Member News

Update on Property Tax Issues: August 2019

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

Arkansas: Pulaski County judge rejects Walmart’s property tax appeal
Pulaski County Judge Barry Hyde on Wednesday rejected Walmart’s bid to cut its Pulaski County property tax assessments by nearly half, finding in part that the company’s appraisal reports were “fundamentally flawed.”

Directly at stake in the case is about $4.5 million in tax revenue for school districts and local governments in the county. But Walmart’s appeal has drawn attention from local government officials throughout Arkansas, who view it as the first serious test of the so-called dark-store theory in Arkansas.

Hyde, who is not a licensed attorney, acts as the county court judge in property tax appeals. He presided over a two-day hearing last month in Quorum Court.

The private appraiser hired by Walmart faced questions during the hearing about steps he took to investigate land sales used to come up with data points comparable to the company’s properties. Hyde ruled that the testimony “demonstrated [a] lack of investigation into the appropriateness of some of the comparable sales used.”

Observers for weeks have said that both Walmart and Pulaski County have prepared as if the decision will be appealed to Circuit Court and ultimately the state Supreme Court.

If the theory prevails in Arkansas, one assessor has warned that more than $100 million in tax revenue could be at stake.

Walmart and other big-box retailers have advanced the “dark store” legal argument in other states, to mixed success.

It holds that such stores should be valued, for tax purposes, as if they are closed and vacant because the buildings are so customized to their own needs that the buildings cannot fetch a price on the open market that compares to assessed values.

The 10 properties at the heart of the case include eight supercenters and two Sam’s Club stores thatPulaski County assessed at a combined $145 million.

Walmart Inc. first petitioned to lower the assessments to $93.4 million total. It later sought a $74.3 million valuation, which would have been a 48.8% reduction.

 

Illinois: Pritzker launches property tax task force
The group has a tight turnaround deadline – within 90 days, it must report back with administrative, electoral and legislative changes it suggests.

Gov. J.B. Pritzker launched a task force Friday designed to “reduce local reliance on property taxes.”

The group has a tight turnaround deadline—within 90 days, it must report back with administrative, electoral and legislative changes it suggests. The final report is due before the end of the year and should include “a suite of short- and long-term solutions to provide relief for homeowners.”

The idea was first pitched during the debate over the graduated income tax. Some Democrats threatened to withhold their votes without promises the state would do something to address constituents’ property tax burden.

“This bipartisan, bicameral property tax task force that will review the entirety of our property tax system” and study best practices in other states, Pritzker said in a statement.

“Together, we’ll ensure our children receive the quality education they deserve even while we provide more property tax relief for our homeowners and make our system more fair for everyone,” he said. Local school districts often make up the largest share of a property owner’s tax bill.

Pritzker’s two appointees to the group are Emily Miller, his First Assistant Deputy Chief of Staff for Policy, and Cameron Mock, the Chief of Staff of the Governor’s Office of Management and Budget. The General Assembly’s four other legislative leaders will appoint their own members.

The task force will also get help from the state’s Department of Revenue, Board of Education and Office of Management and Budget.

 

California: Splitting the Tax Roll Would Threaten Shopping Centers Across California
If the California Schools and Local Community Funding Act passes in 2020, it could trigger the closure of strip malls and small businesses across San Diego County as owners struggle to keep afloat due to massive spikes in their property taxes.

This deceptively named measure would end Proposition 13 protections for businesses, creating a “split roll” for property tax assessment. And Prop. 13’s residential protections could be next.

Any property tax increase on mall owners will most likely be passed onto store owners within the mall, and store owners generally pass the increase onto the customer. In essence, we will pay the tax through higher prices on goods and services.

Many mom-and-pop businesses are having a hard enough time surviving as they compete with online retail giants such as Amazon and cope with new minimum-wage requirements. In January the minimum wage increased to $12 per hour for large employers (26 employees or more) and $11 per hour for the rest. The minimum wage in California will rise to $15 in 2022, profoundly impacting small businesses.

If voters pass the California Schools and Local Community Funding Act, neighborhood strip malls will have a much tougher time meeting their financial obligations as stores close due to loss of revenue and increased rents.

Opinion logoMall closures are not limited to San Diego; they are closing all over the country. A recent report estimates that 20% to 25% of malls will shutter over the next five years, largely because of store closures. Many mall stores are closing for the same reason they’ve always closed: they are not meeting consumers’ needs. Technology is playing a big role in that, but it is not the only reason.

In California, high taxes have driven out many businesses, and it’s been widely reported that the soaring cost of housing and other living expenses in California is forcing many residents to move as well. California remains one of the highest-tax states in the nation. The latest gas tax hike has made fuel more expensive in California than Hawaii.

The California Schools and Local Community Funding Act would add to all these taxes by amending Prop. 13 to require reassessment of business property every three years starting in 2021, not just when a property is sold, as is the law now.

The state Legislative Analyst’s Office projects that the split-roll proposal would generate $6.5 billion to $10.5 billion in additional annual revenue, which would be divvied up between schools and local governments. However, the unintended consequences of any additional tax increase is a negative effect on our local economy for years to come.

Prop. 13 was a landmark when it passed in 1978 because it helped struggling homeowners deal with skyrocketing property tax increases. Many of these homeowners were seniors on fixed incomes who were facing foreclosure because they could not make their property tax payment.

But Prop. 13 did not eliminate property tax increases. It reset assessments to 1% of the 1976 value, then limited assessment increases to 2% a year, and allowed full reassessment only when the property sold. This kept the growth in taxes manageable. Many fear that if the split-roll measure passes, its backers will come next for the residential side of Prop. 13, and the cycle of foreclosures and evictions will resume. That’s a problem that should concern everyone.

The need to better educate our students is clear as California ranks among the lowest in the country in terms of math and English test scores, and nationwide the achievement gap between disadvantaged and well-off students is as wide today as it was for children born in 1954. What we need are innovative solutions to address our struggling schools, such as Career Technical Education internships, community volunteers in the classroom, and parental empowerment through school choice programs.

But the need for good schools must be balanced by smart economic decisions. The unintended consequences of splitting Prop 13. could outweigh any perceived benefits. Splitting the tax roll will only shift the tax burden onto consumers who are already taxed enough.

As currently drafted, the California Schools and Local Community Funding Act is ill-advised and will most likely lead to some of the same economic and housing problems that Prop. 13 corrected. Let’s hope the voters are able to look at the unintended consequences of such a proposal and “just say no” to any additional tax increases in California.

 

Nebraska: 2019 Nebraska Property Tax Issues
Nebraska property taxes are the tenth highest in the United States, sales taxes are the ninth-lowest, and both income taxes and total state taxes are in the middle. Property taxes account for 38% of total state and local tax collections in Nebraska, the highest of any tax. Sales taxes are 29% of total tax collections, and income taxes are 26%. If property taxes, sales taxes and income taxes were equalized as sources of state and local revenue, property taxes would need to be reduced over $600 million.

Sixty percent of property taxes go to K-12 education funding. Nebraska state school aid is the second- lowest in the United States, while the local share of K-12 school spending is the second-highest.

Nebraska property taxes on agricultural land historically have been high in Nebraska relative to other states as a percent of net farm income. Since 1950, Nebraska property taxes on agricultural land are

46% higher than the United States average. In 2017 agricultural property taxes paid were 47% of Nebraska net farm income. When other taxes are taken into account this means that most Nebraska farmers or ranchers were paying 50-60% of their net farm income in taxes.

This agricultural property tax crisis has led to two efforts to place property tax relief proposals on the ballot. The 2018 initiative would have given property taxpayers a refundable state income tax credit of 30% of property tax payments, effectively reducing property taxes 30%. It also would have cost the state treasury $1.1 billion, 25% of the General Fund budget, and would have forced sharp cuts in state spending as well as major increases in-state sales and income taxes.

The 2018 initiative campaign was called off April 27, 2018 and did not appear on the 2018 ballot. However, property tax reduction groups are attempting to place a new version on the 2020 ballot, called the “35% solution.” This proposal would give property taxpayers a refundable state income credit of 35% of property taxes paid. It would work like this for a homeowner: $150,000 house x 1.6% tax rate x .35 = $840 refund. For a farmer or rancher it might look like this: $2.5 million farm x 1.2% tax rate x .35 = $10,500 refund.

Implementing the proposed 35% solution would cost $1.5 billion, which would require even larger state spending cuts and/or state tax increases. If Nebraska lawmakers cut state spending $750 million and increased state sales and income taxes $750 million, the state tax increase would be 17%. If there were no spending cuts, sales and income taxes would increase by 33%. If there were no state tax increases, state general fund spending would need to be reduced one third.

To avoid these sharp tax increases and spending cuts, lawmakers have tried to find a political path to property tax relief with enough votes to overcome legislative filibusters (33 votes) and a likely gubernatorial veto (30 votes). Several property tax relief bills were introduced in 2019 and a consensus bill, LB289, emerged late in the session. The product of intense negotiations among Revenue Committee members and other senators active in the property tax-school finance debate, LB289 would have:

  • raised the state sales tax rate from 5.5% to 6.25%, a 14% increase;
  • begin collecting sales taxes on candy, pop, bottled water, plumbing services, moving services and veterinary services for pets, among others;
  • increased cigarette taxes 56% to $1/pack;
  • provided state school aid of 33% of total education costs per pupil to all schools; and
  • limited school spending increases to consumer price index increases and growth in student numbers.

Every item on this list is politically controversial, and LB289 came up five votes short of the 33 votes needed to end a legislative filibuster. The proposal would have provided between $350-$500 million in property tax relief.

Rural senators did manage to tie passage of property tax reform with reform of state economic development programs. The economic development program overhaul–LB720–was stalled when a handful of rural senators withdrew their support after the property tax relief proposal was filibustered. This political hardball does provide an improved chance that if enough common ground can be negotiated before next January, both LB289 and LB720 could be enacted early in the 2020 legislative session.

There are many challenges and uncertainties ahead. Urban senators may feel their constituents are not being treated fairly under LB289–urban taxpayers will pay much of the higher sales taxes paying for property tax relief, but most of the increased school aid and property tax relief will go to rural areas. School districts across the state will want to evaluate the impact to them of modifying the complex state school aid formula. Counties in flooded areas may need state financial assistance in rebuilding damaged roads and bridges. Agricultural land property values could continue their gradual decline and be joined by associated declines in agricultural land property taxes assessed and paid (which most agricultural landowners would welcome).

The Governor might veto LB289 and the legislative veto override attempt might fall short. The proposed 35% solution may be on the 2020 ballot and voters could find it more attractive than LB289. The way ahead is anything but clear. But significant progress was made in 2019–LB289 appeared to have the support of at least 28 senators, which is something to build on. Stay tuned and hold on to your hat – it is likely to be a very bumpy ride.

 

New York: Tinkering with the Property Tax System Could Put Strain on NYC
Property taxes are a mess in New York City, and officials – even the mayor – appear reluctant to mess with them.

In fact, May Bill de Blasio said during an interview on radio station WYNC this past week, tinkering with the creaky property tax system could put too big a strain on an already strained city.

A report is expected shortly from a commission that the mayor and City Council put together in 2018 to look at the labyrinthine system of real estate excises. He warned the caller, though, that he would not permit any reforms that might be called for to strain the budget and keep the city’s expansive workforce from further expansion.

“We cannot end up with a system that reduces our revenue substantially, unless people want to see a change in the services provided by the city,” de Blasio said on air. “Right now I believe the city is at a point of some equilibrium: crime has continued to go down, the economy is strong, more jobs, city services are stronger in many ways than they’ve been. But we still have a lot of giant problems to address. And we can’t—in my view—reduce revenue without really negatively affecting the quality of life, and negatively affecting the economy and our safety.”

“For decades, tax laws have prevented assessments from rising more than 6% a year, even though property values in certain areas—such as de Blasio’s home neighborhood of Park Slope—have increased far more,” Crain’s New York Business recently reported. “Advocates argue this has forced a disproportionate burden on rental buildings, commercial properties and houses in outer-ring neighborhoods which are more likely to belong to minority homeowners.”

“We’re going to have to figure out how to make the system better, but not lose substantial revenue in the process. So, it’s not going to be a panacea to say the least,” de Blasio told the radio audience. “In the end, I gotta go with what is the quality of life of New Yorkers? How safe are we, how strong is our economy, how good are our services, what is the quality of life – and what do we need to sustain it?”

If the mayor was taking heat for the tax and budget picture, he was more concerned with the summer heat searing the city. He, Emergency Management Commissioner Deanne Criswell and Health Commissioner Dr. Oxiris Barbot updated New Yorkers on the heat emergency. The Mayor signed an Executive Order proclaiming a state of local emergency due to the extreme heat.

“New York City is dealing with a major heat emergency with temperatures in the high 90s this weekend,” said de Blasio. “Every single New Yorker must take this seriously. Drink plenty of water, stay cool and seek help if you need it. To limit strain on our energy grid, I have ordered both City government buildings and private office buildings to limit their energy consumption by turning thermostats to 78 degrees. Everyone must do their part to ensure safety until this heat wave passes.”

 

Delaware: Chancery judge to rule on possible new property tax assessments
A Chancery Court judge is expected to rule by the end of the year whether counties need to reassess property values. Attorneys for the ACLU, the NAACP and Delawareans for Educational Opportunities faced lawyers representing Delaware’s three counties last week.

The civil rights groups are arguing the state is failing to give schools enough funding to ensure students have equal access to a quality education. They argue counties have a duty to do new assessments.

Richard Morse is among the attorneys representing the civil rights advocates. He said the lawsuit in part calls for counties to stop collecting taxes based on outdated property tax assessments.

“The counties have violated the state constitution and state law by not reassessing those properties for many years,” he said.

About 80 percent of property tax revenue goes to school districts. But property values in Delaware have not been reassessed for more than three decades. Morse argues outdated assessments deprive disadvantaged students of needed funding.

“The number, you know, that the county has given each property as its assessment — each property as its assessment — is so far different from the true value, the fair market value of the properties,” he said. “And the values that counties have given are so non-uniform.”

If the judge rules in favor of the education advocates, another trial will be held to determine remedies. A separate trial against state officials for what the groups claim is inequities in the state’s education funding formula is scheduled for November of next year.

 

Pennsylvania: Court Reverses Philadelphia’s 2018 Assessment of Many Commercial Real Properties
In Duffield House LP v. City of Philadelphia–a case involving assessment appeals by approximately 700 owners and lessees of commercial and industrial properties in the City–Philadelphia County Court of Common Pleas Judge Gene Cohen held that the City of Philadelphia’s reassessments of commercial real property for the 2018 tax year violated the Uniformity Clause of the Pennsylvania Constitution, that the plaintiffs’ assessments must be stricken, and that the City must pay refunds to the plaintiffs (taxpayers that appealed their 2018 real estate tax assessments on or before October 2, 2017).

Background

The City is required to assess all properties in the City each year at the current fair market value of each property. The City completed the first countywide reassessments in a very long time in 2013, effective for the 2014 tax year.

In 2017, the City announced that it had better information to establish the value of commercial properties than it had in 2013 and began reassessing commercial and industrial properties in the City for the 2018 tax year. The City did not reassess residential properties for the 2018 tax year because it argued that studies showed the assessed values of residential properties already reflected the fair market value of those properties.

 

Duffield House Case

A group of commercial real property owners challenged their reassessments for the 2018 tax year based on the Uniformity Clause of the Pennsylvania Constitution, which requires that “[a]ll taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax, and shall be levied and collected under general laws” – i.e., all taxes must be imposed uniformly and without discrimination.

Judge Cohen found that, by reassessing only commercial and industrial properties and not residential properties, the City violated the Uniformity Clause. Accordingly, he ordered the City to reassess the plaintiffs’ properties at their 2017 assessed values and to pay refunds to the plaintiffs based on the difference between the 2018 assessments and the 2017 assessments by July 1, 2021. The City estimates that–before including interest–the real estate tax and use and occupancy tax refunds it will be required to pay as a result of the order will be approximately $48 million.

The court rejected the City’s contention that the commercial reassessments were constitutional because, based on information that became available after the 2013 countywide reassessment, they were necessary to bring the valuation of commercial properties in line with the valuation of residential properties. The court reasoned that the “equalization of the quality of the real estate tax assessments” was not a compelling justification for treating the property classes differently.

Judge Cohen also rejected the City’s argument that paying refunds to the plaintiffs would cause a budget shortfall, stating that “[w]here there is a conflict between maximizing revenue and ensuring that the taxing system is implemented in a non-discriminatory way, the Uniformity Clause requires that the latter be given primacy.” In essence, Judge Cohen told the City that it could not violate the law to obtain revenue.

It is notable that Judge Cohen ordered the City to pay refunds to the plaintiffs. Pennsylvania courts frequently do not order the payment of tax refunds when tax statutes are struck down or a taxing authority collects a tax unconstitutionally. At least in part, the courts’ reasoning in such cases has been that requiring a taxing authority to refund amounts that it collected when it believed the taxes were legally collected and it already spent (or earmarked for spending) would be unduly burdensome on the financial health of the state or municipality. This case presented somewhat unique facts because the City was on notice of the challenge because the lawsuit was filed before the due date for the 2018 real estate taxes.

The order requires the City to change its assessment practices. By giving the City two years to pay the refunds, Judge Cohen is allowing for budgetary planning by the City. However, the City said it is likely to appeal the order, and whether refunds are payable is expected to be a part of that appeal.

Owners/users of and tenants in buildings that are the subject of this appeal should file use and occupancy tax refund claims for use and occupancy tax paid based on the 2018 assessments.

 

EUROPE

Greece: New Greek government bill will cut ENFIA property tax by more than 20%
The government also plans to cut to 24 percent the corporate rate that was raised by Tsipras to 29 percent as part of an avalanche of tax hikes and new taxes to satisfy the country’s creditors

ATHENS – Keeping his vow, new Prime Minister and New Democracy leader Kyriakos Mitsotakis’ government is planning to cut the hated ENFIA property tax surcharge by 20 percent, a mostly unfulfilled promise by the previous ruling Radical Left SYRIZA.

The tax was put into effect during Greece’s now 9/1-year-long economic crisis and former Premier Alexis Tsipras walked back his pledge to eliminate it and then kept and increased it under orders from the country’s European creditors.

He moved to cut it as well during the waning days of his administration just before he was bounced out in July 7 snap elections New Democracy, the party he had unseated in January 2015 when it was led by then-Premier Antonis Samaras.

The total cost of the cut has been estimated by Finance Ministry experts at around 565 million euros ($634.59 million,) said Kathimerini, with 265 million euro ($297.69 million) already set aside in this year’s budget by the SYRIZA government.

The bill will end the SYRIZA-introduced provision that was designed to cut the ENFIA by 10 percent but only for those who owned properties up to 200,000 euros ($224,670), leaving The New Democracy plan would cut 20 percent for all property owners in their entirety in 2019. The reduction in 2020 will be 10 percent. It will be part of a mini-tax bill going to Parliament in August.

The government also plans to cut to 24 percent the corporate rate that was raised by Tsipras to 29 percent as part of an avalanche of tax hikes and new taxes to satisfy the country’s creditors, the Troika of the European Union-European Central Bank-European Stability Mechanism (EU-ECB-ESM).

That was part of the memorandum Tsiporas signed in the summer of 2015 to get Greece a third bailout, this one for 86 billion euros ($96.61 billion) that he said he would never seek nor accept but did both.

The high corporate rate, along with elements in SYRIZA trying to keep out foreign businesses, had scared off foreign investors Tsipras said were crucial but as his government simultaneously stymied them.

The proposed cuts in the property and corporate taxes so far have not met objections from the Troika, whose envoys will monitor Greece’s economic progress for decades to make sure fiscal targets are hit, otherwise automatic spending cuts would be triggered.

The same bill will include changes to the 120-installment scheme for settling debts in taxes and social security contributions to make it more attractive, the paper said, likely allowing businesses with up to one million euros ($1.12 million) owed the state to take part.

But Mitsotakis won’t be getting a break from fellow center-right leader German Chancellor Angela Merkel who said her government – German banks put up the bulk of the bailouts – won’t let Greece get a “discount” on its debt owed the lenders.

She told reporters her government will keep a wary eye on Mitsotakis’ plans, said the Greek business newspaper Naftemporiki.

“We’ll have to see what developments will arise,” she said while calling this past week’s successful issuance of a seven-year bond by the Greek state, with a yield of 1.9 percent, as “very positive,” as Greek is trying to make a full return to markets.

Both Merkel’s ruling CDU party and New Democracy (ND) are members of the center-right European People’s Party (EPP) grouping in the European Parliament.

 

United Kingdom: Chancellor gives cold shoulder on business rates reform plea

    • Chancellor Sajid Javid shrugs off letter from 50-plus retail bosses calling for business rates reform
    • Bosses from Asda, Sainsbury’s, M&S, Harrods, Iceland, F Hinds, and River Island called for “fundamental” reforms to the “broken” system
    • Letter was coordinated by the BRC

Chancellor Sajid Javid has seemingly given the cold shoulder to more than 50 retail bosses who signed a letter urging the government to reform the “broken” business rates system.

Earlier this week, bosses from the likes of Asda, Sainsbury’s, Marks & Spencer, Harrods, Iceland, F Hinds, and River Island wrote to Javid’s office calling for “fundamental” reforms to the taxes paid by businesses on the properties they occupy.

The letter, co-ordinated by the BRC, demanded four fixes that would address many of the challenges posed by business rates.

This includes a freeze in the business rates multiplier, which is set by the government and adjusted each year in line with inflation.

Other recommendations are fixing transitional relief as it currently forces many retailers to pay more than they should, introducing an “improvement relief” for ratepayers, and ensuring that the Valuation Office Agency is fully resourced to do its job.

According to Retail Week, while a Treasury spokeswoman did not comment on the demands made in the letter, it said: “Last month, the Prime Minister announced a £3.6 billion Towns Fund to support our high streets and town centres, allowing them to attract greater footfall, jobs and investment.

“The Chancellor will announce further details of the government’s policy programme in the coming weeks and months.”

The Treasury also said there was a review of business rates in 2016 but it did not eventuate to a consensus on alternatives.

BRC chief executive Helen Dickinson said the lobby group would continue its campaign for reform.

She also re-iterated that there was “complete agreement that the business rates system as it stands is broken”.

“The fact there is no ready-made answer is part of the difficulty – that’s where government comes in,” she said.

“It needs to decide what it needs to incentivise. Does it want to disincentivise people with physical stores?”

 

Czech Republic: Real estate taxes to increase in most of Prague after long being stagnant

Most Prague districts agreed to an increase the real estate tax coefficient. Some 53 out of a total of

57 districts were in favor of changing the method of determining the amount of tax, according to Deputy Mayor Pavel Vyhnánek (Praha sobě). The four districts not planning an increase were not identified

The city is now preparing a decree allowing the amount of the coefficient for calculating the tax to be decided by individual town halls. Real estate tax is the only tax the city can influence.

“Real estate tax has not changed in Prague for many years. The approval of the increase was carried across the political spectrum,” Vyhnánek said. “The city districts have been calling for the real estate tax to increase. We decided to meet with them.”

Of the 53 districts planning an increase, 33 intend to set the coefficient higher than the city’s draft decree, and 20 town halls will be satisfied with the proposed height.

In Prague, the local coefficient is now set at the national lowest possible level of one.

Prague is proposing an increase to level two on a five-point scale. According to the draft decree, the districts would set the size of their coefficient.

The coefficient is one of the factors used to set the final rate of residential property tax. Real estate tax consists of a land tax and a tax on buildings and units.

According to the draft decree, the commercial coefficient, which affects the amount of tax on commercial real estate, will remain at 1.5. The proposed introduction of a local coefficient means this tax will effectively rise as well.

Housing prices in Prague have been rising sharply, even without property tax increases. They are the most expensive in the Czech Republic, and, relative to the average net wage, among the most expensive in Europe.

Since mid-2015, new apartment prices have risen by about 90 percent, creating an unsustainable situation where housing is inaccessible to most Prague citizens. A new 70-square-meter Prague apartment would cost the buyer their entire annual gross wage for 14.6 years, according to the Housing Availability Index published by developer Central Group in June. Currently, the price of a new flat in Prague is more than CZK 106,000 per sqm.

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