Update on Property Tax Issues: May 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

California: Protect Prop 13 protections for property owners
In November 2020, California voters and taxpayers will have the opportunity to weigh in on one of the most sweeping economic propositions in the state’s history.

Proposition 13 has been protecting California’s taxpayers since 1978 and is one of the only protections Californians have had against unimpeded increases in property taxes. A well-funded coalition, known as the “Schools and Communities First” campaign, which includes, among others, the League of Women Voters of California, Evolve California, ACLU SoCal, the Coalition for Humane Immigrant Rights of California and the California Federation of Teachers, has qualified a measure for the 2020 ballot that would dismantle Proposition 13 by removing taxpayer protections for non-residential property.

The “California Schools and Local Community Funding Act” would amend Proposition 13 to raise taxes on business properties and vacant land not intended for housing by requiring reassessments every three years. This type of property tax is referred to as a “split roll” because it divides the property tax roll by residential and business properties.

Under Proposition 13, California property taxes are limited to 1% of assessed value and yearly increases are capped at the lesser of 2% or the rate of inflation. This formula provides homeowners and business owners with predictability when budgeting for property taxes and prevents extreme increases in rates when property values rise quickly. Adam Smith, often considered the father of modern economics, wrote long ago that “The certainty of what each individual ought to pay is, in taxation, a matter of so great importance that a considerable degree of inequality … is not near so great an evil as a very small degree of uncertainty.”

Proposition 13 has benefitted homeowners and business owners, and has created a stable, reliable and growing source of income to protect local schools and services during times of economic downturn. The California Tax Association reports that property tax revenue increased from $4.9 billion to $49 billion in the first 30 years after voters approved Proposition 13, according to data from the California State Board of Equalization. Adjusted for inflation and population growth, those figures indicate property tax revenue was 89% higher in California in 2010-11 than in 1978-79.

Helen Hutchison, president of the California League of Women Voters, has argued that the property tax protections ushered in with Proposition 13 have hurt the stability of state revenue by forcing California to rely heavily on volatile income taxes. “From the league’s point of view,” she states, “the major thing we’re looking for is a stable source of funding for services.” But California’s own Legislative Analyst’s office has warned that the proposal will actually introduce more volatility into the state’s funding stream that could potentially put school funding and other programs at risk.

Under the proposal, non-residential properties and vacant land not intended for housing will be assessed at 2020 values and then reassessed every three years thereafter. Commercial property owners will lose certainty about future tax liabilities and one can only imagine the impact and cost to long-time property owners who will be faced with massive adjustments. Unravelling Proposition 13’s protections for businesses through a split roll will make the economy susceptible to potentially drastic ups and downs of the real estate market and could entail harsh budget cuts by local governments when the market plummets.

Although the proponents of the split roll proposal argue that “we can no longer afford to give billions of dollars in tax breaks to millionaires, billionaires, and big corporations,” it is small businesses who will inevitably be hit the hardest, and they, along with large businesses faced with significantly higher property taxes, will be forced to pass on the cost of these taxes to consumers by increasing the prices of nearly every product we use. Potentially these businesses could be forced to eliminate jobs, move out of California, or close up shop altogether, which is the last thing our communities desire.

The California Assessors’ Association, a nonpartisan organization, recently released a study on the administrative and budgetary impacts of the split roll proposal and concluded that it was a recipe for disaster, not just for taxpayers and business owners, but also for county assessors.

According to the study, “The cost to complete the annual assessment roll would increase between $380 million and $470 million annually, state-wide, during the first five to ten years.” Bob Dutton, the San Bernardino County assessor and a former California State Senator and Assemblyman, writes that this figure “doesn’t even include the additional costs of training employees, upgrading technology and the additional cost burdens on downstream agencies to accommodate a split roll. After factoring in the latter, it is estimated that the state-wide costs of implementing a split roll would range from $517 million to $639 million annually.”

“Implementing a split roll would be a logistical nightmare”, he continues, “as the study also found that as many as 900 new positions would be needed. Trained assessors are few and far between. We simply don’t have enough assessors available to even consider implementing a split roll.”

If passed, not only would this initiative create a bureaucratic and administrative nightmare akin to that recently encountered by the DMV, but the split roll initiative would inflict a mortal wound on Proposition 13 protections for all property owners and would open wide the doors toward eliminating these protections for residential homeowners as well.

 

New Jersey: Call to ban Assessors from Moonlighting with Reval Firms
State watchdog finds multiple cases of officials working for companies around time a municipality’s property assessment overhaul was underway

Municipal tax assessors in New Jersey are seen as impartial appraisers of property values to ensure that the tax system is fair and unbiased. But the state comptroller says some assessors have side jobs with firms hired to conduct revaluations in their towns — a finding that raises serious ethical concerns.

An investigation by the Office of the State Comptroller (OSC) — New Jersey’s independent watchdog agency — found multiple instances of municipal tax assessors working for these firms at or near the time the municipality’s property-tax revaluation took place, “leaving ample opportunity for unethical self-dealing.” One town business administrator told OSC that when he expressed concern to a revaluation firm regarding this behaviour, he was advised “not to worry” and that “this happens all the time.”

When a town undergoes a revaluation — a wholesale recalculation of property-tax assessments done to realign them with actual market values — the tax assessor acts as the “project manager” or “supervisor” of the process, according to State Comptroller Philip Degnan. As such, the assessor is tasked with making sure benchmarks and contract terms are met on time. In this overseer role, Degnan wrote in his report, “an assessor cannot reasonably maintain his or her objectivity and independence on behalf of the town while simultaneously performing work for the revaluation firm.”

Using data from 2015 to 2017, the OSC was able to identify at least five tax assessors who worked for, or had worked for, the revaluation firm hired to perform the assessment in the town in which they were employed as assessors. At least one of those individuals appears to have worked as a town’s assessor and for the revaluation firm that was hired to conduct the revaluation in the town at the same time.

“Taxpayers rely on municipal tax assessors to conduct a fair and above-board assessment of their tax liabilities when a revaluation is conducted,” Degnan said in a statement. “My office’s recommendations of increased enforcement and new regulations will help to ensure that these assessments are done fairly.”

Andrew Cliver, a spokesperson for OSC, said the agency would not be releasing the names of the individuals and towns in question due to strict due-process requirements that necessitate giving those mentioned time to respond before going public.

Degnan, though, is recommending that two agencies — the state Division of Taxation and the Division of Local Government Services of the Department of Community Affairs — conduct a more extensive investigation and draft regulations that keep an assessor from having any employment with, or financial interest in, a revaluation firm performing work in any municipality within the county in which the assessor serves.

Is it legal?
While the OSC believes the concurrent employment practices of tax assessors is a conflict of interest, its legality is a bit of a grey area.

Municipal tax assessors hold what OSC calls “a unique hybrid employment status” in New Jersey. They have responsibilities to the citizens of the town, the local governing body, the county Board of Taxation and Tax Administrator, and the director of the Division of Taxation at the state level. In terms of ethical requirements, assessors are considered “local government officers” and are governed by the state’s Local Government Ethics Law.

The Local Finance Board within the Division of Local Government Services has jurisdiction over tax- assessor conduct and governance.

A spokesperson for the agency said the Local Government Ethics Law does not require a tax assessor to seek approval for secondary employment from the Local Finance Board. Tax assessors are required, however, to file an annual financial-disclosure statement.

Recusing oneself from performing any actual work for the revaluation firm may not fix the ethics problem, according to the comptroller’s report. Experts told OSC that the assessor “could still receive a financial benefit from the revaluation firm by virtue of the contract having been awarded to the firm with which he or she is associated, even if the assessor is not actually performing any revaluation work.”

The comptroller noted that, while several local-government ethics rules appear to prohibit a tax assessor from simultaneously working for, or having an interest in, the revaluation firm, there’s no law that rules the practice out definitively.

In 1993, the Division of Taxation adopted a regulation that expressly restricted an assessor from having any interest in a revaluation firm doing business in the state. However, that rule was rescinded the next year, a move that critics said would allow assessors to hold the kind of dual employment that OSC found this week. The rule does apply, however, to commissioners and employees of boards of taxation.

The OSC report also notes that several Attorney General opinions over the years “appear to support a finding that this type of concurrent employment constitutes a conflict,” but, none of them explicitly stated that dual employment would create a conflict.

What happens now?
With the legality around this practice blurry at best, OSC announced they will be referring evidence from their investigation to the Department of Community Affairs to continue to look into the matter.

At the same time, the comptroller’s legal research puts much of the responsibility on the Division of Taxation, which “has clear authority to enact restrictions on the outside activities of tax assessors.”

OSC is putting pressure on both agencies, recommending that they consider adopting strict rules barring an assessor from having any employment with, or financial interest in, a revaluation firm performing work in their municipalities. The comptroller also wants the Division of Taxation and the DCA to start putting municipal assessors on notice for engaging in such practices.

Legislation (A-1169) sponsored by Assemblyman Edward Thomson (R-Monmouth) has also been introduced this year that would codify those recommendations. That bill is awaiting action in the Assembly State and Local Government Committee.

 

Illinois: New assessments, old story
Property owners are receiving reassessment notices with increases of 200 percent or even 300 percent on commercial property and apartment buildings. Even those who planned for the reassessment this year never imagined increases on this scale and do not know how to budget for the potential tax increase. As an attorney who contests property tax assessments, I have been hearing a lot from taxpayers this year.

Townships in the north and west regions of Cook County are being reassessed in 2019 as part of the triennial reassessment cycle. All other counties in the state are also being reassessed this year on the four-year (quadrennial) reassessment cycle. It is imperative that taxpayers watch for reassessment notices because appeals must be filed within 30 days of publication. By the time a tax bill is received, it is generally too late to contest the assessment for that tax year.

In Cook County, the Assessor and the Board of Review each have a formal appeal process. So, if a taxpayer misses the opportunity to appeal to the Assessor, there is another opportunity to appeal to the Board of Review. In other counties, appeals must be filed to the Board of Review within 30 days of the assessment notice. Filing an assessment appeal to the Board of Review is a prerequisite to appeals to the Illinois Property Tax Appeal Board or the Circuit Court, so if a taxpayer misses the Board of Review deadline, the right to further appeals is lost.

Illinois already has the highest property taxes of any state except New Jersey. So, when property owners see their assessments double or triple, they have good reason for concern. The new Cook County Assessor, Fritz Kaegi, believes that commercial property in Cook County is under-assessed and is imposing assessment increases the likes of which some taxpayers have never seen. Assessors in other jurisdictions will soon begin to issue reassessment notices and we have yet to see how much those assessments may increase.

Everywhere in the state of Illinois except Cook County, the assessed value of real estate is one-third of the market value. In contrast, Cook County uses a graduated system of assessment with residential property assessed at only 10 percent of market value and commercial property at 25 percent of market value. In this way, most of the tax burden is shifted to commercial property owners.

The property tax is determined by multiplying the assessed value by the equalization factor (or “multiplier”) and tax rate. (Tax = assessed value x multiplier x tax rate.) The equalization factor is determined by the Illinois Department of Revenue from Transfer Tax Declarations. Those declarations are not just an additional tax imposed when real estate is sold. The information is used to compare assessments to sales prices.

If the Department of Revenue finds a disparity between sales prices and assessments, then it corrects the disparity by an equalization factor. In Cook County, the 2017 (last published) equalization factor was 2.9627. This means that the assessed value is multiplied by almost 3 times before the tax rate is applied.

The tax rate is the result of the levies of all of the taxing districts in which the real estate is located. Illinois has the most taxing districts of any state—ranging from mosquito abatement districts to school districts. In fact, we have about 2,000 more taxing districts then even the next runner up. In some locations, tax rates have reached 30 percent. The property taxes are almost as great as mortgage payments and make up most of the rent paid for commercial property. The amount of the tax burden can make or break a business.

As if assessments and taxes are not enough to worry about, taxpayers have another reason for concern. The Cook County Assessor is promoting legislation that will require owners of income producing property to turn over their financial records and tax returns every year—even if they do not file assessment appeals. Failure to comply would result in financial penalties. The proposed legislation would affect not only taxpayers in Cook County, but throughout the state of Illinois.

The Cook County Assessor wants the financial records of taxpayers to help assess real estate. The value of most income-producing property is determined by a process called capitalization. Essentially, the net income from real estate is divided by a capitalization rate to calculate the market value. The capitalization rate reflects various factors, including mortgage interest rates and the percentage return on investment.

The most important information for taxpayers is the fact that assessments are not set in stone. Assessment appeals can make a dramatic difference in taxes. The amount of real estate that assessors must value is enormous, so they often rely on mass assessment methods. If taxpayers provide specific evidence of the sales prices of comparable properties or the actual net income of commercial real estate, it is possible to prove that real estate is over-valued and to reduce assessments.

Where the new owners of a shopping center were struggling, I was able to use income capitalization to convince the Board of Review to reduce the assessment even though it was already lower than the purchase price of the property. Similarly, assessment appeals for an apartment complex produced annual savings of hundreds of thousands of dollars. Those savings may allow the hiring additional staff, improvements to the real estate or incentives to attract tenants to fill vacant space.

Most assessment agencies will also give temporary relief when vacancy rates are unusually high. The formula for relief varies, but in Cook County, the government may reduce the assessment on a building in direct proportion to the amount of vacancy. Experienced property managers and investors know that filing assessment appeals is just a part of doing business. This is especially true this year as real estate is reassessed.

Although it may offer little consolation, taxpayers should know that increases in assessment do not necessarily result in a proportionate increase in tax. If the entire assessment base is increased, but the taxing districts are not asking for more money, then in theory, the tax rate should be reduced to offset the increase in assessment. However, this assumes that everyone’s assessments are increased proportionately. The whole assessment process is a balancing act.

For example, if the assessment of commercial real estate in Cook County is increased at several times the rate of single-family homes, then the tax burden of commercial property owners will multiply. The same is true for homeowners if their property assessment increases by a larger percentage then their neighbors.

The uncertainty is a problem in itself. Homeowners do not know how much money to put aside for taxes or whether they will be able to afford the taxes on a home they want to buy. Commercial property owners do not know how much to charge tenants in anticipation of the taxes and tenants fear a sudden bill that they may be unable to pay. At the same time, investors cannot know whether real estate will be profitable and may refrain from investing in Illinois and, in particular, Cook County. Economists tell us that this uncertainty will have a chilling effect on the economy as a whole.

 

EUROPE

France: What Property Taxes Can I Expect in Paris?
From stamp duties to other fees, buying in the City of Lights has many costs

Paris may be a dream destination, but it comes with a cost. Taxes in France are high, and the capital city is no exception.

Buyers in Paris will have to pay stamp duties on the purchase, according to Jessica Duterlay, a tax associate at Attorney-Counsel, a law firm with offices in the U.K. and France.

Buyers should expect to pay about 8% of the purchase price in stamp duties, plus a registration fee of 5.8%. Buyers pay the notary’s fees as well, which are approximately 1% of the cost of the property.

New construction and homes bought off plans have a separate tax structure, according to the French tax firm Roche & Cie. Buyers pay about 2% in transfer and registration fees, plus a value added tax, or VAT, at the rate of 20% on the purchase price. The amount of registration fees included is 0.7% of the purchase price.

Once the property is purchased, there are a few regular taxes to consider.

Taxe Foncière, or property tax, is paid annually by the owner. The tax is based on “the cadastral income” of the property, which is determined by halving its rental value, Ms. Duterlay explained.

Tax rates for the Taxe Foncière vary depending on the location and condition of the home, according to Roche & Cie, but the taxe foncière rate for a primary home is around 1%, and 3% for secondary homes.

Taxe d’Habitation, or the housing tax, is paid by the person living in the home. If the property owner lives there, he or she will pay this levy as well. If the home is rented, the current occupant will pay it.

This tax is also based on the cadastral rental value of the house and any outbuildings, Ms. Duterlay said. It’s currently being phased out for many Parisians, but second-home owners and high-income households will still be charged, as reported previously by Mansion Global.

There’s also the wealth tax, or Impôt sur la Fortune Immobilière, to consider, according to Ms. Duterlay. Homes with a net taxable worth of over €1.3 million (US$1.6 million) are subject to the tax, although debt on the property and taxes already paid may reduce the taxable amount. The rate ranges from between 0.5% to 1.5%.

 

Ireland: High commercial rates threatening future of wind farms
Taxes ‘many times higher’ than for fossil fuels

The government has a target of 70 per cent of all energy coming from renewable sources by 2030

Commercial rates on wind farms could put companies out of business and may threaten Ireland’s ability to meet European Union-imposed renewable energy targets, the head of an industry body has warned.

Grattan Healy, chairman of the Irish Wind Farmers’ Association, has called for reforms to the way in which commercial rates are calculated for wind farms.

“Following the 2001 Valuation Act, the Valuation Office set about a revaluation of all rateable properties in Ireland,” he said. “Up to that time, wind farms were paying roughly the same rates per megawatt of generating capacity as other electricity generating stations and were fully accepting of same and happy to contribute to the local authority in support of their communities.

“However, the revaluation has in some instances tripled or even quadrupled rates for wind farms, while not doing anything similar for other generators. Such large increases amount to unfair government policy.”

The government has a target of 70 per cent of all energy coming from renewable sources by 2030. Ireland is the second worst EU member state in terms of meeting its commitments on reducing greenhouse gas emissions. Mr Healy said that many wind farmers were struggling to make ends meet and to keep their turbines functioning, as they were paying many times more in rates than generators that use fossil fuels. He added that the high rates were also deterring investors and putting community groups off wind.

He said that an IWFA member in Co Carlow was being asked to pay well over €100,000 a year, up from just over €40,000 when it began operations. Another wind farmer in Co Limerick had a demand for more than €80,000, up from less than €20,000.

“Existing wind farms were developed under support schemes and relied on the fixed price offering for electricity generated as being sufficient to cover all reasonable costs. Projects achieved bank approval on that basis and have contributed enormously to the task of reducing emissions, securing energy, creating employment and supporting communities.

“Now the state, through its valuation office, has decided to hugely increase the tax level on those same projects. This is an indirect form of retrospective change. Indeed, the increased tax may in some cases exceed the total support paid under the department’s support scheme, which defeats the whole purpose.

“The wind sector is keen to pay commercial rates, but rates that are reasonable and at a level similar to all other generators,” Mr Healy said.

The Department of Communications, Climate Action and Environment did not respond to a request for a comment.

Last month Richard Bruton, the environment minister, said that the state was “committed to taking the lead on climate action”. He said that the government wanted to build a “competitive renewable energy sector”.

 

UK – Northern Ireland: NI rates system set for major review
The Department of Finance is planning a major review of the rates system in Northern Ireland. Rates are the property taxes paid by households and businesses.

Some businesses, particularly in the retail sector, complain that the system has become an unfair financial burden. A Stormont minister would need to be in place to implement any recommendations that emerge from the department’s review.

The department last conducted a review of rates in 2016, but the Stormont crisis meant it was never acted on. The then finance minister, Máirtín Ó Muilleoir, proposed a number of changes, including increasing the rates charged on empty commercial properties.

There were also proposals that charity shops and halls of residence for students would have to start paying rates. It is understood the forthcoming review will take a more fundamental look at the system of local property taxation.

Business rates are currently based on a property’s net annual value (NAV). NAV is an assessment of the annual rental value that the property could reasonably be let for, at a fixed point in time.

The NAV is then multiplied by the “rate in the pound” to produce the annual bill.

 

UK – Scotland: Retailers plead for help as business rates hit 20 year high
Call to lower levy as discounting drags inflation down to 0.4% in April

Business rates in Scotland are at their highest in 20 years, according to official figures.

In response to a written parliamentary question, ministers confirmed both the headline poundage/tax rate and the large business rates supplement have reached their highest levels since 1999/2000.

The news came as it emerged that UK shop price increases slowed in April as retailers more than doubled the number of products on discount to boost sales.

Since the start of 2010, the headline business rate has leapt from 40.7% to 49%. For the 22,011 medium-sized and larger commercial premises – 5,065 of them retailers – liable for the large business rates supplement, the figures are 41.4% and 51.6% respectively.

April’s increase in the business rate added a further £13.2 million to retailers’ rates bills in Scotland. David Lonsdale, director of the Scottish Retail Consortium, said: “Headway is being made on rates reform; however progress is uneven and the overall burden of business rates is onerous.

“This is at a time when firms are already grappling with other government-imposed cost rises and with one in every eight shops in our town centres lying vacant. The cumulative burden of tax and regulatory costs has mushroomed over recent years and is accelerating the pace of change within the retail industry, as firms seek to reinvent themselves in the face of profound changes in shopping habits.

“We want to see a medium-term plan for lowering the rates burden, coupled with restoration of the level playing field with England on the large firms’ supplement. This would increase retailers’ confidence about investing in new and refurbished shop premises.”

British Retail Consortium figures showed price inflation fell to 0.4% in April from 0.9% in March as the number of both food and non-food products on offer more than doubled compared to both last year and last month.

Retailers have turned to placing more products on offer with shallower price cuts, with the substantial increase in discounting in April “a testimony to shoppers’ reluctance to spend and to the intense competition within the industry”, according to the BRC-Nielsen Shop Price Index.

The clothing and footwear category saw the highest growth in promotions, followed by DIY and fresh food.

BRC chief executive Helen Dickinson said: “Consumers will be pleased to see a slowdown in the shop price growth for both food and other goods. This has been driven, in part, by the significant number of promotions that have taken place in April.

“There were more than double the number of product lines on discount this month compared to the previous, as retailers hope to recover ground after March’s disappointing sales figures.

“Intense competition may be benefiting consumers but is cutting into the already slim margins of retailers. In order to be successful, retailers must invest in both their physical and digital offerings to ensure they can provide the customer experience consumers want.”

Mike Watkins, head of retailer and business insight at Nielsen, said: “The slowdown in shop price inflation this month is welcome news for shoppers who are now facing rising households bills across energy, travel and entertainment.

“However, many households are still cautious about spending, so we anticipate promotions continuing over the summer months to help the momentum in retail sales which was kick started by the late Easter and some warm weather.”

 

UK: Digital Services Tax not a panacea for the high street
The Chartered Institute of Taxation (CIOT) is tempering expectations that the planned UK Digital Services Tax is a cure for ailing high streets.

The CIOT makes this point in a submission to the House of Commons Treasury Committee’s inquiry on the Impact of Business Rates on Business. The Committee is examining how business rates policy has changed, including business rates retention and alternatives to property-based taxes, such as the proposed UK Digital Services Tax.

John Cullinane, CIOT Tax Policy Director, said: “The Digital Services Tax (DST) should not be seen as a panacea for the problems of ‘bricks and mortar’ high street shops.

“Questions around business rates and the drivers for the DST are very different issues. The DST is about the UK getting what is sees as the right share of international tax on profits based on value added by users – and not a tax on online sales more generally.

“The DST is expected to raise £440 million by 2023-24 and affect mainly large multinational businesses that operate search engines, social media platforms and online marketplaces. As such DST has a wholly different focus to business rates.

“Business rates are a tax on the occupation of business premises such as shops, offices and warehouses. Rates are charged on the land and the buildings on it. They raise significant revenues forecast to be in the region of £31 billion annually. But business rates are criticised, notably by economists, because much of land is exempt or given reliefs, and taxing buildings means imposing a cost on business and specifically on the value of improvements.”

John Cullinane added: “Economists caution against removing business rates suddenly, or failing to tax land values at all, as ultimately, that would give windfall gains to current owners.

“Those who share the view that the real economic burden of the tax falls significantly on landowners might prefer it if the legal structure of the tax were brought fully in line with this. This would be a significant change requiring extensive consultation.

“In any event, those who believe that the tax system should be used to help the high street hold its own better in the digital economy should not think of the Digital Services Tax as a plausible way of doing it.”

The Government has announced that it will introduce a new Digital Services Tax in April 2020 However, the Government will continue to lead efforts with its partners in the EU, G20 and OECD to reach international agreement on future reforms to the international corporate tax framework, and will dis- apply the DST when an appropriate international solution is in place.

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