IPTI | Update on U.S. & EU Property Tax Issues: May 2023

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

Illinois: Cook County’s property tax system needs reform. Here’s how to fix it.

Accuracy in assessments, fair hiring, reforming the tax appeals process are some measures that must change, former Cook County Clerk David Orr writes.

New reassessments, mayoral campaign promises, criminal convictions — the property tax system seems to be constantly in the news in Chicago and Cook County.

In part that’s because property taxes are simply far too high, mainly a result of over-reliance on this revenue source to fund our schools. In part, it’s the legacy of a corrupt assessment system and ongoing efforts to reform that system.

One top priority for reform is the data modernization bill sponsored by state Rep. Will Davis and backed by Cook County Assessor Fritz Kaegi.

HB 1288 would bring the assessor’s office in line with other large jurisdictions that require that large commercial properties submit detailed data on income, expenses and vacancies. That’s the data most property owners submit when they appeal their assessments.

The measure would increase accuracy and would likely reduce the need to appeal. It would particularly help neighborhood businesses, which should not be assessed based on regional assumptions.

It’s based on legislation in New York City and mirrors requirements in the majority of large counties across the country, which coexist with strong commercial development trends.

As Kaegi emphasizes, better data means fairer assessments — and HB 1288 will further boost his success in correcting systematic undervaluing of large commercial properties.

Other legislation now under consideration would fix some of the problems with tax sales of delinquent properties, in which low-income homeowners can now lose their homes and their entire equity over relatively small shortfalls.

These would lower interest rates and consider establishing payment plans for late taxes; ensure troubled homeowners have access to information and resources; and close huge sale-in-error loopholes that provide huge unearned profits to private equity investors.

Other measures seek to replenish the county’s Indemnity Fund, which is supposed to reimburse homeowners for lost equity in tax sales, but which is hopelessly underfunded.

Meanwhile, things may be changing at the Cook County Board of Review — the agency that considers appeals to assessments — with two new commissioners elected in November.

The County Board recently mandated a feasibility study of integrating the board into the computer system now being adopted by the rest of the county’s tax agencies. Integration would reduce delays and save money.

Late last year, outgoing commissioners rushed through an employment plan, more than two years after the county’s inspector general found politically motivated hiring practices at the agency. The plan must be followed, and the rest of the IG’s recommendations must be implemented, including a transparent database to track hiring processes.

And the County Board should look into the $100,000 contract to an outside legal firm to conduct an internal investigation after a Board of Review employee was charged in a bribery scheme. The firm reported reaching no conclusions after the employee refused to cooperate, and we’ve been told no written report was completed.

We need a forensic audit of appeals handled by that employee, who pleaded guilty last year. Was he telling the truth when he claimed he was just the middleman, or when he changed his story after his arrest? Two previous federal investigations have revealed groups of agency employees working together in similar schemes.

Kaegi recently reset the assessments of 559 large commercial properties to their 2021 values, giving new board members a chance to reconsider reductions totaling $2.7 billion granted by their predecessors. Those reductions were part of a larger reduction of tax burden for the largest property owners by the old Board of Review.

And after years in which assessment officials reaped huge political contributions from property tax attorneys who practiced before them — and who benefited from skewed assessments that shifted the burden to homeowners and small businesses — new Board of Review Commissioner Samantha Steele followed Kaegi’s lead and refused to accept donations from property tax attorneys. This needs to become the standard for all commissioners.

Finally, it’s time to roll back the Property Tax Appeals Board, a third level of appeal that was extended to Cook County by Republicans in 1995 over the objections of the Civic Federation and many others.

PTAB now has a huge backlog of cases and serves mainly to further erode big property owners’ share of the tax burden. In addition, we must raise appeals standards so that PTAB and Board of Review are no longer granting excessive reductions based on “junk” appraisals.

Like death, property taxes will probably always be with us. But at least as far as taxes go, we deserve the maximum amount of transparency and fairness.

Pennsylvania: From slots to mills, big property owners aim for smaller property tax bills

With Allegheny County’s property tax appeal system now recalculated in favor of owners, schools and municipalities large and small are preparing to take hits.

From the Rivers Casino Pittsburgh to U.S. Steel’s Clairton Coke Works, big commercial property owners are looking to take advantage of a unique tax appeal season to save money — at the expense of schools and municipalities.

An archaic property assessment system, now reshaped by lawsuits and resulting court rulings, has created “assessment chaos,” which is making it hard for governments to budget, said Ira Weiss, solicitor for the Pittsburgh Public Schools. “The bottom line is: It’s a mess.”

Allegheny County’s Board of Property Assessment, Appeals and Review [BPAAR] has received 11,660 appeals of 2023 tax assessments. That’s notably higher than the average of around 8,000 appeals per year filed from 2015 through 2021.

This year’s appeals are 1,000 lower than the number filed last year, but there’s a key difference. Last year, nearly 90% of appeals were filed by school districts hungry for more revenue as property values rose.

Appeals of 2023 tax bills, by contrast, came in almost as heavily from property owners looking to lower taxes (44% of appeals) as they did from school districts (54%). Municipalities — the only other entities that can appeal — consistently account for around 2% of filings.

Driving the change in the mix is a judge’s decision in a taxpayer lawsuit that tilted the tax math in favor of property owners — but only if they appeal. And many sophisticated property owners are doing just that.

U.S. Steel, for instance, is appealing the tax bills on 95 properties, virtually everything it owns in Allegheny County. The steelmaker has filed the most appeals of any property owner in the county, covering property assessed at around $58.5 million.

Clairton is home to 32 of the U.S. Steel parcels under appeal. The Mon Valley city relies on the steelmaker for almost one-third of its total tax base, according to Mayor Rich Lattanzi.

To have all of that under appeal is “huge for us,” Lattanzi said. The revenue loss could “be catastrophic for the City of Clairton,” he said, adding that U.S. Steel has helped his government and he believes the company doesn’t want to hurt the home of its coke works.

U.S. Steel is appealing its assessments to “bring its property values back into proper alignment,” according to spokesperson Amanda Malkowski, and to correct the “improper calculation” that has affected the taxes of property owners for years. The steelmaker doesn’t intend to apply any savings it achieves until 2024, so it won’t upend the current operating budgets of schools and municipalities.

But after that? “We would hope to be assessed fairly moving forward,” Malkowski wrote.

School districts contend with ‘nitroglycerin’

The genesis of the property owner appeals is a lawsuit alleging that Allegheny County engineered years of unfair property taxation for thousands of properties. It led Common Pleas Judge Alan Hertzberg to change the common level ratio [CLR], a factor used in calculating the assessments of properties that are subjects of appeals.

The effect of the new ratio on assessed values will depend on an involved property’s market value and whether it has any tax exemptions, but could in many cases bring a reduction of around 20%. That reduction would carry into future years until another appeal or a reassessment occur. The reduction is only available to owners who file appeals and prove that the market value of their property warrants the reduction. The deadline for filing appeals was March 31.

Whereas appeals under the prior ratio often brought increased revenue to districts, now they could instead “knock 30% off of the value” used to determine the tax bill, according to Weiss. For school districts, he said, an appeal is now “like picking up a container of nitroglycerin and not knowing if it is going to blow up.”

The fact that 44% of appeals were filed by property owners represents “a dramatic shift in the breakdown from last year,” said Michael Suley, former manager of the county’s Office of Property Assessments and a consultant to the plaintiffs in the lawsuit. “The pendulum is swinging the other way.”

Why didn’t even more owners appeal in a county with some 580,000 properties? “What that tells me,” Suley said, “is that the property owners still don’t know how to do the math” to determine whether they can save money via appeal.

Most of the appeals involve residential properties, but the most consequential may be those related to commercial parcels. Countywide, owners of 877 commercial properties are appealing their 2023 tax bills.

One of those properties, the Rivers Casino, carries the highest assessment of any taxable property in Allegheny County, at $240,905,100. According to Pittsburgh’s property tax calculator, that likely means around $5.5 million annually in revenue for the city, county and Pittsburgh Public Schools.

A Rivers Casino spokesperson declined to comment.

A significant recalculation of the casino’s tax bill alone could shave $1 million or more from public coffers. And that’s one property.

“The impact is going to be significant,” said Weiss. It could cut into the budget of not only Pittsburgh Public Schools, but of other districts with large commercial properties, including Montour and Upper St. Clair, which his firm also represents. Schools could theoretically make up lost revenue by raising tax rates, known as millage, but those increases are limited by state law. “You can’t tax your way out of this problem.”

In Clairton, ‘shoestring’ budgets and big steel

Mon Valley communities like Clairton are already feeling the economic pressures of a declining tax base and the rising costs of municipal services. Clairton City School District receives about 3% of its total budget from U.S. Steel, and lower corporate contributions could mean potential budget shortfalls, said Larry Nicolette, the district’s business manager. That’s made it difficult to build up funds or include any slack in their budgets.

The district “started at less than zero and we’re building up,” he said. “We’re trying to provide a world-class education, but we’re on a shoestring budget as well.”

The City of Clairton was under Act 47 — the state program for municipalities experiencing “severe financial difficulties” — for over 25 years starting in the late 1980s. The city exited the program in 2015 after combining jobs, using the lowest responsible bidders for contract work and implementing other cost-cutting measures, said Lattanzi, the mayor. But things are still tight.

Going back into Act 47 is “always a concern,” he said. “It’s always in the back of your mind.”

“We’re probably at the end of the rope as far as our savings,” he said.

“The cost of everything is up,” Lattanzi said. “If we lose any additional revenue through taxes, we may have to do a tax increase for the City of Clairton.”

Lattanzi noted that U.S. Steel works with the city to build playgrounds and hang banners touting veterans, plus donates funding that has helped his administration to buy and renovate a community center, purchase a dump truck, build a baseball field concession stand and prepare land for redevelopment.

Nicolette added that the company’s craftspeople have helped paint and lay carpet in the school.

“With U.S. Steel,” said Lattanzi, “it’s very important to have a relationship.”

In Munhall, paving and parks at stake

Further up the Monongahela River, U.S. Steel and affiliates filed 12 appeals on properties in Munhall. The borough’s current financial outlook is stable, according to borough manager Seth Abrams, but “I wouldn’t say we’re flourishing.”

U.S. Steel makes up about 3% of Munhall’s total property tax revenue, according to Abrams, much of which comes from one property in The Waterfront.

Abrams said the borough is looking for places to potentially cut costs in the future.

“Overall, we are concerned about the appeals in combination with the CLR that the courts have handed down,” he said. “We did budget for a potential loss of some revenue and did proactively have a small millage increase.”

Abrams emphasized that Munhall has no concrete plans to trim services, but officials have begun to take note of services and investments that could be on the chopping block, like paving projects or a park rehabilitation.

He regretted, too, the practice of many school districts and some municipalities of appealing the assessments of new homebuyers, using the sale price as evidence to wring assessment increases from BPAAR. “We need the funds to maintain the services,” he said, “but to dump it on the people who are moving into town is not the welcome we want to give them.”

Potential fix not politically popular

Generally, property taxes are supposed to be based largely on the value of the property.

Allegheny County’s system — in which most tax bills are static while schools and municipalities appeal the assessments of recently sold properties — is rooted in the county’s decade-ago decision not to regularly reassess properties.

Other than Pennsylvania, “There’s no other state out there that allows counties to go 10 years without a reassessment,” said Dominick Gambino, owner of Diversified Municipal Services, a company that consults for schools, municipalities and counties regarding assessments. He managed Allegheny County’s Office of Property Assessments from 2001 through 2003, leading a reassessment of all properties.

The common level ratio is intended to achieve rough equality between years-old assessments — like the decade-old values that still determine the tax bills of most Allegheny County properties — and newer assessments based on recent sales.

Gambino, though, said the ratio “does not achieve equity, and it’s kind of like a Rube Goldberg machine. They took something very simple and made it so complicated that people can’t even understand it.”

The only fair system, he said, involves routine reassessment of every property.

Weiss said the county’s decision not to reassess has left the property tax system “in a shambles. … It is my hope that whoever is elected immediately addresses this problem.”

Reassessments, though, have been politically fraught, as they tend to boost at least as many tax bills as they reduce.

At an April 19 town hall debate sponsored by PublicSource and NEXTpittsburgh, all of the candidates for county executive were asked whether they would reassess all properties.

One, state Rep. Sara Innamorato, pledged to “create a system that people have buy-in to, so it needs to be transparent. It needs to be regular. It needs to be without bias.”

No other candidate, though, expressed any intention to conduct a blanket reassessment.

“Let’s acknowledge that we have a horribly unfair system of taxation here in Allegheny County,” said city Controller Michael Lamb. “… I can’t support a reassessment until we can protect homeowners from these massive increases that are likely to happen to them.”

Wisconsin: ‘Dark store’ ruling may not shed light on future of big-box store property taxes

A ruling from the Wisconsin Supreme Court is leaving unanswered questions about whether “dark store” property tax breaks for big-box retail stores are truly a thing of the past.

The court ruled against the retailers Feb. 16 in a long-awaited decision that said businesses cannot lower their property tax bills by paying the same amount for active stores as they do vacant stores.

The issue has long pitted big-box operators like Home Depot and Target against local governments who contend that stores are getting unfair tax breaks at the expense of homeowners and other taxpayers.

While the Supreme Court was preparing its ruling, the City of Burlington postponed a court battle with Walmart attorneys who are trying to slash a store’s assessed value by more than $4 million.

But with the Burlington case now heading back to court May 19, observers are offering conflicting opinions about whether the Supreme Court finding has resolved the “dark store” issue as absolutely as court decisions sometimes do.

The League of Wisconsin Municipalities, which opposes the tax breaks for businesses, says the court ruling is decisive.

Curt Witynski, a consultant to the statewide association of cities, said no retail store owner should expect any judge to contradict the Supreme Court’s finding that dark stores cannot be used to determine the value of stores that are open for business and generating income.

“That argument just goes nowhere now,” Witynski said. “That is just completely gone.”

Business groups, however, assert that the court ruling in a case that involved a Lowe’s Home Improvement store is not an unqualified victory for cities and other tax collectors.

Tom Larson, executive vice president of the Wisconsin Realtors Association, said that while the Supreme Court brought “a little bit more clarity” to the issue, it did not create a universal framework for assessing big-box retail stores in the future.

If Lowe’s and other stores cannot be compared with vacant properties, Larson said, retailers will look for other ways to avoid paying needlessly high taxes.

“I don’t think it resolved the issue,” he said.

Referring to store owners, he added, “They’re still trying to figure out how to value these properties.”

The powerful lobbying group Wisconsin Manufacturers & Commerce joined the Supreme Court case by filing a brief urging a decision in favor of dark store taxation.

In the brief, group attorney Scott Rosenow wrote that the court’s ruling would be far-reaching.

Rosenow now says the ruling does not close the door on dark store taxation methods. The court “left open an avenue for businesses,” he said in a written statement.

“Although Lowe’s lost this case under its specific facts,” he wrote, “the Supreme Court’s discussion of the law should help ensure that local governments don’t inflate a property’s assessed value in order to excessively tax it.”

The dark store issue emerged after a different court ruling in 2008 allowed for setting a retail store’s taxable value based on similar properties that were vacant.

Walmart, Target, Menards and other large retailers began arguing statewide for lower values on their stores, in many instances leading to court fights with cities.

In the Burlington case, Walmart sued the city and asked a judge to lower the taxable value of its store at 1901 Milwaukee Ave. $8.6 million to $4.5 million.

That would reduce the company’s tax bill in Burlington from $160,000 to about $80,000 a year, leaving the city with a revenue shortfall that would necessitate higher taxes for other property owners.

A status hearing in the Burlington dispute is scheduled for 11 a.m. May 19 in Racine County Circuit Court.

Local government officials contend that active stores are inherently more valuable and, therefore, should have a higher value for tax purposes.

Businesses say the value of the land and building has nothing to do with whether a store is open for business.

After trying for years to lobby state lawmakers to close the loophole, municipal leaders in Wisconsin decided to leave the matter to the courts.

The Lowe’s case originated in Walworth County after the City of Delavan assigned an $8.9 million value to the Lowe’s home improvement store at 2015 E. Geneva St.

Based on dark store comparisons, the company insisted that the property value was just $3.6 million.

After losing at both the circuit court and appeals court level, Lowe’s appealed to the Wisconsin Supreme Court.

In their ruling, the justices said dark stores are generally less valuable than active stores, and therefore retailers cannot expect appraisers to value both kinds of properties the same way.

“A site that can sustain a business is more valuable than one that cannot,” the ruling states.

Business groups, however, emphasize that the court also stated that “dark” stores typically are those that have been vacant for a long time, suggesting that perhaps recently vacated stores could be used in determining the value of active stores.

Witynski said that sort of argument is different from the dark store method, and it raises the possibility of new disputes over big-box taxes.

“That was their bread-and-butter argument,” he said. “They’ll have to come up with a different argument now.”

EUROPE

Germany: Property tax: wave of lawsuits due to false assessments and higher taxes

The president of the association Haus & Grund Germany Kai Warnecke said that people were irritated because the notifications did not allow any conclusions to be drawn as to how high the burden would be.

The standard land value seems unreal to them, and the tax imposed has little to do with reality. Holznagel and Wernecke appealed to the states that use the federal model to quickly enact a simple property tax law themselves so that the municipalities are on the safe side. The necessary data are available.

The so-called federal model was criticized by tax experts as particularly complicated even before the churchyard report. The federal model currently applies in eleven federal states: these include Berlin, Brandenburg, Thuringia, Saxony-Anhalt, Mecklenburg-Western Pomerania, Schleswig-Holstein, Bremen, North Rhine-Westphalia, Rhineland-Palatinate and, in a slightly modified form, Saarland and Saxony. Each of the other federal states have their own property tax laws.

The report lists a number of points that make the Property Tax Act illegal. Kirchhof considers the standard land value to be particularly problematic because the values show “systematic valuation deficiencies” and are “sometimes hardly comparable”.

The value is based on the property purchase prices in a municipality and the statistical net cold rent. The report therefore sees the danger that the principle of equality of the Basic Law will be violated by the strict application of the standard land value.

Another point of criticism are the possible additional costs (higher property tax) for the property owners. “The final property tax burden is only certain when the municipalities have decided on the assessment rates,” the report says.

“However, the structurally too high valuations of real estate due to incorrect land values or flat-rate net cold rents in view of the age of real estate, remaining useful lives or value-reducing factors that have not been taken into account will result in unconstitutional overloading.”

Greece: Property transactions probed

Tax administration to target suspicious realty transfers, notaries and land registry officials

The increase of the tax-free threshold for parental concessions and donations to 800,000 euros each and for property transfers, many of which are carried out in cash, have activated the monitoring mechanism of the Independent Authority for Public Revenue (AADE), which will root out violations of tax legislation.

Based on the tax administration’s planning, AADE will probe the cases of thousands of property transactions, parental gifts, donations and inheritances, as well as monitoring more than 100 notaries and land registry officials.

Soaring real estate prices and high demand from Greeks as well as foreign investors have sounded the alarm at AADE, which is setting out to investigate 2,500 cases.

The monitoring process will also include older cases, dating since 2017, which concern properties outside the objective values system and run the risk of falling outside the statute of limitations at the end of the year.

As far as notaries are concerned, the inspectors of the tax mechanism will seek out problematic cases that are related to donations and parental concessions following the increase of the tax threshold to €800,000, as well as checking the so-called ENFIA certificate; that means they will crosscheck whether the Single Property Tax for properties sold in the last five years has been paid in full.

Meanwhile, taxpayers who are tenants will need to declare in their tax statement the rents they paid last year, either for their main residence or their holiday home, or even for the house any children of theirs live while studying in another part of the country (student homes are declared as a secondary residence).

Tenants must also declare the details of their landlords. However, data for the period for January to May are already filled using the details collected last year for the “Power Pass.”

Furthermore, landlords will need to add in their tax declaration the details of their rented assets at Section 5 of the main form (E1), as leased properties constitute assets considered for the arbitrary assessment of taxpayers’ actual incomes.

UK: Retail groups call for business rates reform to save Britain’s high streets

Retail and hospitality groups have called for a reform of “unsustainably high” business rates.

Retail and hospitality groups have called for urgent reform of business rates, which are contributing to shop closures and job losses.

“Retail accounts for 5 per cent of the economy but pays more than one-fifth of business rates,” Helen Dickinson, British Retail Consortium (BRC) chief executive, said. “The overall industry tax take is unsustainably high and contributes to shop closures, job losses and stifled investment.”

“There must be a permanent freeze of business rates and a cut to the multiplier in the longer term,” she said.

UKHospitality chief executive Kate Nicholls agreed, saying: “Reform of business rates, further action to tackle energy costs and suppliers, and a reduction in the burden of red-tape and other operating costs are all vital if the sector is able to gain the headroom it needs.”

“The last few years have been some of the toughest the industry has ever had to face and the climate remains challenging, with energy bills soaring, costs rising and a chronic shortage of workers,” Nicholls added.

Dee Corsi, chief executive of the New West End Company, also joined calls to review business rates.

“It is time for a future government to make a bold move to reform or replace business rates, which have disproportionately hit high street retail businesses,” Corsi said.

Corsi also called for “targeted support” including introducing longer Sunday opening hours in the West End and reviewing the UK’s visa system to tackle workforce shortages.

Labour has pledged it would cut business rates for small firms by increasing the rates relief threshold, if in government, paid for by raising digital services taxes on giants like Amazon.

Starmer said: “Britain’s businesses already give so much to our economy, and hold a huge amount of potential and promise just waiting to be unlocked, but they’re being held back by 13 years of Tory economic failure.

Greg Hands, Conservative Party chairman, commented: “Labour have abandoned their pledge to abolish business rates. The only position they remain committed to is more unfunded, uncosted spending pledges.”

“We have a £13bn package in place now to support firms with the cost of business rates,” hands said.

UK: Rates reform brings some relief along with a bundle of red tape

On the surface, the changes proposed in the new Non-Domestic Rates Bill look positive.

The bill states there will be more frequent revaluations, and announces measures to support decarbonisation and investment, including a relief for low-carbon heat networks and the new 12-month improvement relief from April 2024.

This is a move in the right direction – although we would prefer annual revaluations and believe limiting the new relief for only 12 months will not encourage long-term investment. The bill also plans to make law the three-year transitional relief scheme and remove downwards transition. There are also proposals to digitalise rates: again, measures we support.

However, closer inspection brings concerns about the bill, since it represents a complete change in terms of the obligations on the Valuation Office Agency (VOA) – obligations now being put on the ratepayer.

The new requirements for the annual provision of information and the ‘duty to notify’, whereby businesses will need to provide updates on rents and lease information as well as trading information – even where there have been no changes – will be cumbersome.

It will mean an additional 700,000 businesses, which currently pay no business rates due to reliefs, will have to send information to the VOA in a bureaucratic exercise that will not result in any increase in the business rates tax-take. It may also put small businesses even further at the mercy of rogue rating surveyors, unless the profession is regulated.

This new regime is backed up with penalties and fines for failure to disclose information properly, which could run into tens of thousands of pounds with imprisonment for false statements.

Meanwhile, no similar obligations have been placed on the VOA to produce its assessments quickly, and there is silence on any timetable associated with transparency.

The bill also says nothing about tackling the real issue with business rates: at over 50p in the pound, it is just too high a tax on business. If the government really wants to help businesses, it must reduce the multiplier to levels they can afford – no more than 34p in the pound.

So, we have our doubts and will be continuing our lobbying campaign among MPs as this bill makes its way through parliament.

Authors:

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

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