Why The Online Threat To Big Retail Means Bigger Holes In Illinois Budgets

The take from sales and property taxes, key revenue sources for local governments, often takes a hit as brick and mortar stores reel under Internet competition. That puts a strain on paying for municipal services.

Retail prospects are grim in the DuPage County suburb of Bloomingdale, where Macy’s recently closed a 150,000-square foot store at the Stratford Square Mall. The village expects to lose an estimated $65,000 in sales tax revenue, enough to pay for replacing a public works truck, two police cars or filling a vacant maintenance job.

Bloomingdale is one of dozens of communities in the Chicago area and downstate grappling with the loss of brick-and- mortar stores, particularly the traditional mall anchors that are reeling from online competition. Shoppers lose, but in ways both big and small, so do taxpayers.

The ongoing retrenchment foreshadows a funding crisis for communities that look to sales tax revenue as a key revenue source. Property tax revenue, too, gets squeezed because abandoned properties get reassessed at lower rates.

This means that municipalities hit with store closings must make difficult budget choices that can mar the quality of life: whether to fill vacant positions or lay off staff, whether to delay street repairs or equipment purchases. Lost retail jobs require the state to pay unemployment benefits while laid off workers have less disposable income to spend in their communities.

“There won’t be another round of big boxes,” said Keith Lord, president and managing partner of Chicago-based retail broker The Lord Companies.

Many mall owners are redeveloping their properties with an eye toward drawing specialty retailers, restaurants and theaters, but Lord said those venues won’t pick up the revenue slack. “Malls need to stop thinking they’ll be rescued by a Lucky Strike bowling center,” he explained.

More likely, retail experts said, smaller malls  will be converted for other uses such as sports complexes, senior centers, condos or medical offices. And that will force city planners to come up with new or altered funding sources—whether that be finding more aggressive ways to recoup taxes from online sales or prevailing on Springfield to broaden the sales tax to cover services as most states do.

In the most recent round of closings announced earlier this year, JC Penney slated the shuttering of 138 stores, including seven in Illinois. Macy’s scheduled 68 closings with three in the state. Troubled Sears Holdings, which has been closing Sears and Kmart locations for years, announced the end of 150 stores, including two Kmarts in Illinois. Other mall staples such as The Limited, Bebe, MC Sports and Radio Shack are saying goodbye.

It’s only the latest iteration of a long painful slide, with secondary “B” and “C” malls taking the brunt. The 60-year-old Evergreen Plaza in south suburban Evergreen Park was torn down in 2015 and replaced with a smaller outdoor mall anchored by Carson’s and Dick’s Sporting Goods.

The shuttered Lincoln Mall in Matteson is scheduled for demolition. The Huntley Outlet Center, which struggled for years, closed the last of its shops in March.  Even glitzy State Street isn’t immune—Macy’s recently announced plans to lease the top floors of its historic flagship. Fewer than half of 17 malls in the Chicago area are profitable, Lord estimates.

Retailers are on pace to close more than 8,600 locations this year, surpassing the number of closings during the 2008 recession. S&P Global Market Intelligence released a list of publicly traded retailers at risk of default in the next 12 months, which includes Sears Holdings and Bon-Ton Stores, the parent of Carson’s and Bergner’s.

The woes are due largely to competition from Amazon and other online retailers, but also from off-price shops such as Ross, and fast-fashion retailers such as Zara. Years of overbuilding contributed to these troubles.

“If you have a Sears, it’s not going to be OK,” said Neil Stern, senior partner at the Chicago consulting firm McMillan Doolittle LLP. Store closings have a ripple effect, Stern notes, as the loss of mall anchor stores reduces traffic to the smaller shops. Some retailers have clauses in their leases that enable them to close if anchor stores depart the mall.

Hard to draw marquee brands

In Bloomingdale, the village faces diminished property tax revenue when the vacant Macy’s is reassessed, though there’s compensation with the recent opening of a nearby Mariano’s supermarket. Macy’s is looking to sell the building and when a buyer is identified, the village will have a better idea of how the space will be used, said village administrator Peter Scalera.

It’s difficult for smaller malls to attract the marquee names that bring traffic such as an Apple store or Cheesecake Factory, which tend to locate in wealthier regional malls such as Oakbrook Center, Woodfield or Old Orchard, Stern said. Discount retailers such as Ross and Marshall’s are a welcome addition, but they typically run 30,000 square feet – a fraction the size of a traditional department store.

Bloomingdale has a particular disadvantage in being wedged between the much larger Woodfield Mall 10 miles to the north and Oakbrook Center 13 miles to the southeast. Scalera said vacant spaces increasingly are being filled by non-retailers such as a dance studio and soccer training center for kids.

It’s easier to redevelop a strip center and replace a closed Kmart or Sports Authority, said Chicago retail broker Allen Joffe, principal and the managing broker of Baum Realty Group LLC. Strip centers can attract passing traffic and offer easy in and out, he adds.

Two years ago, after losing an 88,000 square foot Kmart, the city of Bloomington in Central Illinois set out to fill the void by creating a tax increment financing district, a complicated mechanism to capture and repurpose property tax revenue for development.

The strip mall where that Kmart once operated now has a Dick’s, HomeGoods, DSW and other stores, and it is generating more sales per square foot than previously. However, tax incentives granted to spur the redevelopment mean that revenue to the city isn’t as large as it once was, said Austin Grammer, the city’s economic development coordinator.

Bloomington faces a daunting task at the Eastland Mall, which this year has already lost Macy’s, Gap, Gap Kids, Radio Shack and MC Sports.  Penney is slated to close its store this summer, leaving the mall with a slimmed anchor roster of Kohls and the financially shaky Sears and Bergner’s.

Publicly available data on sales per square foot and store size point to an annual sales tax loss from those store closings of around $700,000. The city expects to recoup a large share of that, however, as shoppers migrate to other stores still in business.

Also, Bloomington and surrounding taxing districts will likely see a decline in property tax revenue. The Macy’s property, for example, had previously been assessed at a value of $7 million, but mall owner CBL & Associates recently purchased it for just $2 million, a transaction sure to translate into a much lower tax assessment.

Another community reeling from the loss of two large retailers is downstate Alton. The Macy’s at the Alton Square Mall and a freestanding Kmart closed in March, resulting in an estimated loss of about $240,000 in sales tax revenue.

That will require the Mississippi River community 22 miles north of St. Louis to rein in spending by deferring maintenance or delaying hiring. “We’ll have some short-term losses,” said Mayor Brant Walker.

Mall owner Hull Property Group plans to tear down the 180,000-square foot Macy’s, add a theater and attract new but smaller stores.

At the Northland Mall in Sterling, a two hour drive west of Chicago, the closing of JC Penney may shift general merchandise sales to a Bergner’s still open at the mall as well as a nearby free standing Kohl’s. “That’s not to say it won’t be missed,” said city manager Scott Shumard. “The overall trend toward online shopping is worrisome.”

The departure of Penney could cost Sterling nearly $90,000 in sales tax revenue, publicly available data indicate. Shumard said sales tax revenues collected citywide are used to fund all capital expenditures in Sterling and also comprise one-third $12 million in annual revenue collected to fund day-to-day operations.

Finding a new revenue model

Since 2015, Illinois law enables the state to collect its portion of the sales tax from Amazon and other online retailers as long as they maintain a physical presence in Illinois as well. But Shumard and others argue the state should find a way to collect local tax revenues long imposed on sales at brick and mortar stores.

The sales tax in Illinois is comprised of different layers, the largest piece of which is a 6.25 percent levy on retail purchases that goes to state government. The state then turns around and gives back 20 percent of what it collects to municipalities.

Those local governments, as well as counties and some other bodies, also tack on additional tax on charges for retail sales. The result is that the total sales tax tab varies often widely from town to town.

E-commerce greatly complicates the ability of the state to calculate both where purchases are being made and what sales taxes should be charged.

The current Illinois taxing arrangement for Internet sales has peculiarities that accrue to the benefit of the handful of communities that are home to Amazon warehouses. That is because, for sales tax purposes, an online purchase from Amazon by an Illinois customer treats the warehouse from which it was shipped as if it were a retail store.  

However, sales taxes collected for online purchases from other big retailers like Walmart, Costco, Macy’s and Nordstrom accrue to the state but aren’t shared with any particular municipality—including those that are home to retail outlets for the same chains.

Many other online retailers are not required to add Illinois taxes to a purchase from an Illinois customer. Under state law, consumers are supposed to make that up by paying a use tax on those purchases when filing annual income tax returns. Few do.  

A bill now pending in the Illinois House seeks to remedy the noncompliance by requiring online retailers who do not collect Illinois sales tax to remind purchasers at the time of sale of their legal duty to pay the use tax. It also would require retailers with more than $100,000 in Illinois sales each year to send a record of larger purchases to the state.

Despite the accelerating shift of sales from traditional stores to the Internet, e-commerce still  epresents only 12 percent of retail sales, according to consultant Stern. Food, for example, still is mostly purchased through groceries, though Illinois taxes it at a much lower rate than general merchandise.

Online shopping will continue to grow, Stern adds, but at some point it will reach a plateau of perhaps 20 or 25 percent. Where the move toward online purchases ends is not just an urgent question for retailers but for the communities that depend on sales taxes to pay police, collect garbage and pave roads.

Lead photo: An outline of a logo sign outside of a closed Macy's retail store in Columbus, Ohio (Kristoffer Tripplaar / Alamy Stock Photo)