IPTI | Update on U.S. & EU Property Tax Issues: September 2022

The EACC, in partnership with the International Property Tax Institute (IPTI), wants to keep its members up to date with the latest developments in property taxes in the USA and Europe. IPTI has put together below a selection of articles from IPTI Xtracts; more articles can be found on its website (www.ipti.org).

United States

New York: NYC’s gauging of commercial property values leads to inequities

Revenue from commercial buildings make up nearly 40 percent of the city’s property tax base.

Commercial properties are a critical part of New York City’s property tax base. Revenue from these buildings make up nearly 40 percent of property tax revenue.

A new fiscal brief from the city’s Independent Budget Office (IBO) indicates that the city’s method for gauging commercial property values leads to inequitable assessments and potentially lower tax revenues.

To calculate a commercial property’s value for tax purposes, the city uses what is known as a “capitalized income approach.” Released on August 30, the IBO brief examines this assessment method, focusing on a key part of the calculation — capitalization rates used by the city’s Department of Finance — and investigates how the overestimation of these rates leads to inequitable property assessments.

Among the IBO’s findings:

• Capitalization rates used by the Department of Finance are, on average, higher than the capitalization rates IBO estimated based on market sales. Adopting artificially high capitalization rates can lead to the underassessment of property values, compared with those that would have been generated based on market information.
• New York State requires the city to value properties in Tax Class 4 according to their current use, rather than their highest and best use. This can lead to lower-assessed values than what the market implies.
• Using established metrics, IBO found evidence of both “horizontal” and “vertical” inequity of assessments under the current system. This means that properties of similar market sale prices have different assessed values and higher-value properties are underassessed – and therefore undertaxed – relative to their lower-value counterparts.

As New York City’s property tax structure is bound by state law, almost any changes require state intervention and the city’s options to remedy these equity issues are limited, the IBO brief pointed out.

However, there may be some adjustments the city could make to its guideline capitalization rates to help narrow the gap between the values it assesses and the market sales values, the brief said.

“Reforming the assessment regime towards equity can lead to raising more revenue from higher-value properties, and at the same time alleviating the burden for lower-value properties to incentivize business activity in the city. These reforms are all the more important in the current times,” the IBO wrote.

“Aside from the shock of the Covid-19 pandemic, which left many commercial properties with no income for an extended period of time, the need for commercial space is going through seemingly permanent changes: new technologies have enabled workers in several industries to work from remote locations, not necessarily from a specific physical spot, and consumers to do their shopping without need to visit physical stores,” the brief said. “These changes highlight the importance of assessment equity as a tool to create a more level playing field, rather than an additional obstacle, for business activities.”

Pennsylvania (1): Philadelphia property taxes under the microscope

Philadelphia’s property tax system is at a “key moment” following the release of the first citywide reassessments in years.

That’s according to a new report from Pew Charitable Trusts that analyzed our tax system and compared it to 10 peer cities, including New York City, Chicago and Baltimore.

Why it matters: Philly has a history of irregular, inconsistent and seemingly unfair assessments.

A scathing audit in 2020 found significant inaccuracies, leading to a series of reforms and the ousting of the city’s chief assessment officer.

Catch up quick: The city skipped reassessments for tax years 2021 and 2022 due to those concerns about accuracy as well as pandemic-related issues.

New 2023 citywide assessments were released this past May, and systemic inaccuracies appear to persist, with the tax burden distributed unequally, according to the Inquirer.

Zoom in: The property tax bill for a “typical owner-occupied home” in the city was $1,131 in 2021, according to Pew — less than any comparable city besides Detroit.

Residential property values increased 31% on average citywide this year since the last assessment in tax year 2020.

The city has made adjustments to the property tax system over the years to help ensure better accuracy and fairness, such as accounting for a property’s characteristics.

Plus: Officials boosted the homestead exemption to $80,000 this year, which Pew said was generous compared to other cities.

What they’re saying: “How well those adjustments are received, along with the new assessments, will go a long way toward determining whether Philadelphians become more accepting of the property tax,” the Pew report says.

By the numbers: Pew found that residential properties account for 71% of Philly’s property tax revenue in 2021 — the highest share among comparable cities.

Yes, but: Property taxes only accounted for roughly 15% of the city’s budget in fiscal year 2021 — far less than the median for the other peer cities (31.5%).

Pennsylvania (2): Some Allegheny County property owners could see massive decrease in taxes after assessment ruling

Homeowners facing possible tax hikes this year because of property assessment appeals brought by school districts and municipalities won a big victory Thursday — one that could have major repercussions for many others in Allegheny County as well.

Common Pleas Judge Alan Hertzberg ordered a huge reduction — from 81.1% to 63.53% — in the number to be used in 2022 appeal hearings to determine the value at which a property will be taxed.

The drop in the common level ratio could provide some relief for thousands of property owners who have been hit with assessment appeals filed by school districts and municipalities after buying homes in Allegheny County. The appeals, which seek to raise the assessment closer to the new sales price, are often derided as a newcomers’ tax.

Before the change, a home valued at $100,000 in an appeal would be taxed at $81,100 using the 81.1% common level ratio.

Using the 63.53% ordered by the judge Thursday, the property would be taxed at $63,530.

That would mean a substantially lower tax bill for the property owner.

The ruling also could result in tax breaks for other homeowners and commercial property owners in the county, particularly if Judge Hertzberg or the county allows another round of appeals to be filed this year. The original appeals deadline was March 31.

If that happens, a homeowner or building owner would only have to show that his or her property changed in value, however slightly, to qualify for the new ratio — and potentially a lower tax bill.

John Silvestri, the attorney for nine property owners who filed the lawsuit that led to Thursday’s reduction, was elated with the judge’s decision.

“The ruling is excellent for property owners because they can no longer be cheated into paying too high taxes,” he said.

Mike Suley, a former assessment board member and director who served as a consultant to the plaintiffs, called the ruling a “game changer.”

Pittsburgh school district appeal may delay assessment deal ⁠— and possible tax breaks for Allegheny County homeowners

“There are winners and losers. The losers are the people who send out the tax bills, and that includes the county,” he said. “And the winners are the taxpayers, the people who own properties.”

A budget buster?

No doubt the ruling could have huge consequences for the county, school districts, and municipalities that were counting on the revenue from property assessment appeals to help balance their budgets this year.

With the stroke of the judge’s pen, much of that revenue could evaporate, barring an appeal of Thursday’s decision to a higher court, which seems likely given the stakes involved.

During a court hearing Thursday, Megan M. Turnbull, an attorney for the Pittsburgh School District, said the change in the common level ratio could have “massive repercussions” for taxing bodies that have already set their budgets for the year.

“There’s not a whole lot of time left to do some course correction in any municipal budget or any school district budget should they need to do so,” she said.

Ms. Turnbull added there’s a need to craft a “fair and equitable” solution “that doesn’t leave every taxing body in the red at the end of the year for reasons that were completely beyond our control.”

Beyond the cases currently pending, she noted the ruling has the potential to trigger a whole new wave of property owner-led appeals. She said that if owners of large multi-million dollar properties appeal to get the lower ratio, they could “drive very big results very quickly.”

Ms. Turnbull urged Judge Hertzberg to allow the district to withdraw some of the appeals pending before the county property assessment board rather than spending the money to pursue them, given that the return won’t be as great as it would have been with the higher ratio.

Prime for appeals

The Pittsburgh School District has already appealed one of Judge Hertzberg’s ancillary rulings involving the assessment case. Asked if the district planned to appeal Thursday’s order, Ms. Turnbull said she would have to look at it.

Shelley Rohrer, an attorney for the county, wouldn’t say in court whether the county intended to appeal the judge’s decision.

“We’re reviewing the order and will act accordingly,” county spokeswoman Amie Downs said afterwards.

Edward Hirshberg, an attorney who specializes in property assessment matters, said government agencies have “pretty strong rights” to appeal the type of preliminary injunction order Judge Hertzberg issued Thursday and “immediately stay its impact.”

Some experts have predicted that a ruling resulting in a lower common level ratio could result in across-the-board tax increases by school districts or municipalities as they look to make up lost revenue.

Still to be determined is if Judge Hertzberg will allow the district and other taxing bodies to withdraw their appeals and whether he will permit another round of appeals by property owners this year.

Ms. Rohrer said that county council may have to be the one to decide whether to allow more property assessment appeals.

However, David Montgomery, attorney for the assessment board, said he believes the judge can also order it.

The assessment board has not been issuing decisions on appeals this year pending a decision by Judge Hertzberg on what common level ratio to use.

Although that has now been decided, Mr. Montgomery said the board will wait until the judge determines whether to allow taxing bodies to withdraw appeals before rendering any decisions.

He also believes property owners should have another chance to appeal.

“Both parties have been proceeding under a number that turned out to be substantially wrong for this year. If one side can withdraw, the other side should be able to participate under the new data,” he said.

Mr. Silvestri argued that taxing bodies should only be able to withdraw appeals if the property owner involved consents to the move. Like Mr. Montgomery, he believes the judge should reopen the appeals window this year.

“There were property owners who were overtaxed in prior years that need their taxes reduced now, not later,” he said.

‘Zero sympathy’

Mr. Silvestri had little sympathy for school districts and municipalities that may lose revenue as a result of the ruling. He said they can adjust their budgets next year to account for any shortfalls.

“The school districts have zero sympathy for having used the higher [ratio] last year that overtaxed property owners. I have not heard either the county say I’m sorry, and I have not heard the school district say the property owners are as important to us as our budget,” he said.

The new 63.53% common level ratio was calculated by Mr. Silvestri and his team based on sales data that had been submitted by the county.

While Judge Hertzberg issued a preliminary injunction setting the ratio at 63.53, he also ordered the county to submit its data to the state tax equalization board, or STEB, to calculate the ratio.

He did so apparently because the county had argued that the board is the only one that can calculate the ratio under the law.

Of course, if the state board comes up with a much different ratio, it could throw a monkey wrench into the entire process, which has dragged on since April when the judge ordered the county to re-examine the way it coded 2020 property sales data used to determine the ratio.

Mr. Silvestri isn’t worried about that happening. Asked if he anticipated any difference between the 63.53% and the ratio to be calculated by the state tax equalization board, he replied, “None.”

The common level ratio is used in appeal hearings to account for widening disparities between assessed values and current sales prices since the last countywide reassessment took place a decade ago.

Alaska: Commercial property valuation is ‘out of control’

The CBJ Assembly needs to act now to fix this problem.

The way in which valuation of commercial property is decided in Juneau is out-of-control. For the most part, Juneau’s Board of Equalization rubber-stamps the city bureaucrats’ commercial assessment process.

The methodology used to value commercial property mostly ignores common sense, deviates from widely accepted standards and is anything but equal.

City bureaucrats are desperately trying to use a peculiar property valuation for commercial property methodology that pumps up assessed values to increase revenue.

The best way to appraise historical commercial property is the income approach. The assessor failed to use the income approach. The second best way is the sales approach using market comparison data based on the sales of similar property as close in time to the assessment as possible. The assessor has cherry-picked higher sales and excluded lower sales to fix his predetermined assessed values.

The assessor’s office has not used standard methods. It’s adopted an odd hybrid cost approach for valuing historical commercial property that uses fabricated expenses for building replacement and that adopts suspect capitalization rates that reflect a bias towards increased property valuation. The use of replacement building costs untethered from reality when valuing historic properties in Juneau fails to account for obsolescence and the depreciation of older structures.

This quest to use improper property assessment to determine the fair market value of commercial property has been going on for over a decade. Looking back on how the CBJ Assessor’s Office has valued commercial property since 2005, its obvious a problem exists.

Whether the CBJ Assembly will turn a blind eye to a deeply dysfunctional system for assessing commercial property is an open question.

The tendency for the Assembly is to defer to the bureaucrats who spout off professional sounding terms like how they use the “mass appraisal method” to value commercial property. The Assembly hasn’t dug into what this kind of mumbo-jumbo really means. Instead, the Assembly goes along with the charade. After all, the tax revenue flows in from this distorted process and spending is more enjoyable than fairness.

The mass appraisal method isn’t “mass” at all. The CBJ Assessor’s Office excluded property where the selling price was less than the assessed value. Unequally, the Assessor’s Office included the market busting sale of the Sub-Port property to Norwegian Cruise Line to justify high assessed values for commercial property. Independent observers believe the sale of the Sub-Port property to a cruise line was a one-of-a-kind property sale and an outlier, not a market-making transaction.

The appeal forms, agenda items and hearings seem to fall short of due process for appellants. For example, presentation on value for complex parcels are given a farcical 15-minute hearing. Presentations before the BOE are chopped off. Breaks in the proceedings are not allowed. Any evidence presented to the BOE was met with resounding silence. The assessor threatens higher assessments from their made-up category called “Assessed Value on Notice” to “Full Market Value (May be recommended to the BOE).” The hearings amount to a kangaroo court where the outcome is certain to go against the commercial property owner. Motions for reconsideration were accepted by the City Clerk and then wrongfully denied.

I urge the CBJ Assembly to take a hard look at the assessor’s office and senior management team.

I also urge the CBJ Assembly to stop deferring to City Hall bureaucrats and require implementation of assessment standards pursuant to IAAO standards and acceptance of MAI appraisals submitted by commercial property owners.

The City Manager employs outside counsel to defend a broken system. How much is this waste of public funding to defend a broken system going to cost?

This scheme to raise revenue must be weighed against losing the lawsuits filed by commercial property owners and paying back commercial property owners for the over-assessment and over-taxation of their properties.

Commercial property owners are a vibrant part of the Juneau. We are unwilling to be cheated by bureaucrats operating in a broken system.

The CBJ Assembly needs to act now to fix this problem, not wait while further damage to our economy takes place.

Missouri: Disappointing property tax outcome

The Missouri Supreme Court set aside a state statute in early August that exempted some solar projects from property taxes. The court said the state legislature had no authority under the state constitution to exempt such projects.

The Missouri legislature exempted “solar energy systems not held for resale” from property taxes.

A solar company entered into a power contract to supply all of the electricity from a five-megawatt solar project to City Utilities of Springfield. The project is on land belonging to the utility. The utility has an option to buy the solar system at the end of year seven and then again at the end of each subsequent contract year as well as the end of the contract term.

The county assessed property taxes on the solar project starting in 2017. The solar company said the solar system is exempt and pointed to a state law that exempts “solar energy systems not held for resale.”

The case landed in the state Supreme Court. The court never reached the question whether the purchase options mean the system is held for resale because it said the legislature has no authority under the state constitution to exempt solar systems from property taxes.

The state constitution has a list of exempted categories of property.

It then says, “All laws exempting from taxation property other than the property enumerated in this article, shall be void.”

The solar company argued that the fact that the legislature has authority under the constitution to set different rates for different types of property means it can set a zero rate for some types of property. The court said no.

The case is Johnson v. Springfield Solar I LLC.

EUROPE

Spain: Putting a value on the Balearics – almost 80,000 million euros

Property tax calculations are based on the cadastral value

By comparison with other Spanish regions, the cadastral value of the Balearics is quite low. But then the land area is small by comparison, while the islands don’t house the nation’s capital and main financial and business centres.

Land registry data indicate a cadastral value in the Balearics of 78,156.27 million euros. These values are what are used to calculate property tax. Madrid, also a small region, has a total value of 510,760.71 million, the highest in the country.

Economist Pau Montserrat points out that the cadastral value is one thing but that the sale value is “quite another”. “The cadastral value is, in general, below the real value.” If the cadastral value were to be raised in line with market value, the IBI property tax would shoot up.

“Market values are subject to great volatility. They are currently going up, but at the time of the financial crisis, the cadastral value came to exceed the real one. Therefore, it is good to maintain a certain cadastral stability so that there are guarantees of fiscal stability.”

The cadastral value factors in both the built property and the land, but the built-up surface is much more valuable than the land, and urban land is worth more than rural land. This helps to explain, says Montserrat, why the total cadastral value of the Balearics is higher than that of Aragon, for example.

That region has a total value of 69,415.07 million. It is far larger and has more people, but the vast majority of its land is rural agricultural.

At the municipal level, Palma is valued at 22,966.60 million euros. Calvia is second at 6,972.20 million. The lowest value is 43 million, and this is for Costitx.

United Kingdom: Why are business rates so taxing?

Taxation is at the forefront of our minds now more than ever. Brexit, Covid-19, the cost-of-living crisis, high inflation and increasing interest rates are proving challenging, leaving politicians with the headache of how to raise revenue, while everyone else wants to see tax cuts.

The Conservative Party leadership race has included various proposals from the candidates to reduce income tax or corporation tax, but cutting business rates has not featured highly.

Tax on property is one of the oldest forms of taxation in the UK, predating income tax by more than 200 years. Its journey to the modern form of business rates has been turbulent with frequent calls for its abolition over the last four centuries.

The truth is, however, the Government can’t afford to abolish it.

Income tax and corporation tax are quite responsive – a reduction in earnings will lead to a reduction in the amount of both taxes collected. Business rates provide the Government with certainty of income. ‘Regular’ business rates revaluations attempt to ‘re-gear’ the burden around the regions and within different sectors, but regardless of how the burden is distributed, the only certainty is that the amount of tax collected remains the same. This goes some way to explain why there has been little commitment to improving the system.

Infrequent revaluations are where the dangers lie for individual ratepayers. Over the past few years, we’ve seen a dramatic decline in retail rental values on the high street, compared with a healthy increase in rental values for warehouses as the popularity of online shopping increases. The 2023 revaluation will address this, reducing rateable values for shops and increasing them for warehouses overall.

The 2023 revaluation cannot come soon enough for some businesses, but it could be quite a shock for others, particularly if they’re unaware of what’s on the horizon.

This will be the first revaluation for six years, which just isn’t frequent enough. More regular revaluations are crucial, so the fact that the current Government has committed to three-yearly revaluations from 2023 onwards is positive, but these will still have a two-year lag in England and Wales between the date of valuation and the date the new rateable values ‘go live’ (but only a one-year lag in Scotland).

Next year’s new rateable values will be based upon the notional rental market as at 1 April 2021. In times such as these, markets change rapidly and whatever these new rateable values will be, they’re arguably already out of date.

The Valuation Office Agency (VOA) has a huge task to produce these valuations efficiently and accurately, but a lack of investment means that the accuracy of the valuations is not always what it should be, hence the right to appeal. Yet this right to appeal is gradually diminishing and a missed deadline here or misinterpretation there can lead to a complete loss of a business’s right to rectify an error for three years.

Investment is needed into business rates system to support the VOA and local authorities to produce a system which will serve businesses well. But that investment can’t happen in a climate of tax cuts, so failings and criticisms of the system will continue for years to come.

The prospect of wholesale business rates cuts look less likely than ever.

France: French tax officials use AI to spot 20,000 undeclared pools

Scheme to be extended across the country after trial in nine departments led to extra €10m in tax receipts

French tax authorities using AI software have found thousands of undeclared private swimming pools, landing the owners with bills totalling about €10m.

The system, developed by Google and Capgemini, can identify pools on aerial images and cross-checks them with land registry databases. Launched as an experiment a year ago in nine French departments, it has uncovered 20,356 pools, the tax office said on Monday, and will be extended across the country.

Modifications to property, including adding swimming pools, must be declared to the tax office within 90 days of completion. As property taxes are based on the rental value of the property, improvements mean an increase in taxes. A typical pool of 30 sq metres would be taxed at about an extra €200 a year.

The tax office – or le fisc, as it is known – says it is now looking at using the system to spot undeclared annexes, extensions and verandas including permanent pergolas.

“We are particularly targeting house extensions like verandas, but we have to be sure that the software can find buildings with a large footprint and not the dog kennel or the children’s playhouse,” Antoine Magnant, the deputy director general of public finances, told Le Parisien newspaper.

However, the tax authorities’ technical team say they are not yet able to establish whether a rectangular shape on an aerial image is an extension or a tent, terrace or even tarpaulin placed on the ground.

In April it was claimed that the Google-Capgemini software had a 30% margin of error. Not only was it mistaking solar panels for swimming pools, but it was failing to pick up taxable extensions hidden under trees or in the shadows of a property. Tests are being carried out to perfect the technology.

“This is our second stage of research and will also allow us to verify if a property is empty and should no longer be taxed,” Magnant added.

France is believed to have about 3.2m private swimming pools and reported a boom even before the Covid lockdowns of 2020 and 2021, when there was a surge in installations as more people worked from home.

The public finance authority DGFiP said the AI programme would now be rolled out nationwide, potentially leading to €40m in new taxes on private pools in 2023.

The clampdown comes as French environmentalists have called for the banning of private pools after the summer heatwave sparked drought and water restrictions.

Julien Bayou, the national secretary of Europe-Ecology-the Greens (EELV), said the French needed “a different relationship with water”. He said that with drinking water supplies threatened, it was reasonable to consider limiting the use of water for recreational purposes. “The challenge is not to ban swimming pools, but to guarantee our vital water needs,” he said.

Mélanie Vogel, of EELV, insisted the party was not in favour of a pool ban, but added: “Because of inaction on the climate, the access to drinking water is threatened and we must restrict its use.”

Denmark’s new property tax rules from 2024

New property tax rules (boligskatteregler) take effect in Denmark in 2024. How will they affect homeowners and first-time buyers?

The new tax rules, which will impact property value tax rates (ejendomsværdiskattesatser) and land value tax (grundskyld), were originally ratified by the previous government in a 2017 bill. In general, they mean the rates for both of the above property taxes will fall in most municipalities, according to the Danish tax ministry.

A public real estate appraisal (ejendomsvurdering) forms the basis for taxation of your property. According to the tax ministry, many homeowners will find that new appraisals issued from September 2021 are higher than preceding valuations from 2011 and 2012. That is partly due to increasing house prices in recent years.

In order to avoid much higher property taxes as a result of higher valuations in the public real estate appraisals, the 2017 political agreement secured a reduction of the two forms of property tax, effective from 2024.

Homeowners who appear to be facing higher property taxes due to the new appraisals – even though tax rates will be reduced – can be eligible for a tax subsidy. This can occur in cases where a property has seen a large increase in its valuation.

In short, the new tax rules will not result in taxes for existing homeowners in 2024 that are higher than they would have been if the current rules (still in effect in 2022 and 2023) were to remain in place.

However, the tax subsidy mentioned above does not apply to new homeowners from January 1st 2024. This is because first-time buyers will be expected to “plan their finances in accordance with the new tax rules,” the ministry states.

This could have a knock-on effect on the housing market, according to financial media Finans, which wrote in November 2021 that people buying apartments would be likely to demand reduced prices as 2024 approaches, to offset the higher taxes they are likely to pay.

An analysis by Finans and Nykredit showed that apartment prices in major cities, particularly in and around Copenhagen as well as in Aarhus and Odense, will typically have to fall by around 5-10 percent for total costs for now buyers – mortgage plus tax – to be unchanged compared to the outgoing rules.

The new rules and subsequent increased taxes will hit first-time (in 2024) buyers of apartments hardest, according to Finans. That is because many buyers will not be able to afford the same mortgage they previously could, due to the higher property taxes.

One reason apartments are more likely to get tax increases under the new rules is that the valuation appraisal system left them subject to lower property tax relative to houses.

“Apartments have been too lightly taxed for many years because the land under them is massively undervalued compared to appraisals of detached house land,” Mira Lie Nielsen, housing economist at Nykredit, one of Denmark’s major banks and the country’s largest mortgage lender, told Finans last November.

People buying apartments before 2024 could also push prices down knowing they risk making a loss if they sell shortly after the tax reform takes effect.

From 2024 onwards, the two property taxes – ejendomsværdiskattesatser and grundskyld – will be pegged to appraisals of the property and land value such that if these fall in valuation, so will the property tax.

If the valuation of the property, and thereby the property tax, increases after 2024, homeowners can fix the rate of (indefryse) their taxes by postponing payment of a part of the property tax. The frozen tax payment becomes due (and is calculated) when the property is sold. Alternatively, the increased taxes can be paid in instalments.

Authors:

• Paul Sanderson, President | psanderson[at]ipti.org
• Jerry Grad, Chief Executive Officer | jgrad[at]ipti.org
• Carlos Resendes, Director | cresendes[at]ipti.org

Compliments of the International Property Tax Institute (IPTI) – a member of the EACCNY.