Member News

Update on Property Tax Issues: IPTI July 2017

News from Europe

The EACC, in partnership with the International Property Tax Institute (IPTI), wants to keep members up to date with the latest developments in property taxes both 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).

As far as Europe is concerned, this month’s report for the EACC includes articles on France, Ireland, Spain and the United Kingdom. There is a separate IPTI report on the United States, with a focus on New York.

France: French finance minister insists taxes will be cut

France’s finance minister insisted that President Emmanuel Macron’s promised tax cuts would be put in place despite an announcement last week that some reductions would be delayed because of a hole in the public finances.

Bruno Le Maire told a conference of business leaders and economists in Aix-en-Provence, southern France, the government was in a position to implement the tax cuts “now” while also bringing the deficit back in line with EU rules.

“Timing has not been decided definitively,” Mr Le Maire said at the Rencontres Economiques d’Aix. “I believe we can cut public spending very significantly to meet our European requirements and lower taxes for the French households and French companies — all at the same time and now.” He added: “Wait for the final trade-offs of the prime minister and president.”

The comment marks a change of tack only days after prime minister Edouard Philippe said he would postpone flagship tax reforms by one or more years in order to cover an unexpected €5bn increase in the deficit.

The delayed measures include a 30 per cent flat tax on investment income, a reform of the wealth tax and the scrapping of the property tax for most households.

Adding to the impression that new government was no longer prioritising the easing of the tax burden, Mr Philippe told parliament last week that higher taxes would raise the price of a pack of cigarettes by 43 per cent, while Nicolas Hulot, environment minister, has vowed to increase taxes on diesel.

On Sunday, Mr Le Maire was forced to deny a report alleging the government intended to increase taxes on the Livret A, a popular savings account.

Mounting criticism over Mr Macron’s tax plan highlights the president’s challenge in meeting the EU deficit target of 3 per cent of gross domestic product while reinvigorating the eurozone’s second-largest economy. Last month, France’s public spending watchdog warned that deficit risked exceeding the EU limit this year, accused the previous Socialist government of providing insincere” budget predictions to Brussels.

In Aix en Provence, there was a hint of disenchantment among France’s business and finance elite only two months after Mr Macron’s presidential victory over far-right leader Marine Le Pen.

“Delaying those tax breaks is a shame,” Francois Lombard, president of Turenne Capital, a private equity firm, said. “There was high expectations among entrepreneurs. There’s disappointment. It’s not what was announced.”

Mr Macron was elected on a resolutely pro-business platform. Promising an overhaul of the rigid French labour market, he won over entrepreneurs and financiers by pledging to cap levies on dividends at 30 per cent, down from more than 50 per cent, and to reduce corporate tax from 33 per cent to 25 per cent. Top earners tempted by the idea of moving abroad were promised their financial assets would be excluded from the wealth tax, which is levied on holdings worth more than €1.3m.

Mr Macron had also vowed to convert Mr Hollande’s flagship tax credit scheme for companies into a permanent reduction in payroll charges — a shift that would incur an estimate one-off cost of €20bn. Mr Macron had also appealed to households by promising to scrap property tax. But Mr Philippe indicated last week that all those measures would be pushed back.

Academics at Rencontres d’Aix warned that the French economy needed a shock of confidence just as the government engaged in reforms to make the labour market more flexible.

“The fiscal measures that were at the core of the president’s programme and that are now delayed must be implemented as soon as possible,” urged Jean-Herve Lorenzi, chairman of Cercle des Economistes, the think-tank organising the conference. “Those measures would send a major signal to attract investments.”

Ireland: Government may raise property tax on vacant homes

The Government is considering introducing steep rises in property tax on vacant properties and using the proceeds to help cut income tax or build more homes.

Property tax could be as much as doubled for owners of vacant homes situated in areas of the country where there are high demands for housing.

Sources said the move was one of a number of options Taoiseach Leo Varadkar was considering to increase the amount of money he has to spend in the October budget.

Mr Varadkar last week said he would cut income tax even if he has to raise other taxes to pay for it.

The prospect of increasing property tax in so-called “rent pressure zones” is set to be examined by Minister for Finance Paschal Donohoe and Minister for Housing Eoghan Murphy.

The rent pressure zones are areas in which rents are permitted to rise by only 4 per cent annually and which are experiencing housing shortages generally.

All of Dublin, Cork city and some of its suburbs, areas of Galway city and parts of commuter counties around Dublin, such as Meath, Wicklow and Kildare, have been classified as rent pressure zones.

There are 189,000 vacant properties across the country but Mr Murphy has said about 90,000 of these are situated in in-demand areas.

He is due to publish a strategy on vacant homes in the coming weeks and has said he wants to pursue an aggressive policy stance on the issue.

The idea of doubling the property tax on vacant homes in rent pressure zones had been previously floated by Fine Gael Louth TD Fergus O’Dowd.

Senior Government sources said “something along those lines” could be introduced in the October budget.

Such a move could also raise a “handy bit of revenue” that could be diverted to the cohort of the electorate Mr Varadkar says he wants to help.

One source described these voters as “early risers who work hard, pay too much tax and can’t afford a home”.

The revenue could then be diverted towards moves to reduce income tax or help build more homes.

The total yield for the exchequer from property tax in 2016 was €463 million.

Spain: €4.3m property tax break on the Costa del Sol

Thousands of home-owners on the Costa del Sol will benefit from help to pay their property tax, known as IBI, after Velez Malaga council ear-marked millions of euros in its 2017 budget.

The move is expected to assist around 26,200 families in total, 1,893 of whom were previously ineligible, with aid capped at €500 per home and €1,500 for multiple properties.

Juan Carlose Marquez, Councillor for Finance, said “this Government has made a particular effort to fit this aid into our budget”.

He added, “We have put aside €4.3 million for assistance in 2017, including to help those who previously lost their eligibility, but we are prepared to consider increasing this amount to deal with demand if necessary.”

Once the measure is approved in full, it will be published in the Official Province Gazette, after which “the council will set out the deadlines by which residents must make their applications,” according to Marquez.

Those eligible for the aid are those who rent or own a home in the Velez Malaga area who missed paying their tax in any year between 2012 and 2016. The Council is prepared to pay up to 100% of a person’s property tax.

United Kingdom: Rates ‘turmoil’ as Local Govt Finance Bill omitted from Queen’s Speech

Businesses and local authorities are facing yet more business rates turmoil following the omission of the Local Government Finance Bill (2017) from the Queen’s Speech, experts are warning.

The Bill, which was introduced to the House of Commons in January and had reached the committee stage of scrutiny, was designed to implement a number of measures, including:

  • The framework for local authorities to retain 100% of business rates revenue
  • Rate-setting and relief powers devolved to local authorities
  • Additional levies to fund specified infrastructure projects
  • Modernised business rates billing

Gerald Eve said with the Department for Communities and Local Government confirming the Bill has been dropped, the Government’s flagship business rates policy has been abandoned, and there will be no reform of the business rates system until at least 2019.

Jerry Schurder, head of business rates at Gerald Eve, said: “The demise of this Bill highlights the Government’s disarray over business rates policy, and is a hammer blow to UK plc’s hopes of genuine reform in the near future. With the Government’s flagship rates policy now up in smoke, it is clear that any hope of fairness for ratepayers has been kicked further into the long grass, despite a Conservative manifesto commitment to more frequent revaluations.

“Firms will be furious that, despite their protestations earlier in the year and Government promises of action, there will be no reform of a rating system desperately in need of modernisation. The abandonment of any pretence of change shows just how low a priority this is for the Government. Warm words by the Chancellor in March and in the manifesto have failed to be followed up with actions.

“A particular impact of the omission is that local authorities will no longer be given the powers to reduce business rates locally, a key element of the Bill. Firms had hoped this would lead, eventually, to a lessening of the grossly excessive burden, but such hopes have been dashed. Companies are once again being taken for granted, and the Government should be careful lest the unfair rates burden reaches breaking point.”

United Kingdom: Software hold-up leaves businesses waiting in vain for rates relief

Hundreds of millions of pounds worth of relief promised to companies hit by dramatic rises in business rates is not reaching them because councils are waiting months for software to be updated.

In delays branded “ridiculous” by representatives of small businesses, local authorities are warning ratepayers that they cannot provide any timetable for when compensation will be provided as they do not know when new billing systems will be ready.

Businesses in England were told by the government in the March Budget that they would be given a share of £300 million of emergency relief to ease the burden of increased rates.

Civica, which supplies the business rates software used by one in five local authorities in England, said it was working with central and local government to update software so bills can be amended to reflect help provided by a business rates “hardship fund”.

Northgate, another leading software provider, said it was meeting the government today to discuss the issue.

Thousands of companies that may qualify for the compensation have been issued with higher rates bills. The Federation of Small Businesses said some of its members were reporting that bailiffs had been appointed to collect debts on bills that they believe are overdue for adjustment.

Councils are telling ratepayers that they cannot issue the emergency relief and corrected bills until software is updated to reflect new policies and support.

In addition to the £300 million hardship fund, which allows local authorities in England to grant discretionary relief to those hardest hit by increases in rates, software issues are understood to be affecting other business rates support targeted at small companies and pubs.

Most companies did not face an increase when business rates changed in April, following a long-delayed revaluation of commercial properties, but more than 500,000 businesses have seen their bills go up and some suffered rates rises of up to 3,000 per cent.

Experts are warning that the help may not arrive until next month at the earliest for many companies.

Mark Rigby, chief executive at CVS, a business rates adviser, said: “Tax demands can be manually adjusted by councils so it is ridiculous that it will take nearly seven months from the Budget for small firms to receive the help they were promised and so badly need.”

Craig Beaumont, head of external affairs at the FSB, said:“Small businesses are literally paying the price for these never-ending delays, with FSB members being chased for over-inflated bills.”

Civica, Capita and Northgate provide most of business rates software to local authorities. A Capita spokeswoman said councils using its software were unaffected by the delays.

A Civica spokeswoman said: “All suppliers of business rates software are working under the same constraints with short timescales for delivery of the new legislation. We are working to implement the necessary updates as quickly as possible in conjunction with both [central government] and with our customers.”

Northgate and Civica did not provide any timescale for when updates would be completed. Last week, the government said the delays to distributing the funds were “unacceptable”.

A spokesman for the Local Government Association, which represents 370 councils in England and Wales, said: “This has been a complex exercise for councils. Uncertainty caused by the calling of the general election led to late government confirmation of the funding and rules around how it should be distributed. This has been compounded by delays caused by the time taken by suppliers to make software changes, which has made it more difficult for councils to plan and administer the schemes effectively.”

United Kingdom: Government revives plans to scrap business rates for ultrafast broadband after election kills local finance bill 

The UK Government has announced special legislation to scrap business rates on new ultrafast broadband lines after earlier plans were derailed by the General Election.

The Telecommunications Infrastructure Bill has been introduced to Parliament to provide 100pc business rates relief on investments in fibre optics.

The move aims to accelerate Britain’s move to ultrafast broadband and 5G mobile coverage. Older telecoms infrastructure will still be taxed as the Government aims to encourage spending on “gold standard” fibre optics instead of upgrades to get better performance from traditional copper telephone wires.

The Chancellor announced preferential treatment for new fibre optics in last year’s Autumn Statement at a forecast cost of £85m by 2022. The tax relief was due to be implemented in the Local Government Finance Bill, but that legislation did not survive the General Election.

It was not included in the new minority administration’s pared-down Queen’s Speech, prompting industry fears the policy had been abandoned.

Matt Hancock, the digital minister, said the Telecoms Infrastructure Bill will deliver the relief instead.

He said: “We want to see more commercial investment in the gold standard connectivity that full fibre provides.”

The relief, backdated to April, is a small boost to Virgin Media’s £3bn Project Lightning network expansion, plans by BT’s Openreach subsidiary to increase its investment in fibre optics and smaller alternative players such as CityFibre.

The older networks that dominate Britain’s broadband infrastructure face steep increases in their tax bills, however. BT and Virgin Media have complained that the regime is not “not fit for purpose” and a barrier to much-needed investment in upgrades.

In February they told the Government the business rates revaluation that came into force in April was “unsound” and called for immediate reforms. BT said the exercise increased rateable value of its network from £165m to £743m and could trigger broadband price rises.

American News

New York City

Tax System Overhaul (Again):

Over the past several years, the New York City Department of Finance (NYCDOF)—the municipal agency responsible, for among other things, property tax valuation, billing and collection—has been undertaking a system-wide overhaul of its administrative framework. 

The system overhaul appears mostly geared toward administration—meaning customer service, data management, assessor activity tracking and mapping—rather than valuation of property for tax purposes.  Other areas of New York City’s focus include continuing to increase the number of property tax liens it can keep out of the annual lien sale, and expanding the public’s awareness of opportunities to qualify for tax exemption is designed to aid mostly not-for-profit, poor and disabled and elderly property owners. 

The latter initiatives are certainly to be applauded, and while administrative re-organization and streamlining can sometimes lead to more accurate assessments, and are welcome and worthwhile goals, the taxpaying public of New York City will need to await future assessment rolls before it can determine whether tax fairness and equity have been achieved.  

The overhaul will entail much in the way of technology and software changes and replacements.  NYCDOF had originally planned a rollout of the new system during a relatively quiet period between the issuance of the 2017/18 final assessment roll (May 2017) and the issuance of the 2018/19 tentative assessment roll (January 2018). 

The launch date has now been delayed until January 2018.  As is the case with many things, the law of unintended consequences often controls.  The last major overhaul of the NYCDOF system occurred in the 1990s, and there ensued a long period of costly, cumbersome and not always successful “de-bugging”. 

Since then, technology has grown and evolved exponentially, along with the public’s reliance upon it and their expectation that it will work flawlessly from the very first click.  Hopefully, NYCDOF’s ambitious launch of an extensively altered and comprehensive system—simultaneously with the issuance of over one million new proposed property tax assessments in January—will go smoothly.

Around the United States

New Hampshire: Is There One “Right” Way To Value Property?  

In recent litigation, the Supreme Court of the north-eastern US state of New Hampshire ruled that the local property tax assessments of a number of utility company properties would be upheld, despite the claim that the valuation approaches used by local property tax assessors differed from those used by state utility tax appraisers. 

The court, in rejecting the argument made by the utilities urging consistency in valuation approaches, observed among other things that “…we have never held that a single valuation approach or specific combination of approaches is correct as a matter of law…”  The court went on to state that the credibility of a real estate  appraisal is a fact question to be decided on the evidence presented, and that a court would be justified in treating differently-based appraisals differently, while still giving weight and validity to each of them. 

In some taxing jurisdictions, the appropriate approach to property tax valuation may be set forth in the law, while in others it may be a case-by-case question to be decided by the courts based upon evidence, facts and the testimony of expert witnesses.

Georgia:

The commissioners of one county in the southern state of Georgia recently voted to freeze the assessments of residential properties at 2016 levels.

The increased tax levy for Fulton County for 2017 would have reportedly been close to 20 percent, an alarming level of increase for taxpayers anywhere.  While this might come as good news for individual homeowners, it has apparently put a damper on the plans of school district officials counting on at least some increase in school taxes to enable them to maintain various programs and educational services.

There is a constant tension among the government’s need for operating revenue, the property owners’ need for fairness and affordability, the demand for essential governmental services (such as schools, police and fire departments), and the seemingly rising depletion of what assessors call commercial ratables (particularly retail).  Freezing residential taxes, while a positive in many  respects, can lead to further increased property tax burdens for commercial properties, which have always been viewed as an engine to economics growth (until excessive taxes stall that engine).   

Add to this the continued and seemingly infinite expansion of the Internet, particularly for commerce, and you again have the dark store problem, about which this newsletter has written in the past, and will continue to revisit in the future. 

Wisconsin (The Assessor Cometh):

A divided Supreme Court in the north-central US state of Wisconsin recently held that property owners’ refusal to let tax assessors inspect the interior of their homes was a proper exercise of their right to be free from search as guarantee by the Fourteenth Amendment of the US Constitution.

It was reported that only those homeowners who refused access to the assessors during a re-valuation of a forty-three home subdivision saw their assessments go up, while the other homeowners’ assessments actually went down.  The lower courts had held that these homeowners had relinquished their right to challenge those valuations as a result of barring the assessors from interior inspection. 

The Supreme Court disagreed with that conclusion.  It held that the assessor’s entry into the homes was a search and therefore violative of Fourteenth Amendment protections, and that refusing the search should not bar challenge to the assessment. 

While scholar and judges continue to debate what does and not qualify as an “unreasonable search”—and not only on tax cases but chiefly in criminal cases—the assessing sector can certainly argue that such rulings in tax cases makes its job that much more complicated.  Many assessors pride themselves on maintaining accurate and defensible “inventory” (the physical characteristics and features of the property they are responsibly for fairly assessing), and would argue that such interior inspections are necessary to avoid the accusation of “drive-by” assessing.

Michigan: Not-For-Profit Exemption Test:

In the case of Baruch SLS Inc. v Town hip of Tittabawassee, the Michigan Supreme Court was asked to determine whether the lower courts had erred in denying not-for-profit property tax exemption to a charitable institution that offered an income-based subsidy to qualifying residents of one of its adult foster care facilities. 

The court’s analysis focussed on its 2006 decision in the case of Wexford Med Group v City of Cadillac, which enunciated six factors for exemption, in particular the factor requiring that the charity seeking the exemption does not offer its aid on a discriminatory basis.  The court elaborated that this restriction as set forth in Wexford was intended to exclude from property tax exemption those institutions which discriminate by applying purposeless restrictions to the beneficiaries of its charity.  Instead, the court noted, there is to be a “reasonable relationship” test for such restrictions, and it should be construed most broadly, need not be totally direct or obvious, and so long as it proves that the charity’s restrictions further its goals, the test has been satisfied. 

In contrast, and as we have written previously, many taxing jurisdictions are moving toward much more restrictive tests for the qualifications of non-for-profits for property tax exemption.  More on this in later issues. 

Compliments of IPTI