toronto Press).