Connecting state and local government leaders
As brick-and-mortar stores close, local governments in struggling regions lose much-needed tax revenues.
SPRINGFIELD, Ohio—The Upper Valley Mall here used to be a place that drew in shoppers. Now it looks like a fortress designed to keep them out. The concrete façade of the empty department store looms large at one end, the letters that once spelled “JC Penney” removed but their outline still present. A recently shuttered movie theater anchors the mall’s middle, its dark glass foreboding. And at the other end, an MC Sports store is draped in garish yellow and red signs that read “STORE CLOSING” and “EVERYTHING MUST GO.”
Inside the mall, the majority of the stores are empty, their gates locked. Only a few bother to put up “for lease” signs. In the past few years, this mall has lost JC Penney, Macy’s, American Eagle, Christopher & Banks, Rue21, Deb Shops, Vanity, and Kays, to name a few, according to Brenda LaBonte, the mall’s manager. The few that remain—a CVS, a Claire’s Boutique, and a Hot Topic—were empty on a recent weekday evening.
Scenes like this are playing out across America. As my colleague Derek Thompson has pointed out, the reasons for the decline of malls are multifold: People are buying more things online, developers built too many malls in the 1980s and 1990s, and consumers are now spending more on services and less on material goods.
But these changes in spending habits have big implications for the counties and towns that depend on retail for sales- and income-tax revenue. Many of the areas affected by retail closures have already weathered other departures: factories closing, young people departing for bigger cities, home values dropping. The constant departure of more retail stores is another blow. Some counties in Ohio, for instance, get half of their budget from the sales tax that they levy on top of the state’s 5.75 percent rate, according to Suzanne Dulaney, the executive director of the County Commissioners Association of Ohio.
Nationwide, sales taxes comprise nearly one-third of the taxes that state governments collect and about 12 percent of what local governments collect, according to Lucy Dadayan, a senior researcher at the Nelson A. Rockefeller Institute of Government, a New York-based research group. “The epic closures of the brick-and-mortar stores is troubling news for state and local government sales-tax collections,” she said. They’re already feeling the hit: States’ tax revenues grew just 1.9 percent between 2014 and 2015, after growing 5.8 percent in the previous four quarters, according to the Rockefeller Institute. Local-government sales-tax collections grew just 1.7 percent, after growing 7.5 percent in the previous four quarters. In Ohio, state tax revenues grew just 0.1 percent, when adjusted for inflation, between 2015 and 2016, according to Dadayan. When revenues don’t continue to grow, governments have to slow down spending and can’t readily invest in long-term projects.
“The mall has been slowly shrinking,” Richard Lohnes, a commissioner in Clark County, where the Upper Valley Mall is located, told me. “And losing any retail business has an impact on Clark County—it has hurt.” The county is bracing for more impacts—the Sears at the Upper Valley Mall may soon close, Lohnes said, even as the mall tries to attract new businesses in to fill empty stores.
Clark County is not alone. In the southeastern part of Ohio, near the border with West Virginia, Belmont County gets $17 million of its $22 million budget from sales-tax revenues, Mark Thomas, a county supervisor, told me. The county has lost a bevy of retailers of late, including Elder-Beerman, Hhgregg, MC Sports, and Radio Shack. A Kmart in St. Clairsville is expected to close soon, according to the company. The decline in sales tax isn’t the only thing that hurts revenues—abandoned malls mean less revenue from commercial property taxes too. Local governments also see lower income taxes and, when retail workers are unemployed, they spend less, creating a vicious cycle of less and less revenue. “That trickle-down effect is huge,” Thomas said.
The retail closures are affecting regions that already have their fair share of economic problems. These are places where many factories and businesses have already shut down, and where consumers have less money to spend than they used to. Springfield, where the Upper Valley Mall is located, saw its median incomes shrink more than anywhere else in the country, falling 27 percent between 1994 and 2014, according to the Pew Research Center. Many manufacturing jobs have been automated, and the new jobs that have come in are lower-paying ones in call centers and in retail, according to Springfield’s mayor, Warren Copeland. That hurts the city, which charges its own local income tax. “If retail starts going away, that’s a new hit. That’s a serious threat that we recognize,” he said.
States that have seen manufacturing companies depart are bearing much of the brunt of the retail closures, according to Dadayan’s research. She tabulated where Macys, Kmart, and Sears have announced in the past year that they are planning to close stores, and found that Pennsylvania will have the most of those total store closings, at 16. Ohio and Michigan have the second-highest number, at 15 each, alongside Florida. Other states that have bigger populations have much lower combined closings. California, for example, only has eight.
The closures raise the question of what state and local governments will do if retail continues to evaporate. Already, many local governments are attempting to raise taxes to make up for budget shortfalls. Springfield asked voters to approve an income tax in November; the measure failed. The sales-tax rate at both the local and state levels has been creeping up in Ohio as governments try to raise taxes to make up for declines, according to Jon Honeck, the acting director of the Greater Ohio Policy Center, a local think tank. Ohio has also cut back on revenue-sharing between states and local governments since the election of Governor John Kasich in 2010, making it more difficult for local governments to make ends meet. “Some have just cut services, since the state is not going to help them out,” Honeck said.
The decline of brick-and-mortar retail creates social challenges in addition to financial ones. When people aren’t going to stores to shop, and are instead shopping online, the vibrancy of local communities that once depended on foot traffic fades. The Upper Valley Mall was eerily quiet when I walked through it on a recent weekday night.
The decline of brick-and-mortar retail isn’t hitting every region equally. As stores close in less-populated areas and governments struggle to find revenue sources, some big cities are actually opening more retail stores, Honeck said. This could be because areas like Columbus are adding to their population while other cities, like Springfield, are shrinking. Shoppers are also increasingly driving to new malls in bigger cities, rather than shop close to home, he said.
Columbus also has a higher labor-force participation rate and lower poverty rates than other regions throughout Ohio. And developers are paying attention. While dead and dying malls are scattered around Ohio, a new outlet mall recently opened near Columbus. And counties with big, new malls collect a higher share of sales tax than those with older or dying properties, Honeck’s group found. “The large municipalities are really starting to pull away from the small or mid-sized ones,” Torey Hollingsworth, the manager of research and policy at the Greater Ohio Policy Center, said.
There might be a fix for the discrepancy in sales-tax collections: Congress could act to require online retailers to collect sales tax and remit it to the states. National legislators have debated bills that would allow states to collect income taxes on online sales, but efforts have thus far been ad hoc. “We are living in a completely different society, and I think there should be tax reform on a Congressional level, amended for the collection of online sales tax,” Dadayan, of the Rockefeller Institute, said. “This should be taken care of—otherwise state and local governments are going to suffer significantly in the coming years.” This won’t, of course, address the challenges that many of these struggling regions will face in upcoming years as jobs disappear and retailers continue to shut down. Those are bigger challenges, for which there are no clear policy solutions. But helping these shrinking regions collect sales tax from the people who still live there, and who still buy things, may be a start.
Alana Semuels is a staff writer at The Atlantic, where this article was originally published.