IPTI | Update on Property Tax Issues: December 2020

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 a selection of brief reports from articles contained in IPTI Xtracts which can be found on its website (www.ipti.org).

USA

California: Prop. 13 Still the Third Rail? Not Exactly

Proposition 13 is still the third rail of California politics,” crowed Jon Coupal in the headline of an Internet posting days after the narrow defeat of November’s Proposition 15, which aimed to take the property tax benefits of the 1978 Prop. 13 away from commercial and industrial property.

“Prop. 13 has almost mythical powers against those who would assail it,” Coupal also told a reporter. Not exactly. For after its loss, the sponsors of Proposition 15 immediately announced plans to bring it back again two years from now.

That’s apparently OK with Coupal, the head of the Howard Jarvis Taxpayers Assn., named for the co- author of Prop. 13’s property tax limits. He argued that this fall’s timing could not have been better for Prop. 15, which embodied a concept called the “split roll.”

Had the split roll passed, residential properties all over California would still have kept all current features of Prop. 13, which sets taxes at 1 percent of the most recent sales price, levies rising no more than 2 percent per year after that. Properties that have not changed hands since 1978 are taxed at 1 percent of their 1975 appraised value, plus that maximum 2 percent yearly increment.

This system sees owners of identical, side-by-side homes that sold at different times paying vastly different tax bills. Homes that stayed in the same hands for the last 45 years pay significantly less than neighbors who moved in more recently. The difference can come to tens of thousands of dollars each year.

Split roll leaves all this alone. Instead, the failed fall initiative went after commercial property, never the main focus when Prop. 13 originally passed. The emphasis then was on preventing seniors and other longtime homeowners from being priced out of their homes by the rapidly accelerating property taxes of that time.

Coupal claimed this fall was the ideal time for labor unions and leftists to go after part of Prop. 13. He also steadily contends that an attack on any part of Prop. 13 amounts to a threat to all of it. He noted that the fall election promised to draw record numbers of voters because of President Trump’s presence on the ballot. It did. He claimed the ballot description by state Attorney General Xavier Becerra was misleadingly favorable to Prop. 15. It was. And he said labor unions were flush with money from dues with which to back the split roll. And they did. The California Teachers Assn. alone put up more than $20 million.

But Coupal ignored the coronavirus pandemic. Some consequences of that plague, like its emptying out of many office towers, made very uncertain the $12 billion in new revenues split roll backers promised to local governments and schools. The pandemic also has shut down myriad businesses everywhere in California, many permanently. Increased commercial real estate taxes would have been passed through to surviving businesses and their customers, even as they tried to recover.

Those conditions mitigated against passage, and the measure lost by a slim 52-48 percent margin, or 670,000 votes out of almost 16 million cast. If Prop. 13 were really a third rail, a type of railroad track that deals electric shocks to anyone who touches it, no one would want to bring it back. The losers would be nursing their wounds.

Instead, they can’t wait to bring the split roll back in 2022. Said the Public Advocates non-profit law firm, “Rest assured the fight for adequate funding for our schools and communities is far from over…the total vote, with 7.5 million in favor, is cause for optimism. Californians know there is an unacceptable gap between the haves and have-nots in our state.”

So it’s virtually a sure thing the split roll will return in the next general election, with a different number and a different ballot description, but the same mission of revising current property tax law to make business property owners pay more of the freight. Which demonstrates Prop. 13 likely has lost whatever mythical power kept it from being seriously challenged over its first 42 years.

Illinois: U.S. Supreme Court Denies Petition to Review Cook County Property Tax Assessment Litigation

As reported in Education Week, the U.S. Supreme Court has denied a petition to hear an appeal brought by the Cook County Treasurer’s Office, the Cook County Assessor’s Office and others challenging a 7th Circuit decision allowing Illinois federal courts to hear property tax disputes.

Franczek P.C., along with other law firms, filed an amicus brief in support of the petition on behalf of several school district clients, the Illinois Association of School Boards, and the Illinois Association of School Business Officials urging the Supreme Court to consider this important issue.

The plaintiffs in this case, a group of seven Cook County property taxpayers sued in the Northern District of Illinois alleging that between 2000 and 2008 their constitutional rights were violated when county officials assessed their properties at the level set in County ordinance but assessed residential property substantially below the level set in County ordinance. The taxpayers’ complaint asks for refunds of $27.8 million plus interest.

In defense of these claims, and to keep property tax matters in state court, the County defendants argued that the Tax Injunction Act prohibits federal courts from interfering with the state collection of revenue where a “plain, speedy, and efficient remedy” exists in state court. The District Court ruled in favor of the County defendants, but the 7th Circuit reversed, finding no “plain, efficient, and speedy” remedy existed for the taxpayers’ constitutional claims in state court. The case will now proceed in the trial court for a determination on the merits of the claims.

The amicus brief argued that school districts and other taxing agencies are the real parties of interest since it is their revenue that will be lost if taxpayers prevail. It went on to set forth all the potential harms that would be imposed on them if litigation continues in federal court. Finally, the amicus brief argued that the issue should be referred to the Illinois Supreme Court since the 7th Circuit’s decision hinged on a question of state law.

The denial of the petition means that the 7th Circuit decision holding that Cook County property owners may sue in federal court will stand. School districts, who often intervene in lawsuits challenging property tax assessments will now potentially have to litigate in federal court as well as face significant refunds.

New York: City Tax Collectors Seek Flying Drone Army to Assess Your Home

City tax collectors are looking to the sky for more revenue — proposing the use of flying drones to do property assessments with an eye on setting up their own pilot certification program.

But experts say New York City needs to modernize its drone laws before the plan can take off.

Municipalities around the country have used drones for inspections and public safety for years. But New York City is notoriously restrictive in allowing drone flights, thanks to a seven-decade-plus law limiting takeoffs and landings of aircraft to approved airports.

A bill to study drone usage for facade inspections passed this fall. And now the City Council looks to expand its overview of drone regulations with a full task force.

The Department of Finance’s property division released a request for information last week to look into the use of “Unmanned Aircraft Systems” — otherwise known as drones — for tasks such as surveying tax lots, geographic information system (GIS) mapping and aerial photography.

Jaqueline Gold, assistant commissioner of external affairs for the Department of Finance, said the aerial move was not in response to any actions by the City Council.

“We are always looking at new technologies that can improve our data collection,” she wrote in an email to THE CITY. “The real estate industry, as well as other jurisdictions, have been using drones for assessment purposes for years.”

The Department of Finance wrote in its solicitation that “inspections conducted by UAS would provide assessors with a more detailed look at properties enabling greater accuracy in valuation.”

The department’s property division is responsible for “assigning fair market values for over one million properties totaling $1.3 trillion, generating an estimated $27 billion in revenues,” according to the announcement.

Eventually, the RFI states, the Department of Finance wants to set up its own drone program, with the ability to train and certify pilots.

Gold wrote that inspections performed with drones will be conducted alongside property department personnel.

“It will still be necessary for DOF Assessors to value any proven drone capture, similarly to how they currently do with our aerial and frontal photography captures,” Gold wrote.

When asked how the department viewed the city’s lack of regulations for drone usage, Gold replied that “we do have some concerns,” but offered no further clarification.

Department of Finance property-tax photos from the 1940s and 1980s, documenting every lot in the city, are preserved in the city’s Municipal Archives. Civic coders have deployed them in time-traveling tours of the city past.

The 1948 law — Administrative Code 10-126, known informally as the navigation statute — prohibits the take off or landing of any aircraft from an area not designated by the city Department of Transportation or Port Authority. The city’s 311 site urges those who spot a drone to call 911.

Brendan Schulman, a lawyer for drone industry giant DJI, says that while nobody has ever been convicted under the statute, the lack of clear drone regulation in New York City causes confusion.

While most of the city falls under the FAA’s tight Class B airspace restrictions because of the proximity to multiple large airports, the local law still technically prohibits drone usage, even if it is outside of the controlled federal airspaces.

“There’s no other city in America that I’m aware of that has relied on the decades-old law to say that drones are illegal,” said Schulman.

He noted that the NYPD already deploys drones, though its quarterly reports show limited use.

“What we need is a general framework for the reasonable, safe use of drones in New York City,” Schulman said.

Councilmember Paul Vallone also wants to see more drones in city government.

The Queens Democrat has been at the forefront of many drone initiatives, including the recently passed bill calling for a study of their use in facade inspections. He argues using drones would not only cut down on scaffolding use, but costs as well.

“For my district, I have many, many co-ops spending millions on inspections of the outside of the premises that can be done with a drone,” he told THE CITY.

Now Vallone is calling for a new task force to look at other uses for drones — commercial, municipal or otherwise.

The goal of the task force is to “look at all the different ways drones can be implemented within the city, or because they’re coming one way or another,” Vallone told THE CITY.

Adam Lisberg, communications director for DJI, called the Department of Finance proposal exciting and said the potential of municipal drone usage could be endless.

“If you have a neon sign in Times Square, and you need to inspect the pixels,” Lisberg said as an example, “of course you want to be able to use a drone to fly up and do that work.”

City assessors fear that drones will be the latest technology used to cull their ranks.

“We are already bare bones,” said a veteran assessor who asked to remain anonymous for fear of retaliation on the job.

The DOF currently has about 15-20 assessor vacancies, forcing those on staff to work overtime to prepare the proposed tax roll due Jan. 5, records show.

The department already has a $13 million contract with CycloMedia, which takes pictures of city properties and uploads them into the Department of Finance’s internal database.

Due to the pandemic, in September city assessors began virtual tours with property owners showing them around on a cell phone or computer video feed. Those checks are helpful but can also miss spots if the owner, for instance, claims a light is put in a certain area.

“The future seems to be technology but you still need people to go out there and look at the properties,” the assessor added.

The head of the city’s largest municipal civilian union, which also represents tax assessors, called the move a “gimmick” and predicted it would fail.

“We’ve seen this kind of gimmick before,” said Henry Garrido, executive director of District Council 37. He noted the Bloomberg administration looked into buying helicopters with infrared cameras and said the better solution is more flesh-and-blood assessors.

“You need an actual human eye to look at each property to assess the income coming in,” he added. “No drone will be able to do that.”

Pennsylvania: Philly is set to create a new construction tax and make changes to a big property tax break in a win for Council President Darrell Clarke

Philadelphia is poised to enact a new tax on residential construction and to make major changes to the city’s controversial property tax abatement program under a deal struck by City Council President Darrell L. Clarke and Mayor Jim Kenney’s administration that paved the way for three bills to win approval from a Council committee late Tuesday night.

The legislation would be a major victory for Clarke, who has proposed using the revenue from the new construction tax and future reductions in the real estate tax break to finance $400 million in bonds for an ambitious antipoverty and affordable-housing plan he is calling the Neighborhood Preservation Initiative.

For city homeowners, it could mean a new tax equal to 1% of the value of new construction or any major extensions they make to their houses. For commercial property owners, it would mean a 10% reduction in the value of the 10-year real estate tax-break program.

The development industry, Kenney, and his political backers in the building trades unions were initially skeptical of the changes, which they feared would slow economic growth in the city. But the administration on Tuesday testified in support of the legislative package after reaching a compromise with Clarke that will exempt commercial properties from the construction tax and delay the implementation of reductions in the tax abatement, according to a City Hall source with knowledge of the deal who was not authorized to discuss it publicly.

“The administration appreciates the dialogue we’ve had with City Council on these bills,” Kenney’s deputy mayor for planning and development, Anne Fadullon, told lawmakers. “We believe it’s a good balance of bills.”

Amendments to the legislation were negotiated in private for hours Tuesday night, and the Committee of the Whole voted to advance the bills around 11 p.m. With approval from the committee, which includes all members of Council, the bills have a clear path to final passage.

The bills now head to the Council floor, where they could come up for final votes as soon as Dec. 10, at Council’s last meeting before its holiday vacation.

The new construction impact tax, which was introduced by Councilmember Cherelle Parker on behalf of Clarke, would take effect in January 2022.

Finance Director Rob Dubow said the tax is projected to generate about $15 million in revenue by its second year and would eventually rise to about $30 million per year. But if the new tax or other factors lead to a 25% slowdown in residential construction, the tax would only produce $11 million in its second year, before rising to about $22 million in its fourth year, he said.

Four Council members — Republicans Brian O’Neill and David  Oh, as well as business-friendly Democrats Derek Green and Allan Domb — voted against the tax.

The two other bills aim to amend the city’s tax abatement program, which since the 1990s has incentivized development by allowing property owners to pay no real estate taxes on the value of new construction or renovations on commercial or residential buildings for 10 years.

Last year, amid calls from progressives and school-funding advocates to end the tax break, which disproportionately benefits wealthy property owners, Council cut the value of the residential tax abatement by roughly half, while leaving the abatement for commercial properties untouched. Those changes were to take effect at the end of 2020.

One of the bills, authored by Councilmember Bobby Henon, would delay the implementation of those changes for one year, and was approved by the committee in a narrow 10-7 vote.

Domb and Green were joined in opposing the bill by the more liberal wing of Council, which includes all four freshmen — Jamie Gauthier, Kendra Brooks, Isaiah Thomas, and Katherine Gilmore Richardson – as well as progressive stalwart Helen.

The other bill, by Clarke, would reduce by 10% the value of the tax abatement on commercial properties and will also take effect in January 2022. If adopted, the bill would initially produce about $1.3 million in annual revenue, before rising up to $5 million to $7 million per year, Dubow said. The committee approved that bill unanimously.

Tuesday’s hearing offered the strongest sign yet that the legislation is headed toward passage. But the bills will still face opposition and could be changed again as they make their way through the legislative process.

Jerry Jordan, head of the Philadelphia Federation of Teachers union, testified that the coronavirus pandemic has already wreaked havoc with the School District’s budget and delaying cuts to the residential tax abatement, as Henon proposed, will cost the district even more tax revenue.

The bill, he said, “demonstrates that our city is once again prioritizing wealthy developers over our school children.”

On the other side of the debate, developers who begrudgingly accepted the compromise version of the legislation nonetheless warned that it could end Philadelphia’s recent development boom.

Mo Rushdy, treasurer of the Building Industry Association, said his group supported the construction tax bill because it recognizes “an urgent need for affordable housing.” But, he said, “we do not do so with any enthusiasm whatsoever. Many projects will no longer be feasible because of the increased costs.”

EUROPE

UK: London retailers & other businesses face £2.8bn business rates bill next year

• 70,000 London shops, pubs, restaurants & hotels face £2.8bn business rates bill when the tax relief ends
• All business premises will return to normal business rates liabilities from April 1 next year
• The government has not yet indicated if it would provide targeted support or to extend the one- year business rates holiday

Almost 70,000 business premises across London face a combined business rates bill of £2.8 billion from next April without discerning targeted support, experts have warned.

Real estate advisory firm Altus Group said that with the one year business rates holiday set to end on March 31 next year, 66,374 business premises – including retailers – across London’s 33 local council areas will return to normal business rates liabilities.

Altus Group said this would total £2.79 billion for the 2021/22 tax year, which begins April 1.

In March this year, just as the Covid-19 crisis started to grip the UK, Chancellor Rishi Sunak wrote off business rates bills for the current financial year in an attempt to negate the economic impact of the pandemic.

The one-year business rates holiday applied to all occupied retail, leisure and hospitality premises irrespective of their size.

However, the government has still not yet revealed if it would extend the business rates holiday or introduce measures that offer targeted support for worst-affected businesses.

“Whilst next April cannot signal a return to pre pandemic levels of property taxes it must strike a balance with public finance affordability,” Altus Group head of property tax Robert Hayton said.

“Adjusting rateable values used to calculate bills, for those properties under appeal, reflecting the profound effect of the pandemic in values ahead of new bills being issued next year is part of the solution which will need to be supplemented by additional targeted support to where it is most needed.”

Earlier this month, Altus Group projected that the UK’s Big 4 grocers – Tesco, Sainsbury’s, Asda and Morrisons – along with Aldi and Lidl will save around £1.87 billion in business rates tax breaks this year despite sales soaring during the pandemic.

This is set to represent more than one sixth of the total £10.1 billion business rates bill which has been written off for all businesses during the year.

Meanwhile, London Mayor Sadiq Khan has urged the government to extend the business rates holiday to provide a lifeline for the capital’s retailers.

UK: A business rates cut would be the perfect Christmas gift from Rishi Sunak

We should scrap the current outdated approach and replace it with a fair and sustainable business rates system.

This Christmas marks the end of a ‘once in a lifetime’ year for retail, when many of Britain’s shops have been closed for extended periods due to the coronavirus pandemic.

While the high street is enjoying comparatively positive trading as people stock up for Christmas following the relaxing of restrictions earlier this month, the industry still needs a shot in the arm to support it through these unprecedented times.

Retail was already under pressure before Covid struck.

Competition from online shopping was growing rapidly, but the truth is that retailers were adapting – using online sales, mobile phone apps and click and collect schemes to increase trade.

Business rates are too high. UK property taxes have grown so much that they are now the highest in Europe.

Most recognise the essential role that shopping centres and high street stores play as a feature of the community. Physical retail is crucial in supporting jobs and local economies. To take an example of this, the Broughton Centre near Chester employed nearly 2,000 people before Covid, with the centre contributing £53 million to the Flintshire economy each year.

That is one of the reasons why British Land is sponsoring the new All Party Parliamentary Group on the Future of Retail; cross-party support will be crucial in securing the future of our high streets and supporting the people they employ as we recover from the Covid pandemic.

The main issue is simply that shops have obligations that online-only retailers escape.

The most burdensome of which is business rates: a local tax that must be paid to the council regardless of the commercial success or not of the business concerned.

This tax on physical retail has put the high street at a serious disadvantage, and with Covid-19’s impact on top, it threatens to tip many shops over the edge.

Business rates are a charge on most non-domestic property, covering everything from pubs, restaurants, and shops to warehouses, factories, and holiday homes.

It is calculated using a property’s ‘rateable value’, or the estimated value of the property on the open market. Accurate and up to date assessments of this value are therefore essential.

Taxes which are too high can have huge effects on the wider economy and prospects for jobs and growth.

And business rates are too high. UK property taxes have grown so much that they are now the highest in Europe.

In fact, they have risen spectacularly compared to rental values in the retail sector – more evidence that they are not a fair reflection of the value of the properties being taxed. As figures from REVO, the retail property professional body, show, in March 2020 business rates in England were 87% higher than in 2001, whereas retail rents were only 17% higher over the same period.

Business rates also penalise high streets in some regions more than others.

We know from recent research that over 75% of the areas of England and Wales paying the highest rates as a proportion of earnings are in the North and Midlands, the same regions the Government wants to help to “level up” because they face comparative difficulties in terms of creating jobs and growth.

The main task is ensuring there is a fair and level playing field between physical, online, large and smaller retailers.

The Government’s decision to suspend business rates in the first lockdown in March this year was therefore absolutely vital: retailers could not trade, so it was unfair to expect them to pay fixed taxes on their business.

It also served, however, as a recognition that the current system, which taxes businesses on their rateable value regardless of their profitability, is unfair.

This is why the Government has implemented a fundamental review of business rates, which is expected to report in 2021. The key question then is what replaces business rates?

The first task, given ongoing restrictions, is to extend the suspension of business rates well into the new year to give those retailers on the brink at least a fighting chance of coming back. But that cannot go on indefinitely. There needs to be a replacement that is fair, practical and sustainable.

There are solutions here.

Simplest would be a reduction in the rate – a substantial reduction across retail property is long overdue and we would suggest 40% is the kind of figure needed.

The Government could also move to a system of annual revaluations, rather than every five years or more which is the present situation, ensuring rates reflect market conditions and the current rateable value of the property.

Finally, the Government could extend the rates relief on empty retail units to 12 months and introduce a 50% rate relief after this period, to reflect the reality that more and more space is going to lie empty until the market thrives again.

Business rates currently bring in around £26bn for the Treasury, so these reforms would create a tax shortfall of part of that, but this could be filled in a number of ways that reflect the changing balance between physical, shop-based retail and other types who escape the responsibilities shops take on.

Options might include an online sales tax, a turnover tax, or delivery charges.

The main task is ensuring there is a fair and level playing field between physical, online, large and smaller retailers.

The best business rates solution is also one which will give our shops a fighting chance, support jobs and local communities, and allow our high streets to thrive: we should scrap the current outdated approach and replace it with a fair and sustainable business rates system.

UK: To save the high street, first fix business rates

The UK’s property-based tax is not fit for a post-pandemic world. Even before Covid-19, a stroll down the high streets of Britain’s less prosperous towns, pockmarked with boarded-up shops, could be a dispiriting experience. The pandemic is making a bad situation much worse. The recent failures of Arcadia and Debenhams alone have put at risk 25,000 jobs and 600-plus stores, many of them “anchors” of town centres or malls. The causes of the retail meltdown, including the online shopping boom, are complex; remedies will need to be no less so. But one urgent reform priority is the property- based tax known as business rates.

Not all store chains are in crisis. Food retailers’ revenues have surged as they have picked up sales from consumers shielding at home, and from hospitality businesses and “non-essential” retail rivals hit by virus restrictions — though grocers have faced heavy costs from scaling up operations to meet demand. After a backlash over £900m dividend payments this year, Tesco bowed to pressure to pay back what it saved from the government’s one-year business rates “holiday”; rivals such as Wm Morrison, J Sainsbury and Asda followed suit.

The estimated £1.8bn the supermarkets are returning could help to fund a one-year extension of the broader rates holiday from next April — which  the government should announce now to give struggling retailers and hospitality businesses a vital breathing space.

A thorough revamp should then aim to make business rates fit for purpose. Their principle remains sound; easy to collect and hard to evade, property taxes to fund local amenities date back centuries. The system introduced in 1990 — a tax linked to assessed rental values — ran smoothly for a while. But the tax rate has soared from 34 per cent of “rateable” values to more than 50 per cent, partly to maintain revenues after successive governments introduced reliefs for smaller businesses that left 600,000 paying no rates at all.

Rateable values, meanwhile, became disconnected from the rents they are meant to reflect. They were not revalued between 2010 and 2017, when retail rents slumped in deprived areas but soared in the richest, and retail sales were shifting rapidly online. Transitional arrangements phase in rate increases after revaluations to avoid sudden big jumps, but also slow reductions — which retailers say leaves depressed high streets in the Midlands and northern England in effect “subsidising” affluent parts of the south. The next revaluation is in 2023, so after the rates holiday retailers will be paying rates that reflect pre-pandemic values with little relation to today’s reality.

To make the system workable, the provision that business rates are supposed to raise a similar inflation-adjusted total each year — currently about £26bn — should be dropped. Reliefs should be reviewed and many phased out, and the rate rebased to closer to its original level. Revaluations should be annual, rapidly reflecting changes in conditions. Such reforms could also help to ease the transition for office property, which faces potentially seismic changes if more people choose to work from home post-Covid.

What they will not do is level the playing field with online-only retailers, which pay much lower rates than groups with lots of high-street stores. A digital sales tax would capture some of the shift in sales but would need careful structuring to avoid simply adding to the cost burden of store-based retailers that have expanded online. Such an idea may merit future discussion. The priority today is to ease the business rate pressure on retailers and slow the retail shake-out. Towns and cities need time and space to manage the transition to the high street of the future.

Author:

• Paul Sanderson, President | psanderson[at]ipti.org

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