Traffic sign: Stopping zone for delivery traffic
Point of view

Town and city centres: Should we use taxes to control or shape them?

The townscape and cityscape will change after the coronavirus pandemic, and not in a good way. A regeneration of town and city centres will be necessary. Some retailers and restaurateurs will not survive the pandemic.

A contribution from Carsten Kühl

The introduction of an online sales tax for online retail is called for on the political scene in Berlin. It should achieve two effects: firstly the competitive advantage of online retail over high-street retail should be reduced by taxing mail order companies, and secondly tax income that is needed for the regeneration of town and city centres after coronavirus should be generated.

Such steering taxes are consumer taxes. They burden customer with lower incomes relatively more than those with higher incomes and their tax revenue can only be attributed with great difficulty to the municipality where the consumer should pay the online sales tax. Like other indirect taxes, an online sales tax would therefore be raised and collected by central government. Its deployment could be earmarked – even though that is not normal in the German tax system (for good reason: rule of non-assignment). Then the tax income could be distributed to the municipalities according to a key.

Systematically observed, the question is begged whether there will be so-called external effects (similar to green taxes) that are connected to online retail and would be (internalised) compensated by the online sales tax. For instance with the green tax, the burdens on the environment that are not considered in the entrepreneurial cost and price calculation are to be priced in.

An online sales tax cannot remedy the problems generated by online retail

Mail order retail is different to high street retail mainly in terms of the delivery of goods that is largely linked to CO2 emissions. It is not very convincing to demand a special online sales tax for this reason. There is already a CO2 tax, with which the environmental pollution caused by motorised private vehicles is taxed and that at least calculatively flows into the prices of the online products. Customers of high street retailers who drive to city centres with their motorised private vehicles ultimately generate environmentally harmful emissions for the same reason as online shops do. Furthermore, does the online sales tax also have to be collected for goods that are delivered by electric vehicles or delivery bikes? Do the high street shops also have to charge the tax, if they start to sell online, e.g. in combination with high street shops and showrooms, in order to reflect the changed consumer preferences and to increase their competitive position?

Others argue that online retail damages the public good in regard to the “functionality of the town and city centres” without the beneficiary contributing to mitigating the damage. The reason is theoretically convincing, but the measures derived from it are difficult to implement. Who defines the benchmark for the harm to functionality? And how many different taxes must be raised in order to price in all the potential damage to town and city centres? Ultimately, every tax that is raised must meet the constitutional principal of equal treatment.

At its core, it is about the threat by online shopping to the existence of retail and to city and town centres. It is about fair and unfair business competition and about how towns and cities can meet the consequences of a potential structural change for town and city centres.

However, unfair competition does not per se exist when consumer preferences change and market shares shift. On the contrary, that is fundamentally desired by competition policy. However, there are many indications fair competition does not exist between high street retail and the large international online providers. Pure online retailers are by definition not on the high street and therefore are best placed to exploit international tax planning and ultimately tax avoidance potentials. The resulting competitive advantages are blatant. In 2017 and 2018, Amazon managed to plan its business results so that it did not pay any tax in the USA, yet a high street retailer in Germany with the legal form of a private company must tax its profits over 58,000 euros at 42 percent. It is the task of national governments, preferably at OECD level, to tackle this disgrace, at least through a minimum business tax and a uniform taxable base.

Many jobs at large online retailers, even in Germany, are precarious with poor pay, poor working conditions and repressed worker participation. The same is true for delivery companies that work for online retailers. It is the task of the national labour market policy to counteract these deficits.

Avoiding insolvencies and driving necessary inner city transformations

On the other hand, high street retailers especially in town or city centre locations sometimes suffer from too expensive rents. Yield driven property funds and unilaterally controlled markets are the reason that rent accounts for an increasingly higher share of the operational costs. Also in this regard, there is a need for action on the part of the national regulator.

It will probably not be possible for politicians to remove unfair competitive advantages of online retailers in the short term. However, they should now and consistently address it. There are two options for quick action: the temporary aid should be continued during the pandemic for as long as can be expected that businesses would have remained solvent, had it not been for the pandemic, and the German government must initiate targeted programmes of support that facilitate a reorientation of the business model of high street retailers, e.g. transformation to high street ranges in combination with online-supported delivery options. Such measures would be more effective and more targeted than the contrived taxing of online products through an online sales tax.

The townscape and cityscape will change after the coronavirus pandemic, and not in a good way. Some retailers and restaurateurs will not financially survive the pandemic. Others will have to close some of their shops and at the same time, enter into the online business as result of changed consumer behaviour. The demand for office space, also in city and town centre locations, will go down because the pandemic has shown how private and public service providers can make use of efficiency potentials by expanding working from home. It is one of the original tasks of the cities and towns to manage the impending vacancy rate so that lively and functioning town and city centres remain through using new policies that are adapted to the respective local situation, for example, spaces for social facilities, rooms for cultural programmes, more (affordable) living spaces in town and city centres. In doing so, what is respectively suitable and what can be implemented is subject to the discourse of the urban society and the value that the local political leaders ascribe to this task.

This important structural task requires public funds. Sustainable urban development costs money. The income from a systematically inconsistent online sales tax with uncertain revenue appears tempting but that is not the correct instrument. The German government and the federal states would tend to tell the municipalities that they have “fulfilled their debt” by raising the online sales tax. However, transformation processes in urban development are municipal core tasks. Therefore, towns and cities are prepared to provide an adequate amount of required tax funds, and if their own financial power is not sufficient, they can use the municipal financial compensation system and corresponding programmes in the urban development funding legislation, which has always claimed to support new challenges in urban development in terms of planning and tax.


Pre-publication of the text that appeared in March in Difu-Magazine Berichte 1/2021.