Update on Property Tax Issues: June 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

Pennsylvania: Trial opens in one of Philly’s largest-ever assessment appeal cases, with $63 million at stake
Assessors “deliberately chose to single out” some of the city’s most-prominent and valuable commercial real estate in a 2018 revaluation that significantly increased their tax bills, an attorney for
700 commercial property owners argued Monday.

The allegation by Adam Koelsch came at the opening of one of the largest assessment appeal cases in the city’s history Monday, with about $63 million in tax revenue at stake and involving office complexes, hotels, and apartment buildings that include One Liberty Place, Centre Square, and the Bellevue Hotel. The city countered that its methodology was appropriate.

The case hinges on a 19th-century law known as the uniformity clause, which requires counties to assess all properties at the same percentage of value. The property owners allege that the 2018 revaluation, which raised an additional $118 million in tax revenue for the city and School District, focused only on commercial and industrial parcels and therefore violated the state constitution.

“In short, commercial properties were revalued at market value and residential were not,” said Koelsch, a lawyer with Chamberlain Hrdlicka, who delivered opening arguments on behalf of the property owners. “The city deliberately chose to single out commercial properties.”

The city maintains that its work was legal, and that while all properties were reviewed in 2018, the nonresidential parcels were most in need of updates.

Another key issue is the city’s implementation of the so-called Actual Value Initiative (AVI) that took effect in 2014. Under it, the city assesses all property at 100 percent of its value, or the amount for which a property could sell on the open market.

Deputy City Solicitor Benjamin Field said the implementation of AVI included values for commercial and industrial properties that were too low and in need of revision. The property owners “benefited from the imperfection” of those values until 2018, when they were corrected, Field said.

Field said the Office of Property Assessment (OPA) does its best each year to improve uniformity and
keep values up to date in the city’s “voluminous and complex property inventory.”

“OPA’s processes were appropriate, were neutral, and improved uniformity each year,” he said. Testimony began Monday with Chief Assessment Officer Michael Piper, who explained the city’s methods of valuing property.

Asked whether the city achieved its goals with the Actual Value Initiative, Piper said: “In some respects
we did, in some respects we didn’t.”

A lawyer representing the 700 property owners questioned Piper about news releases, testimony before City Council, internal emails, and presentations that referred to the 2018 assessment project, in an effort to prove that only commercial and industrial properties were revalued.

Piper’s days as chief of OPA are likely numbered; after City Council called for new leadership in the office and declined to approve his appointment to another term, Mayor Jim Kenney launched a search in February for his replacement. The search for a new chief assessor comes amid an unrelated but continued outcry from City Council members and residents over a 2019 reassessment that raised the median value of a single-family home by 10.5 percent. Values and corresponding tax bills are set to rise again in 2020 for thousands of homeowners.

Former Mayor John F. Street, who has filed his own lawsuit against the Kenney administration over property assessments, attended the trial Monday wearing a T-shirt underneath his blazer that read, “Stop illegal real estate assessment tax increases.” Street said he designed the shirt himself.

In court Monday, lawyers for the property owners cited the 2019 reassessment that changed the values of most residential properties in the city as evidence that commercial property owners were unfairly singled out in 2018.

Two administrators of OPA’s residential property division also testified Monday. They said OPA’s modeling team modeled only commercial and industrial property values for 2018. The residential property unit, they said, did only routine work for 2018, which included updating values for new construction, tax abatements, and changes in conditions of properties.

Whether that work amounted to a reassessment of residential properties is at issue in the case, because the commercial property owners allege that there was no full reassessment of residential properties that year.

The trial, before Senior Common Pleas Court Judge Gene Cohen, is expected to last two weeks.

Texas: Here’s what we know about the Legislature’s final property tax reform bill
The final version of the bill is expected to require cities, counties and emergency service districts to hold an election before raising 3.5% more property tax revenue than the previous year. Community colleges and hospital districts would need to do so at 8%.

Lawmakers have hammered out a final version of their high-priority property tax reform package, a wide-ranging measure that aims to slow the growth of property taxes and make the way they are levied more transparent.

The bill, the result of negotiations between House and Senate legislators, is poised to be sent to both chambers and then the governor for approval as soon as this weekend. A version of the bill was obtained by The Texas Tribune.

In its final form, Senate Bill 2, the reform package, appears to have changed little from when it passed out of the House earlier this month on a 109-36 margin.

If signed into law, the measure would require cities, counties and other taxing units to receive voter approval before raising 3.5% more property tax revenue than the previous year. Community colleges and hospital districts will need to hold an election before surpassing 8% property tax revenue growth. The constraints only apply to revenue collected on existing property, not new developments.

School districts appear to have been carved out of the bill, but their tax revenue increases are constrained in a sweeping public education bill, House Bill 3. That legislation could lower school tax rates by an average of 8 cents per $100 valuation in 2020 and 13 cents in 2021. For the owner of a
$250,000 house, that could yield a tax cut of $200 in 2020 and $325 in 2021.

Currently, taxing units can raise 8% more property tax revenue before their voters can petition to roll back the increase. The 8% figure was set during a period of high inflation in the 1980s. The final version of the bill, now titled the Texas Property Tax Reform and Transparency Act, appears to have several provisions intended to add flexibility around the reduced election trigger.

Some of the money taxing units spend providing indigent defense attorneys and indigent health care would not be factored into the revenue growth calculation. Taxing units would be able to bank unused revenue growth for three years, allowing them to exceed the 3.5% threshold in some of them. And tax districts can raise $500,000 without having to hold an election, as long as that increase does not exceed 8% revenue growth.

The $500,000 figure is intended to change with inflation, and the election to exceed 8% growth would not be automatic; voters would have to petition for it, though they would need to gather fewer signatures than what is required in current law.

A Tribune analysis of state comptroller data from 2017 found more than 1,000 smaller taxing units could be able to surpass 3.5% revenue growth using this $500,000 provision. Added by House lawmakers, it is designed to offer districts with small tax bases the flexibility to make costly one-time purchases, such as to buy a new fire truck, without automatically triggering an election. The sponsor of the legislation, state Rep. Dustin Burrows, R-Lubbock, has also suggested it is illogical to require an election if the cost of administering it outweighs the revenue it could raise. Burrows’ office has calculated that the majority of Texans — more than 90% of county residents and 80% of city residents
— live in municipalities that would be subject to the lower 3.5% election trigger.

State Sen. Paul Bettencourt, a Houston Republican and chair of the Senate’s GOP caucus, authored the Senate’s version of the bill. Burrows and state Sen. Kelly Hancock, R-North Richland Hills, a member of the Senate’s property tax committee, chaired the conference committee that negotiated the language in the final bill.

Previous drafts of the legislation had tried to require almost all taxing units, including community colleges, hospitals and school districts, to hold an election before raising 2.5% more property taxes than the previous year. At one point, the House considered changing the revenue growth calculation to incentivize cities and counties to offer homestead exemptions to their residents. And there was an attempt to let taxing units bank unused revenue growth for five years rather than the three years in the final version.

The Senate also tried to exempt small taxing units — those with potential property and sales tax collections of $15 million or less — from portions of the bill, unless their residents voted to opt in. The
$500,000 allowance in the final version of the bill is likely to affect many of those small districts.

Georgia: Commercial properties in Atlanta undervalued for taxes, report says
If you live in a modest house in the city of Atlanta, chances are Fulton County assessors can peg the value of your home pretty close to what it’s worth. But the more expensive a property is, the more likely it is that the county’s valuations will come up short.

A report commissioned by the Atlanta City Council found more expensive properties — particularly commercial developments — are typically appraised for tax purposes at a lower percentage of fair market value than lower-priced parcels.

The findings suggest that the city’s schools and city and county governments are missing out on tens or even hundreds of millions of dollars they could be owed in annual property taxes, critics say. That shifts the burden to smaller businesses and homeowners to pay for vital services such as police, fire, the courts and public education.

“It is unacceptable that homeowners are stuck with way more of the bill for running our city than our fair share,” said Julian Bene, a former board member of Invest Atlanta, the city’s economic development arm, who has raised questions about the fairness of the Fulton tax digest.

And the taxable value gap widens even further once owners are able to appeal their properties’ worth.

The owners of the highest-value real estate — office, apartment, retail and mixed-used developments
— have greater incentive to appeal and more resources to outgun the county when they contest their tax bills.

After appeals, a sample of properties of $20 million or greater were only valued for tax purposes at two-thirds of what they are worth, the Atlanta report showed. For real estate valued at less than
$250,000, the county’s appraised values were nearly 98 percent of fair-market value.

“If you are the owners of a $250,000 home and you go to contest your (tax assessment), you are probably not going to have the benefit of being represented by top-dollar, silk-stocking lawyers and accountants,” said Atlanta City Councilman Howard Shook, who represents parts of Buckhead.

The City Council requested the MuniCap report following aNovember investigation by The Atlanta Journal-Constitution and Channel 2 Action News that found dozens of commercial properties, including apartment buildings, warehouses, office complexes and shopping centers in the city were valued for property tax purposes at far less than what buyers paid for them in recent sales. The AJC and Channel 2 examined 264 multi-million dollar commercial property sales since 2015 recorded by the research firm Databank Atlanta. About 175 — or two-thirds — sold for at least 50 percent more than the county said they were worth that same year.

And 119 of those nearly 175 properties sold for more than double their assessed value, the
AJC/Channel 2 analysis showed.

The MuniCap report looked at 176 properties, ranging from those worth less than $250,000 to those worth more than $20 million. The firm found that while appraisers valued the priciest real estate at
81 percent of fair market value, successful appeals pulled down those values to 68.5 percent of what
they’re really worth, on average.

And that reduces the taxable value, too.

At the same time, residential property owners in Atlanta have seen their values soar in recent years. Fulton is locked in litigation with the state Department of Revenue after the state tax commissioner refused to approve its 2017 or 2018 tax digests. County leaders in 2017 froze residential values at 2016 levels following complaints from homeowners about high values.

The AJC/Channel 2 report spurred the City Council to seek an independent review, and the Fulton County commission also ordered an audit. It is pending. Jon Wiley, a Georgia State University real estate professor, said most current or retired assessors, if they’re being candid, will say their goal is to find the right balance when they’re appraising commercial properties. They want to be near fair market value, but also value properties low enough to avoid triggering costly and time-consuming appeals.“

As a result, almost every jurisdiction in the U.S. has a downward bias between assessed value and
market value,” Wiley said.

He said commercial properties such as mixed-use developments with a blend of residential, office and retail are the most complicated to assess, further increasing the likelihood that assessments will be low.

That’s frustrating to homeowners like English Norman, a Buckhead resident, who said she doesn’t
mind paying taxes — but wants others to also be on the hook.

“When you have big commercial pieces of property not paying their fair share, it damages the community overall,” she said. “You can’t look at the homeowners and expect us to bear it all.”

Norman said she was disappointed to learn that residential properties were being valued more accurately than commercial.

“Nobody wants to pay more than they have to, but at some point, [taxes are] how our community
functions,” she said.

The AJC sought comment from several commercial property owners, developers and trade groups, but none returned messages or agreed to comment by press time.

MuniCap found county assessors do not “systematically under-assess commercial property.” But the consultant found county assessors “tend to under-assess” expensive parcels and the under- assessments widen as properties’ values rise.

The appeals are another factor, and owners can save lots of money if they do so successfully. In Georgia, property owners can appeal their tax bills to their county’s board of assessors based on factors including uniformity of the assessments and on the values themselves. If the board of assessors rejects a property owner’s petition, the taxpayer can appeal that decision to the county board of equalization or to an arbiter or hearing officer.

If the appeal is successful, the property’s value is frozen for three years. It’s a big incentive to appeal.

Fulton has taken steps to increase exemptions for homeowners to try to level the playing field with big businesses, but it’s only a stop-gap measure, said Lee Morris, a Fulton County commissioner who has questioned commercial property values. Ideally, Morris said, commercial values would consistently end up higher.

Shook said he was disappointed the report didn’t calculate potential lost revenue. Municap’s suggested fixes also mostly centered on matters requiring state legislative fixes, Shook said, “otherwise I’d already be drafting local legislation for the city.”

The MuniCap report said legal and other constraints on the county’s assessors are a primary cause of
the undervaluing of high-priced Atlanta real estate.

Among those constraints, the report said, are no mandatory requirements for commercial property owners and managers to report all of their income and expenses and the inability of assessors to include the value of tax incentives in their appraisals.

Dwight Robinson, the Fulton County chief appraiser, agreed with the suggestion. He said there were a number of legislative fixes that could improve accuracy — and some that could be implemented on the county level.

Last year, Robinson strongly disputed the AJC and Channel 2’s findings. This year, he said his office is
“under a magnifying glass” when it comes to appraisals.

Robinson said the county could benefit from having a larger, more diverse pool of hearing officers to consider commercial appeals. Fulton only has two, both of whom Robinson suggested are biased toward commercial owners, while neighboring DeKalb County has 10.

“We really need people with fresh perspectives,” Robinson said. “By looking for an influx of hearing
officers, we’re looking for a diversity of perspectives.”

Wiley, the Georgia State professor, said additional hearing officers “would likely pay for itself” in new
revenue.

EUROPE

Germany’s grand coalition to present bill on property tax reform
German lawmakers in the ruling coalition have settled a dispute over property tax reform. A bill is expected to be presented to parliament before the summer break.

Germany’s grand coalition has reached an agreement regarding property tax reform, according to a joint statement from coalition leaders on Monday.

Lawmakers from Chancellor Angela Merkel’s conservative Christian Democratic Union (CDU), its Christian Social Union (CSU) sister party and center-left coalition partner Social Democratic Party (SPD) had met for the first time since the resignation of former SPD leader Andrea Nahles.

The agreement on property tax reform came after a months long dispute. Finance Minister and SPD member Olaf Scholz had presented a value-based model for calculating property tax that would apply countrywide. But Bavarian and other CDU/CSU lawmakers wanted a system based on land area and demanded that the states have the right to deviate from federal requirements.

The details of the agreement have not been disclosed, but the document addresses “all substantial questions” in regards to property tax reform. The coalition intends to put the legislation up for debate in the German parliament before it goes on a summer break so the reforms can be implemented this year.

At 49.4%, Germany has the second highest tax rate among developed countries, according to data from the Organization for Economic Cooperation and Development (OECD). Property taxes make up around 2.7% of the tax share.

Property tax has been a hot button issue since Germany’s constitutional court deemed the tax unconstitutional in 2018 because properties are taxed based on their value from the early 1960s (1930s in East Germany).

Sunday’s meeting, led by Merkel, was the first in which the SPD was represented by its interim leadership trio of Malu Dreyer, Manuela Schesig and Thorsten Schäfer-Gümbel.

The party’s former leader, Andrea Nahles, stepped down at the beginning of June after the party suffered significant losses in May’s European elections.

The coalition also reached agreements regarding the reduction of the country’s so-called solidarity payment or “wall tax” — a surcharge originally introduced to finance costs caused by German reunification in 1990 after the Berlin Wall came down — as well as affordable housing and climate protection. Those pieces of legislation will be presented to the German parliament after its summer break.

Greece: Greek property tax among the highest in Europe
Washington-based think tank, the Tax Foundation, found that over-taxation was growing in Greece following a study of data from the Organisation for Economic Development (OECD).

The Tax Foundation examined the tax burden on ownership and its ratio to tax revenues of properties in Greece and found that Greek property owners were among Europe’s most heavily burdened by taxes. The study found that most countries both in Europe and globally have a particularly low ratio of property ownership taxes to total tax revenues averaging at 4.6 per cent of all tax takings in the EU. In Greece, the figure was at 8.1 per cent. At the other end of the spectrum, Estonia collects just 0.7 per cent of its tax takings from property, followed by Austria, Lithania, Slovakia and the Czech Republic where the number ranges between 1.3 and 1.4 per cent.

Greek property taxes had particularly risen following 2007, when the rate of Greece stood at 5.3 per cent against the OECD member average of 5.5 per cent. Since then, the Greek ratio has risen to reach
8.9 per cent in 2013 with the imposition of EETIDE, the property tax collected through power bills. The single property ENFIA tax has also meant a 68 per cent increase in the ratio of property taxes in Greece within just six years. The ENFIA load was somewhat eased up during the government of Antonis Samaras when it was reduced to 8 per cent, however it had grown to 8.4 per cent under the government of Alexis Tsipras in 2004 despite his pre-election promises of eradicating ENFIA, which was initially introduced as a one-off tax burden.

In a new promise made prior to the July 7 Greek government elections, the SYRIZA government has pledged an average ENFIA reduction of 10 per cent for this year.

Greece: Property rate adjustment to be passed on to the next gov’t
The hot potato that is the adjustment of the property rates used for tax purposes – known as objective values – has been forwarded to the next government. The announcement of the snap poll means that this obligation to the country’s creditors will have to be postponed until the new Finance Ministry leadership emerges after the July 7 election.

Finance Ministry officials note that the competent agencies have long since prepared the new zone prices that were put on ice by the ministry’s political administration due to uncertainty over when the parliamentary election would take place.

Sources say the agencies have now examined last year’s valuations by the special property surveyors, which in many cases would lead to greater objective value hikes than those the ministry eventually decided. In order to avoid taxpayer discontent, the government has decided to keep the objective values at the same level, passing the obligation on to the next government.

Ministry officials say there is a risk of a rise in 4,132 areas around the country where the government had decided last year to keep the values frozen. These areas have seen their market value rise, partly due to the growth of short-term holiday rentals.

Greece: Property tax a heavy burden for Greeks
Greek property owners are among Europe’s most heavily burdened by taxes, according to a study by Washington-based think tank the Tax Foundation that examines the tax burden on ownership and its ratio to all tax revenues.

A few weeks before the general election, and while the discussion on over-taxation is growing, the Tax Foundation study, which is based on data from the Organization for Economic Cooperation and Development (OECD), illustrates that most countries both in Europe and globally have a particularly low ratio of property ownership taxes to total tax revenues.

Data analysis shows that property taxation in Europe averages at 4.6 percent of all tax takings. However, in four European Union states, including Greece, the situation is very different.

In the United Kingdom taxes on realty come to 12.6 percent of tax revenues, followed by Luxembourg with 9.6 percent, France with 9.5 percent and Greece with 8.1 percent. At the other end of the chart, Estonia collects just 0.7 percent of its tax takings from property, while in Austria, Lithuania, Slovakia and the Czech Republic the figure ranges between 1.3 and 1.4 percent.

The study also showed Greece has always been at a higher level than, or at least on a par with the European average. After 2007, when the rate in Greece stood at 5.3 percent against an OECD member average of 5.5 percent, the Greek ratio kept rising, to reach 8.9 percent in 2013, originally with the imposition of EETIDE – the property tax collected through power bills – then ETAK, and then ENFIA with its supplementary tax on asset ownership over 250,000 euros. This has meant an increase of 68 percent in the ratio of property taxes within just six years.

The lightening of the ENFIA load in 2014 by the government of Antonis Samaras reduced the ratio to
8 percent, before it rose to 8.4 percent under Alexis Tsipras’ administration in 2015 and eased to 8.1 percent in 2017 due to the increase in other taxes. The government has promised an average ENFIA reduction of 10 percent for this year.

Ireland: “In five years’ time there will be businesses gone bust over this”
“What this will do is put independent filling stations out of business,” warns Cavan businessman,
Pauric Rudden. The cause of his ire is a revaluation process undertaken by the Valuation Office (VO).

The REVAL2019 revaluations, which concludes in September 2019, is a new valuation list for eight local authorities. These valuations will become effective from 2020 onwards.

In Cavan 2,461 properties are being assessed. The VO say 59.6% will have reduced rates, 37.7% will see an increase and 2.80% will have no change. Roadside service stations say the rates hike they face are so extreme that closures are almost inevitable.

Currently service stations’ rates are calculated primarily on the square footage of their premises; under the new system they will be calculated on turnover. Meanwhile other businesses will continue to be charged on square footage.

Philip Kiernan operates two service stations on approach roads to the centre of Cavan Town: “Our Dublin Road site is facing a 200% increase, while our Ballinagh Road site is facing a 300% increase. My understanding is that I will be paying more rates than Lidl, they are my neighbours and they are assessed on square foot, not turnover.”

With some family-owned stations facing five-fold increases in their yearly bills, preparations are under way for a European Court of Justice challenge against the revaluation. Martin McSorley, of the Irish Petrol Retailers Association (IPRA), said around 100 independently-owned stations were threatened with closure, while many more would be swallowed up by the big fuel companies.

Pauric Rudden has also seen a dramatic increase in his bill: “The rates on my shop and fuel station in town were €12,500 per year, we undertook a number of upgrades and the rates went up to €17,500, that was a sizeable increase, but we were happy enough.

“What they are trying to do now is rate filling stations on turnover. This means that the re-rating will
be around €38,000.”

In a statement to The Anglo-Celt the VO said an increase of 400% would be “unusual”. They added: “in instances where the Valuation Office has sought specific information from a ratepayer by way of a section 45 notice and that information has not been provided the Proposed Valuation entered on the PVC (certificate) will be an estimate”.

A ‘section 45 notice’ is the form on which the revaluation is based. Both Messrs Kiernan and Rudden
have returned their completed forms.

Mr Kiernan says the IPRA have been lobbying on the issue: “There are service stations that are going to close. There is no way they can justify these increases. The IPRA are appealing it to the European Courts, but that’s a costly exercise.”

He claims the revaluation process lacks fairness: “I have a family business. I have a multinational company beside me and I am going to be paying more rates than them? It’s not that I am complaining about them, I’m just looking for fairness.”

Disparity

The disparity between the supermarket rates and the service station rates appears to be a common bugbear for those who have experienced the rise in their rates payment. Mr Rudden also made the point: “In total between fuel and other goods in our shop we turn over around €128,000/week before VAT. The most successful supermarket in the town has about three times that turnover in the same period, now our rates will be double their rates, because they are done on square footage.”

However the VO say the new rating system is appropriate: “Service stations are a distinct class of property and while there may be some similarity with supermarkets in the products that they sell they are not directly comparable to supermarkets. ” The VO added that the rate “must reflect open market rental values at the valuation date”.

Mr Kiernan says there are other business hit by the increases: “Pubs that do food and restaurants have been hit quite badly as well. As the Valuations Office are doing it on turnover some pubs have come down, but any pubs doing well have experienced significant increases.”

Pauric Rudden says by going on turnover the VO are cutting into tight margins: “They are going to take a half a cent on all fuel. We make, on average, 3.5c [per litre] profit on fuel. So they will be taking 1/7 of our profit on the fuel. Instead of rating us they are putting on another tax.

“It’s unfair that one section of the business community are rated on turnover and another is rated on square footage.”

Discussions by both retailers with elected reps and the local authority have yielded little optimism. The independence of the VO is pointed to by all avenues. In fact the council say that despite the changes, there will be no increase in their rates income.

The VO explained this by saying: “Revaluation is essentially a revenue neutral exercise. The total amount of rates liable to be collected by the local authority in 2020 compared with 2019 will not increase by virtue of the revaluation. There will however be an allowance for inflation.”

In five years there will be a further evaluation of rates, but Mr Rudden feels that having to bear the brunt of the increases for half a decade is unfair: “For five years they expect us to pay the high rate. You either do it for all or for none. In five years time there will be businesses gone bust over this.”

UK: Business rates now ‘biggest challenge’ facing retailers
Business rates now exceed rents in many high streets and have become the biggest challenge facing retailers, according to a new survey.

Feedback from 50 retail decision-makers found 61% claiming that rising rates are the biggest threat to their business, followed by reduced footfall (19%), pressure to discount (11%) and declining consumer confidence (8%).

The survey was conducted by law firm Royds Withy King to measure the level of confidence among retailers at a time of increased trading pressure on the high street because of Brexit and the growth of online sales.

Bharat Nahar, partner and head of retail at the law firm, said: “Business rates continue to batter the high street and it is clear that reform of our outdated regime can’t come soon enough. Retailers are working hard to improve the customer experience but the government need to do their bit to help the high street – including looking at less obvious answers.”

In a separate study of retailer opinion, the company found that 42% of respondents backed calls for a new sales tax on internet companies to level the playing field between online and bricks and mortar. The survey also revealed that 64% traditional operators believe the “experiential” element of retail shopping will give them an edge in the growing battle with online competitors.

Compliments of IPTI,  a member of the EACCNY