Last week, state Sen. Duey Stroebel (R-Cedarburg) wrote an article opposing one I submitted, “Taxpayer-Funded Lobbyists Pushing Legislation that will Make Property Taxes Worse,” where I outlined how your tax dollars are being spent on lobbyists and campaign ads who are pushing legislators to raise property taxes in Wisconsin. Wisconsin Manufacturers and Commerce (WMC), the state chamber of commerce, has concerns with Stroebel’s legislation because it would allow local governments to use the property tax to tax business value, as opposed to property value, in certain circumstances. This practice would amount to double taxation because the state already taxes business value through the income tax.
Before we get to how Stroebel’s bill would double tax businesses, we need to discuss how rental properties are taxed. No one doubts that assessments of rental property should be based on the property’s income-producing capacity. However, the focus should be on the capacity of the real estate to generate income, not the income generating capacity of the business occupying the property. In Wisconsin, and most other states, the goal of our property tax law is to base assessments on market rent, that is, the typical rent that a property can be expected to generate in a competitive market.
In most instances, the actual rent paid by a tenant will represent market rent. That is because landlords and tenants negotiate leases in a competitive market. But sometimes, the rent paid by a tenant will exceed market rent. Typically this occurs when the lease is really a financing device. Many Wisconsin businesses use a lease to finance the construction of a property, the expansion of a business or to buyout an older generation. In these lease transactions, the amount of the rent is not driven by the income producing capacity of the property, that is, its market value. Rather rent in these transactions is typically driven by the amount of money a tenant wants to raise for their expansion and the tenant’s credit-worthiness, i.e. the business success of the tenant.
For example, a manufacturer may finance the expansion of its business using a sale-leaseback transaction as opposed to a conventional loan. A sale-leaseback transaction is when, in exchange for money to expand their business, the manufacturer will sell their property and immediately lease it back from the purchaser. The amount of money the purchaser of the manufacturer’s property will pay for the manufacturer’s property—that is the loan—is not related to the value of the property, but instead related to the amount of money the manufacturer is looking to raise and the manufacturer’s ability to repay the loan through rent (the ability to repay the loan is tied to the value and profitability of the business). The amount of rent is directly related to the size of the loan, and may have nothing to do with the property’s fair market value and everything to do with success of the manufacturer’s business. The property tax is not intended to tax business value, but rather the value of the real estate.
What Stroebel’s position ignores is that in such a case, the rent will not reflect the value of the property as much as the value of the tenant business. Thus, basing assessments on above-market rents arising from these financing leases taxes business value, that is, the success of the tenant occupying the property. No one would seriously argue that we should base assessments of single family homes on the income or net worth of the owners. However, that is precisely the approach that Stroebel’s bill would do to businesses if enacted.
What’s worse, this approach would penalize businesses that use one type of financing—lease financing—over more conventional types of financing such as bank loans. State government should not be in the business of punishing entrepreneurs who take a risk and use sale-leaseback transactions and other methods of unique financing to start or expand their businesses.
Wisconsin already has the 5th highest property tax burden in the nation by one measure. This bill will make Wisconsin a national outlier in both the process we use to collect the property tax as well as the amount of tax we charge. The state Legislature should be working to make Wisconsin’s tax burden and business climate more competitive, not less.
Cory Fish is Wisconsin Manufacturers and Commerce’s (WMC) Director of Tax, Transportation and Legal Affairs. WMC is the state’s chamber of commerce and represents over 3,800 businesses of all sizes and from every sector of Wisconsin’s economy.