IPTI | Property Tax in the News – November 2024

USA
North Dakota Voters Reject Dramatic Plan to Eliminate Property Taxes as Other States Embrace Caps

A ballot question that would have eliminated property taxes in North Dakota was soundly defeated on Tuesday, after critics argued the step would have gutted funding for essential services.

Measure 4, which would have made North Dakota the first state in the nation without any property taxes, was one of nearly a dozen statewide ballot questions on property taxes that appeared on ballots across the country during the general election.

Most of them, including significant new restrictions on property taxes in Georgia and Florida, passed, indicating voter frustration after property taxes soared in recent years. Last year, state and local governments collected about $760 billion in taxes on real and personal property, a 31% increase from 2018, according to U.S. Census Bureau data.

The proposed ban in North Dakota was spearheaded by a former Republican state legislator, who called property taxes “immoral” and expressed anger over their rapid recent increase in the state.

But the measure was opposed by a huge coalition of more than 80 groups, including the North Dakota Fire Chiefs Association, School Board Association, Sheriffs and Deputies Association, EMS Association, the North Dakota AFL-CIO, the Greater North Dakota Chamber, the North Dakota Farmers Union, and the North Dakota League of Cities.

State officials estimated the ban would cost $3.15 billion over two years. Critics had warned that, absent property tax revenue, local governments would have to either dramatically cut services or turn to new statewide income or sales taxes to preserve essential services.

“The North Dakota proposal to eliminate property taxes does not specify what the alternative will be,” notes Realtor.com® Chief Economist Danielle Hale. “The property tax in North Dakota could stand to be reformed, but getting rid of it entirely could create bigger problems than property owners currently face.”

Ultimately, Measure 4 was defeated by a wide margin, with 63.5% voting against the proposal, and 36.5% voting in favor.

Meanwhile, Florida and Georgia voters both approved measures to limit annual property tax increases, but with major differences that could affect their housing markets very differently.

Florida’s approach is more straightforward and less likely to distort the state’s housing market. Known as Amendment 5, the measure provides for an annual inflation adjustment for the value of the homestead property tax exemption in Florida.

Homes in Florida are assessed for tax purposes at market value, minus homestead tax exemptions. Most owner-occupied primary residences qualify for two $25,000 homestead tax exemptions, totaling a fixed $50,000 that is exempt from property taxes.

Amendment 5 allows one of those $25,000 exemptions to increase annually in pace with inflation. The adjustment would be made on Jan. 1 each year and would be based on the prior year’s percentage change in the Labor Department’s consumer price index, as long as the change was positive.

Importantly, the homestead tax exemption applies uniformly to Florida homeowners and remains the same after moving from one home to another, preventing distortions in the market that arise when homeowners refuse to move to cling to a tax benefit.

Georgia’s approach fails to avoid that pitfall, however. Known as Amendment 1, Georgia’s approach is legally more complicated. But in essence, it allows the passage of legislation that would cap annual property tax increases at the rate of inflation, but only for existing homeowners. When a home is sold, its assessment limit would reset to the current market value.

The Tax Foundation, a center-right think tank, had strongly opposed the measure, saying that it would distort Georgia’s housing market by discouraging homeowners from selling or moving, lest they lose their tax benefit.

“This makes it harder for new residents to access housing and could discourage homeownership or shift purchasing patterns to less attractive options among the next generation of Georgia residents who are incentivized to purchase homes that they otherwise would not have purchased,” the group wrote.

Oklahoma voters reject special tax districts. Elsewhere, the only other property tax ballot measure to fail was in Oklahoma, where voters rejected a proposal for new special tax districts.

State Question 833 would have allowed municipalities to create public infrastructure districts when all property owners within the proposed district sign a petition, and give those districts the authority to issue bonds for public improvements if approved by voters within the district.

The public infrastructure districts would have been governed by a board of trustees who would have the power to levy a special assessment of up to 10 mills ($10 per $1,000 of assessed value) on properties benefiting from any improvement projects to be used to pay off those bonds.

Supporters billed the measure as a way for homeowners to fund the improvements they desired in their neighborhoods. But opponents argued it would create a system ripe for abuse by developers, who could sell bonds to fund construction of golf courses and swimming pools, and then pass along the repayment obligation to homeowners in the form of higher property taxes.

“Without guardrails, this State Question is an easy grift that profits a handful at the expense of the rest of us,” said state Rep. Andy Fugate, a Democrat who opposed the measure.

 

Texas: Property Tax Overview – Value Protests and Appeals

Property tax is a major concern for Texas property owners, since it represents one of the most substantial expenses they face. In 2023, local taxing entities’ property tax collections totaled $82.1 billion, matching the total revenue generated by all state taxes combined. A property owner’s tax bill is determined by applying the tax rates established by local taxing entities to the property’s taxable value.

Individual property owners cannot directly challenge tax rates but are permitted to protest their property taxes by disputing the appraisal district’s appraised values before local appraisal review boards and through subsequent appeals to binding arbitration or District Court if necessary.

Each year, appraisal districts appraise all taxable property within their jurisdiction. The valuation date is January 1st of the tax year. Property taxes become delinquent on February 1st of the following year. If the appraisal district increases a property’s appraised value, they will send a notice of appraised value to the taxpayer or their designated representative.

Filing a Property Tax Protest in Texas. Texas property owners can protest the appraisal district’s appraised values. Protests are initiated by filing notices of protest with the county appraisal review board. The filing deadline is the later of May 15th or 30 days after the value notice is received.

Once a protest is filed, the appraisal review board schedules a hearing. The taxpayer may appear and offer evidence and argument, in person, through a representative or by affidavit. During the hearing, taxpayers can request a reduction in appraised value based on market value or equal and uniform value theories.

Market Value and Equal and Uniform Value Standards in Texas. The Texas Constitution mandates that property taxes “shall be equal and uniform” and “in proportion to its value.” The Texas Property Tax Code allows a property owner to protest value under both market value and equal and uniform value grounds. Ultimately, the taxpayer is entitled to the lesser of the two.

In these hearings, the appraisal district generally bears the burden of proving the property’s market value is accurate and appraised equally and uniformly with other properties. Following the appraisal review board hearing, the appraisal review board issues its order. Taxpayers have 60 days to request binding arbitration or file suit in district court.

Pursuing a Property Tax Appeal in Texas District Court. In district court, Texas property owners can seek reduction of the appraised value on either market value or equal and uniform value grounds. Property Owners may also recover reasonable attorney fees within the limits of Texas.

Market Value is defined as “the price at which a property would transfer for cash or its equivalent under prevailing market conditions if: (A) exposed for sale in the open market with a reasonable time for the seller to find a purchaser; (B) both the seller and the purchaser know of all the uses and purposes to which the property is adapted and for which it is capable of being used and of the enforceable restrictions on its use; and (C) both the seller and purchaser seek to maximize their gains and neither is in a position to take advantage of the exigencies of the other.”

To determine the appropriate appraised value, appraisal districts must use generally accepted appraisal methods and techniques (GAAMT). GAAMT includes the Appraisal of Real Estate published by the Appraisal Institute; the Dictionary of Real Estate Appraisal published by the Appraisal Institute; the Uniform Standards of Professional Appraisal Practice published by The Appraisal Foundation and mass appraisal publications.

Methods Used in Determining Texas Property Tax Value. Determination of market value, for property tax assessments in Texas, considers the three approaches to value; the cost approach, the income approach and the market data or sales comparison approach.

Cost Approach: The cost approach is the value “indicated by the current cost of reproducing or replacing the improvements (including indirect costs and entrepreneurial incentive), less depreciation, plus land value.”

Sales Comparison or Market Data Approach: The market data approach or sales comparison approach is the “value indicated by analysis of sales of comparable properties appropriately adjusted for differences from the subject property.”

Income Approach: The income approach is the value “indicated by the present value of a property’s earning power, based on the capitalization of income.”

Equal and Uniform Value: The appraised value is considered equal and uniform if its appraised value is the median of a reasonable number of comparable properties’ appraised values appropriately adjusted.

Conclusion: Texas Property Tax Protests and Appeals. Navigating the Texas property tax appeal and protest process can be complex and full of traps for the inexperienced. With $82.1 billion collected annually, property tax is one of the highest costs for Texas property owners. Disputing tax assessments with market value and equal and uniform value theories, provides Texas Property Owners the opportunity to lower their tax burden.

Understanding the protest and appeal options allows property owners to make informed decisions ensuring their property tax assessments are fair and equitable.

 

EUROPE
Greece: Realty measures in new bill

The National Economy and Finance Ministry tax bill put up for public consultation which implements a number of changes regarding real estate that the government had announced. They include the exemption from income tax for three years for properties to be rented long-term, which were previously declared vacant or available for short-term rental, while the Single Property Tax (ENFIA) will be reduced by 20% as of 2025 for those who insure their homes against natural disasters.

With regard to closed properties, in order for those interested to qualify for the exemption, they must meet conditions such as that the residence must be up to 120 square meters, contracts must be for at least three years of lease between September 8, 2024 and December 31, 2025, that the property was closed for 2022, 2023 and 2024 (if the lease is drawn up in 2025), and that they had not been declared as leased properties, nor as main or secondary residences, nor as self-occupied, nor free-granted properties or allocated exclusively for short-term lease. The short-term leases must be declared to the tax administration.

From 2025, ENFIA will be reduced by 20% (from 10% previously) for individuals’ residences with an objective value of up to 500,000 euros, which are insured for natural disasters (fire, earthquake, flood). The condition is that the insurance covers the previous year for a duration of at least three months. If the duration of the insurance of the previous period is less than one year, the reduction of the ENFIA will be adjusted proportionally.

The imposition of capital gains tax from the transfer of real estate is also to be suspended for two years, while a provision for the VAT exemption of new buildings for 2025 will also be included in the next bill.

The bill also provides for compulsory insurance for businesses with annual gross revenues of €500,000 or more, and compulsory insurance of vehicles for natural disasters based on their current commercial value. Also, a climate crisis resilience fee is to be established in hotels per night and per room from April to October, ranging from €2 to €15.

 

UK: Taxing questions raised on business rates

Business rates is the tax that is easy to collect but almost universally hated; it has been a bugbear of the retail sector for well over a decade. Calls to reform the system have grown louder as the high street struggles under the weight of the tax burden and the rise of online retailing. A fresh government had raised hopes of a new approach, but many in the property sector view Labour’s first Budget in 14 years as a missed opportunity for business rates reform.

The government said it would permanently adjust business rates multipliers for retail, hospitality and leisure (RHL) properties, but not until 2026-27, and launched a consultation starting in November on wider reform. The Budget will also provide £1.9bn of support to small businesses and the high street in 2025-26 by freezing the small business multiplier and providing 40% relief on bills for RHL properties, up to a £110,000 cash cap.

However, reacting to these changes, British Property Federation chief executive Melanie Leech summed up the disappointment felt by many in the industry when she said that with no concessions on the overall business rates burden, the government was “just robbing Peter to pay Paul”.

John Webber, head of business rates at Colliers, echoes these sentiments. “It feels a little bit like a groundhog day,” he says, adding that the chancellor’s business rates announcements “were far from the radical reform we were hoping for”.

He continues: “Despite being vocal about helping businesses, particularly those with a physical presence, Labour’s Budget seems contradictory when you look at the planned tax increases on business rates, which don’t match the support narrative.”

Webber argues that 14 years in opposition should have been long enough for the Labour Party to think through the many issues, implications and contradictions of the business rates regime. In fact, Labour pledged a number of quite radical proposals while in opposition.

“It’s easy to say these nice words in opposition, talking about abolishing rates or reform,” he adds. “But it feels like, once in office, the bureaucrats have told [the government] how it is: ‘This is the easiest tax to collect, and we won’t get rid of it.’ In fact, they’re now trying to extract more.”

The Office for Budget Responsibility’s assessment of the Budget backs Webber’s claim. It reveals that, overall, business rates receipts are expected to rise significantly, from £29.3bn for the fiscal year 2023-24 to £39.8bn by the end of Labour’s parliamentary term in 2029-30.

This projected increase has fuelled criticism of Labour’s business rates policy, which ostensibly aims to support high streets and bricks-and-mortar retailers. But Webber questions how hiking the tax by around a third in the course of one parliament can square with the government’s pro-growth agenda. “Where does that sit with the narrative of trying to help businesses?” he asks.

Meanwhile, the increase in employers’ National Insurance rate from 13.8% to 15%, which is expected to raise around £25bn for the government over the course of this parliament, will also add to the costs that businesses face.

Michael Shapiro, partner at law firm Spencer West, says the combination of business rates with other costs exacerbates the financial burden on employers.

“The increase in minimum wage, along with the National Insurance adjustments, hits the hospitality, leisure and retail sectors hardest, as these sectors often employ the most minimum-wage workers,” he adds. “While business rates relief might initially appear beneficial, these concurrent costs effectively neutralise much of the intended support, leaving businesses struggling to stay afloat.”

Shapiro feels the Budget also failed to address some of the core business rates issues. “Business rates are a very archaic form of tax,” he says. “The only way that many pubs, restaurants, hotels and other retailers stayed afloat on the high street is because of the various reliefs given on business rates.”

While many smaller businesses will be able to claim relief, the government has yet to tackle the overall structural imbalance between the high street and online retailers. “The support given to RHL is essential, but it’s sort of taking away with one hand and giving with the other,” says Shapiro.

The government has said it is listening to the industry’s concerns, hence the consultation for businesses and other stakeholders to comment on how to overhaul the business rates system.

The consultation runs until March, “with an initial phase of engagement before Christmas”, according to the government.

However, unlike many consultations, such as the one on National Planning Policy Framework reform, when it comes to business rates, Labour has not set out any in-depth questions for the sector to respond to.

The first 14 pages of the consultation outline what the government intends to do, with one page allocated to “conversation between stakeholders and government”. It may be that the consultation is a fact-finding exercise for more substantial proposals in 2025.

Scott Parsons, chief operating officer of Unibail-Rodamco-Westfield (URW) UK, has a more upbeat view on Labour’s business rates plans. “Just the fact that they are having a look at it [business rates] is a very positive step after a decade of the sector struggling but failing to get a proper look in,” he says.

“I am an optimist, and I think this is good news. We’ve had many years of the retail cash cow getting milked until the teats ran dry, and it wasn’t really ever given any proper attention in any depth by the previous government.”

But Parsons does question how long it will take the government to change the system. It is not yet known how quickly the government will put in place a long-term business rates plan, although Jonathan De Mello, founder and chief executive of consulting firm JDM Retail, believes reform could be expected in around two years.

“They [the government] are talking about 2026-27 as the time that they might look at introducing potential reforms to business rates, which relates to the rateable values and the multiplier charge of certain buildings and locations,” he says. “However, I think the Budget was overall disappointing for retailers.”

The government’s consultation does serve as a reminder of why business rates are so tricky to reform. It states that the tax forms a quarter of local authority core spending power. With councils facing spending squeezes and budget pressures of their own, Labour is in no position to either reduce this key income metric or offer a suitable alternative – at least until the economic outlook improves.

One of the issues raised by the Budget is the number of business rates multipliers now operating in the sector. The Budget introduced permanently lower multipliers for RHL businesses with a rateable value of under £500,000 from 2026-27, to be funded by a higher multiplier on properties with a rateable value of over £500,000. This will include large distribution warehouses used by online retailers such as Amazon.

The multiplier for the smallest properties will be frozen in 2025-26, which the government says will “protect a million properties from inflationary bill increases”, but Webber remains unimpressed by these measures.

“By 2026, we’re going to have five different multipliers based on your property type and sector,” he says. “It’s a level of complexity that’s going to drive people away from understanding business rates altogether. Simplifying it would have been the key, but they [the government] have chosen a path that’s so much more convoluted.

“The problem is business rates make UK plc look unattractive, especially to foreign investors. For many businesses looking to enter the UK, it becomes a deal-breaker. The Budget announcements don’t change that.”

De Mello also sounds a word of caution over hiking rates for the highest-value stores. He says the overall impact will not be to lessen the burden on bricks-and-mortar retailers, but rather simply to shuffle around the overall tax burden between retailers themselves, which is not a long-term solution.

“Is it the right thing to be looking at increasing the multiplier for locations of high rateable values?” he asks. “In London, for example, where the rateable value is very high, this will make it even more difficult to run a commercially successful business. That’s certainly going to have an impact on certain retailers, and especially independents that trade in those sorts of locations.”

Large grocery chains such as Marks & Spencer, Sainsbury’s and Tesco will also feel the impact on their stores. “The Budget is more a rebalancing of rates among the sector; it’s not proper reform or making things fairer in practice,” says De Mello. “A lot of the bigger retailers trade on thin margins; we saw that with Wilko, so increases in the living wage and business rates will certainly affect them.” Without a more comprehensive strategy, Labour’s Budget suggests it is only willing to implement incremental change to business rates. This raises the question of whether the government has had time to understand the complexities of the Budget it has delivered.

Meanwhile, considering what will happen in the next 12 months, Webber warns: “What we’re going to see in the final year of this revaluation cycle is a mad rush. [Revaluation] cowboys will be out in full force, exploiting businesses with promises of quick appeals. The government has set this up perfectly for them, especially with a looming deadline pushing people into their arms.”

Just how retailers will be affected next year by the government’s changes to the system remains to be seen, but one thing we can be certain of is that the business rates debate is far from over.

 

Compliments of the International Property Tax Institute