Member News

Update on Property Tax Issues: October 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: County Assessors Are Wary of Proposed Prop. 13 Overhaul

Thousands of property appraisers who work for county assessors across the state are about to retire. That has assessors worried because a state-wide ballot initiative is offering to change the way certain properties are valued in California.

The California Board of Equalization met in San Diego this week to gather feedback from officials on the best ways to recruit and retain property appraisers who work for county assessors across the state. About 70 percent of those appraisers, according to state data, are over the age of 50.

That means thousands of appraisers — who play a key role in the collection of property taxes that fund schools and cities — are about to retire.

This large turnover in staff has county assessors worried because a state-wide ballot initiative is offering to change the way certain properties are valued in California. A coalition of unions, advocates and Democratic politicians want to amend the state Constitution so that commercial and industrial properties are taxed based on their market value, rather than their purchase price.

Approved in 1978 by voters, Proposition 13 set limits on the annual increases of a property’s assessed value. It was designed to protect families from sharp tax increases on the death of a loved one. But as the Los Angeles Times reported last year, Prop. 13 has also proven highly profitable to an elite group of people who use second homes as investments, providing windfalls for long-time homeowner families while exacerbating generational inequities.

Prop. 13 has also meant fewer resources for schools and local governments — an estimated $528 billion over the last 40 years.

Under the new initiative, which has qualified for the 2020 ballot, commercial and industrial properties would effectively be removed from Prop. 13, providing schools and cities with new resources. Polls suggest that a slight majority of Californians are in favor. But the county assessors at Thursday’s Board of Equalization hearing were skeptical.

Santa Clara County Assessor Lawrence Stone said the initiative would be impossible to implement on the timeline its proponents have offered, because it would cause assessment appeals — and the costs to review those appeals — to skyrocket. By his account, it takes five years to fully train a commercial and industrial property appraiser.

Stone also complained that while the initiative is offering to give small businesses a break, assessors are not equipped to verify how many people work for a business. Some might lie in order to keep their tax rate low, he suggested.

Supporters of the initiative acknowledge that the funding in increased taxes wouldn’t begin to flow and offset the cost of all those new assessment appeals until 2023, but argue that the Legislature could ramp up its reimbursements to counties sooner.

“No one wants to leave county assessors holding the bag,” said David Lagstein, the Service Employees’ International Union political director. Others portrayed the initiative in a moral light, arguing that the new revenue could be used on homeless services and affordable housing.

“This is a funding stream that will allow cities to rebuild, to refurbish, to reform, and this is a fight for the future of California,” said Christopher Rice-Wilson, associate director of Alliance San Diego. “We’ve been starving our governments, we’ve been starving our communities for 40 years, and it’s time to stop.”

Board of Equalization members were expected to listen to the initiative’s supporters and opponents and ask questions, but at least one of them made clear he’s already made up his mind: Mike Schaefer, a Democrat who represents San Diego, Orange and Riverside counties and parts of San Bernardino.

Schaefer said the initiative was vaguely written and a bad idea because it would put certain tax policy decisions best left to the Legislature in the hands of county assessors. “They’re creating a monster,” he said, referring to the initiative’s supporters.

 

Texas: Cities and Counties Scramble to Increase Property Taxes Before New Law Takes Effect

The new property tax law, which kicks in next year, limits increases at 3.5 percent for local governments and 2.5 percent for school districts with anything above requiring voter approval.

Since the so-called “Super Bowl” property tax legislation of the 86th Legislature was signed into law, many taxing entities have been trying to squeeze all they can out of taxpayers before the new limits go into effect next year.

Currently, these entities can increase property taxes by as much as eight percent before triggering a ratification election with voters. Once the new law takes effect, that will be lowered to 3.5 percent for cities and counties and to 2.5 percent for school districts.

Some counties, such as Lubbock and Harris, have been forced to adopt the effective tax rate (no-new- revenue rate) through a loophole in the state’s local government code requiring a quorum at a regularly scheduled meeting.

Conservative legislators on the Lubbock and Harris County commissioners’ courts simply decided not to show up for a meeting to prevent a tax increase from hitting their constituents.

Other entities, however, have raised property taxes right up to the current threshold. Dallas County raised property taxes 7.5 percent. The Tarrant County Commissioners Court proposed a rate increase between nine and 10 percent to the tune of $43.5 million in additional revenue.

Travis County will adopt an eight percent increase. And Bexar County will increase property taxes by around six percent from the previous year. On the city side, Austin will raise property taxes by eight percent.

Meanwhile, Fort Worth elected to raise their tax rate 2.39 percent — above the effective rate, but below the 3.5 percent limit that SB2 implements. Next door, the City of Dallas reduced its property tax rate by one-hundredth of a cent.

However, the amount of property taxes collected will still increase because of rising appraisals. Similarly, the City of San Antonio adopted a 2.43 percent increase from the previous fiscal year.

Houston elected to decrease its rate by two-cents which will yield a slight 1.8 percent increase total in property tax revenue collected after the aggregate appraisal increase.

As for El Paso, the city will bring in 7.1 percent — or roughly $21 million — more in property taxes this fiscal year compared to last.

The City of Denton will bring in 6.31 percent more revenue from property taxes than the year before

— a three-cent decrease from the previous year’s rate.

Fredericksburg’s proposed 2020 budget would raise over 12 percent more property tax revenue, amounting to about $585,000 in additional funds.

And Lufkin has proposed a budget that would bring in five percent more revenue from property taxes.

The legislature made a point of addressing “bread and butter” issues and property taxes were chief among them. But numerous figures — including both Sen. Pete Flores (R-Pleasanton) and Rep. Jeff Leach (R-Plano) — say there is still room to improve when the next legislative session convenes in 2021.

Clearly, some officials at the local and county level see their efforts as the last opportunity to snatch additional tax dollars before the new law’s caps kick in, bringing a greater level of voter scrutiny and approval required for future taxing plans.

 

Illinois: Better data, more state funding needed to address property tax crisis, assessor says

The collapse of the housing market and the financial crisis that followed triggered events that caused property taxes to skyrocket in the south suburbs, Cook County Assessor Fritz Kaegi said Tuesday evening during a town hall in South Holland.

Kaegi and other local and state officials fielded questions and discussed potential solutions to the property tax crisis with an audience of about 70 people at South Suburban College.

Many homes in the region lost about half their worth during the economic downturn, and values have been slow to recover, Kaegi said. That caused property tax rates to increase to today’s high levels that are squeezing owners of homes and businesses.

“Many communities saw their housing values halved because of the crisis,” Kaegi said. “That can make rates double.” That’s because the property tax system in Illinois starts with a tax levy, he said. The levy is an amount set by various taxing bodies. Once the amount to be collected is known, the assessor is supposed to determine how the tax burden should be distributed among property owners.

“Here, we do it backwards,” Kaegi said. “We start with the levy, then we do assessments to divide up the tax bill.”

There is less wealth in the south suburbs than in the city of Chicago or the northern suburbs, according to an annual report issued in June by the Cook County clerk’s office. The report listed tax rates for the county’s 130 municipalities.

Audience members listen to a speaker during a forum on property tax reform on Tuesday, Oct. 1, 2019, at South Suburban College in South Holland.

“Tax rates have an inverse relationship with taxing district equalized assessed values,” the report said. Taxing districts throughout Cook County billed taxpayers a record $14.9 billion in total property taxes this year, the report said.

The highest tax rates in suburban Cook for 2018 were in Park Forest (34.55%), Ford Heights (30.76%) and Riverdale (30.72%), the report said.

The lowest rates were in Hinsdale (6.9%), Burr Ridge (7.2%) and Barrington (7.5%). Chicago’s tax rate was among the lowest, at 6.8%.

Tax rates matter for obvious reasons. A property with an assessed value of $100,000 would be billed $30,000 in property taxes in a community where the tax rate was 30%, but only $7,000 where the tax rate was 7%.

High tax rates in south Cook have driven many residents and business owners elsewhere, including to Will County and Indiana, officials said. A state legislative task force charged with proposing solutions to the property tax crisis is focused on providing relief for the south suburbs, Kaegi said.

“The Southland is particularly sensitive to reform,” Kaegi said. “It all comes together here … No place is more exposed than the Southland.”

Elected officials at the forum included state Sen. Michael Hastings, D-Tinley Park; state Reps. Will Davis, D-Homewood, Debbie Meyers-Martin, D-Olympia Fields and Nicholas Smith, D-Chicago; Cook County Board member Donna Miller, D-Lynwood; and mayors Vernard Alsberry, of Hazel Crest, and Riley Rogers, of Dolton.

“This conversation is long overdue,” Davis said. “We know we’ve got some challenges.”

The legislative task force is due to submit its recommended solutions to Gov. J.B. Pritzker by Dec. 31. The Property Tax Reform Task Force is tied to a push by Pritzker to convince voters state-wide in November 2020 to support the Fair Tax Amendment. If approved, the referendum would amend the

Illinois Constitution to allow a graduated income tax structure where wealthier individuals and businesses would pay higher rates than the current flat rate charged to everyone.

The concept is that if the state collected more revenue from income taxes, it could get closer to fulfilling its constitutional obligation to be the primary source of funding for public education. Instead of funding at least half the cost of schools, states resources account for about one-fourth of school funding, Kaegi said.

“What’s missing (in the conversation) is how much we rely on property taxes to fund schools,” Kaegi said.

Local elementary and high schools typically account for about two-thirds of property tax bills, Kaegi said. Municipalities, townships, county government, park and library districts and other taxing bodies account for the rest.

“We’re caught in a trap now,” Kaegi said. “No area of the county or state has more riding on passage of the Fair Tax Amendment than the Southland.”

Increasing the state’s share of education funding is one of several steps that could be taken to address the property tax crisis, lawmakers said.

“Finally, we’ve got some order and strategy to the conversation we’ve been having for years in the south suburbs,” Meyers-Martin said.

As he has done at multiple forums since taking office in December, Kaegi described how he is implementing reforms to promote fairness, accuracy and transparency in the assessment process.

He urged lawmakers to approve a “data modernization” bill that would allow the assessor to consider rental income and other factors when calculating market values of some properties. Kaegi said he also wants to incorporate the effects of foreclosures into the market-value assessment process.

Property owners already introduce foreclosures, rental incomes and other data into the property assessment appeals process, Kaegi said.

“It’s data they give during the appeals process, it just comes to us too late,” Kaegi said. “What we want to do is get (the assessment) right the first time.”

In many other metropolitan areas around the country, typically only 2% to 3% of property owners appeal their assessments, Kaegi said.

“Here in Cook County we’re over 30%” of owners appealing assessments, he said.

Miller said county commissioners support Kaegi’s reforms, but also want to revise the system of property-tax breaks for economic development incentives. Currently, owners of vacant commercial properties can seek assessment reductions of up to 90%, Kaegi said.

“We need to make sure we’re not accidentally incentivizing vacancies,” Kaegi said.

A  proposed  change  would  give  municipalities  the  ability  to  challenge  a  “perverse”  assessment reduction for commercial and industrial properties that are vacant for two years, Kaegi said.

Vacant stores hurt a town’s ability to raise revenue through sales taxes, officials said. It is one of many examples of the complicated connections among income, property and sales taxes.

“When we talk about property taxes, mayors deal with the problem more than anyone else,” Alsberry said. “We’ve been dealing with the problem for so long, I think a lot of people gave up hope that anything would happen to fix the problem.”

 

New York: Lawmakers Seek NYC Property Tax Fix After Months of Inaction

  • State legislators, mayor look to 2020 session for first system reforms since 1996
  • Senators gathering input while awaiting city advisory commission findings, pending lawsuit

New York state legislators – after months of inaction from a New York City advisory commission – intend to tackle reform of the city’s much-criticized property tax system themselves.

State Sen. Brian Benjamin (D), chairman of the Senate Budget and Revenues Committee, is conducting a series of public forums across the city to hear from constituents, policy makers, and elected officials on how to bring more fairness and transparency to the system.

The September-October listening tour has the endorsement of Senate Majority Leader Andrea Stewart-Cousins (D). She cast city property tax reform in the 2020 session as the next stage of work by the newly Democratic-controlled chamber to follow up on major rent reform legislation in June that beefed up tenant protections.

At stake is the structure of a system that, with nearly $30 billion a year in tax collections, makes up nearly half of the city’s revenue. The changes would be the first in more than 20 years to a tax framework widely maligned as opaque, confusing, and riddled with disparities and inequities.

A pending 2017 lawsuit by a coalition of real estate interests, civil rights groups, and elected officials is seeking to have the system declared unconstitutional, leading Mayor Bill de Blasio (D) and City Council Speaker Corey Johnson (D) to convene an advisory commission in May 2018 to recommend ways to improve fairness and transparency.

But the commission hasn’t held a public meeting since the end of February or released a timeline to issue recommendations, fueling impatience among critics.

The commission’s mandate is for the proposed reforms to be revenue-neutral—meaning that some taxpayers will pay more if others will pay less. So, there will be winners and losers.

“At the end of the day, there’s largely policy consensus that high-end properties in expensive or rapidly gentrifying areas, including co-ops and condos, pay too little in property taxes and that utilities, rental properties paying full taxes, and—to a lesser extent— small residential properties in lower-value areas, are often paying too much,” said Moses Gates, a vice president of the Regional Plan Association good-government group, said in a statement Sept. 27. “There is far less consensus about commercial property owners and whether they pay too much.”

The role of the state Legislature is central, since most of the important steps being discussed to equalize the tax burden among taxpayers would require changes in state law. The Legislature’s unexpectedly broad action on rent regulation, which dealt a major lobbying blow to landlords, may have raised the stakes.

Collaboration Seen

The state legislators respect the city’s process but have to gather their own input on the issues, Benjamin said.

“We see this as working collaboratively with the mayor and the council, assuming they provide their recommendations,” he told Bloomberg Tax on the side-lines of a standing-room-only public forum in Jamaica, Queens, a middle-class section that’s one of the hardest hit by the system’s disparities. “But if not, we want to be prepared to act on this. It’s our due diligence to hear concerns directly from the most impacted communities.”

While the commission deliberates and the litigation continues, “it’s unacceptable to be taxing seniors and lifelong residents of southeast Queens at a higher effective tax rate than the billionaires moving into expensive condos,” Sen. Leroy Comrie (D) said at the Sept. 26 evening meeting. The effective tax rate is the amount of real property tax as a fraction of the property’s market value.

“The state Senate is here and prepared to act,” Comrie sought to reassure a restive audience of more than 200, which greeted some remarks with murmurs and shouted responses. “What’s the polite word? We’re being ripped off. We want to get something done next year.”

Benjamin said that de Blasio has told him to expect the city’s reform proposal for consideration in the next legislative session, which begins in January and ends in June. The commission has pushed back timelines before, but a City Hall spokeswoman, Laura Feyer, backed up Benjamin’s account.

“The commission will release its recommendations by the end of this year, and the mayor will be lobbying on behalf of New Yorkers in Albany next year,” she said in a statement Sept. 27.

City Council members have been told that the commission’s preliminary recommendations will come out in late October or early November, Council Member Daneek Miller (D) said at the Queens forum. Commission leaders have said before that final recommendations would follow the preliminary findings after another round of public input.

The lawsuit, meanwhile, remains at a near-standstill after the trial judge refused a motion by the city and the state to have it dismissed and then stayed further proceedings while cross-appeals are pending. Arguments on the appeals are slated for mid-October.

The plaintiff, Tax Equity Now New York LLC (TENNY), wants the court to declare the system unconstitutional. “Commissions that don’t do anything and a lack of political will from politicians are exactly why we went to court,” the group’s spokesman, Chapin D. Fay, said in a statement Sept. 27. “We would again urge the City and State to stop opposing our lawsuit at every turn and to put their time and energy into reforming what everyone agrees is an unfair, discriminatory and unlawful property tax system.”

‘Sat on Their Hands’

Lawyers for the group maintain that the city won’t act on its own. “The City and the State have made abundantly clear by their inaction and delay, even since this case was filed, that they will not act unless compelled by the courts,” they said in a Sept. 23 brief.

Although both have long recognized the system’s failures, “they have sat on their hands and offered excuses for decades,” the brief said. “But this can has been kicked down the road for long enough.”

De Blasio, in a July interview on WNYC radio, acknowledged the system’s problems and said that, with the state Legislature returning in January, “we’re coming up to the point where these things are going to be put on the table and resolved.”

The challenge is “to figure out how to make the system better but not lose substantial revenue in the process,” he said, adding, “So it’s not going to be a panacea, to say the least.”

The case is Tax Equity Now LLC v. New York City, N.Y. App. Div., No. 2019-3610, brief 9/23/19

 

EUROPE

Germany: Property Tax Reform

The German Bundestag passed the Federal Ministry of Finance’s proposal for a property tax reform by approving an amendment to the Basic Law.

The property tax reform must be completed by the end of the year as the Federal Constitutional Court had previously objected to outdated tax bases.

Professor Sebastian Siegloch, head of the Research Department “Social Policy and Redistribution” at ZEW Mannheim, comments on the adoption of the reform by the German parliament.

“Economically, it makes sense to closely link the amount of property tax to the value of real estate. In this respect the reform passed today is to be welcomed.

Unfortunately, the so-called ‘opening clause’ allows the individual federal states to go their own way and base the tax solely on plot size. Hence, the reform could lead to a federal fragmentation.

If the plot size model prevails in the competition between the individual states, there is the danger of an economically unsound and unfair property tax.”

What you need to know about the German property tax reform that affects us all The Bundestag on Friday paved the way for the reform of Germany’s property tax, which most of us have to pay in some form. Here’s what you need to know.

What’s happening?

Last year the Constitutional Court ruled the Grundsteuer (property/land tax) obsolete and gave the government until the end of 2019 to come up with a new way of calculating the tax for Germany’s 36 million properties.

On Friday the Bundestag paved the way for reform with an amendment to the Basic Law.

As put forward by Finance Minister Olaf Scholz, of the centre-left Social Democrats, the tax will now be calculated according to land value and rent, which means 36 million properties and houses have to be revalued.

However, due to pressure from the state of Bavaria, there will be a clause that means states can introduce their own regulations.

Here’s the background and who has to pay it:

What exactly is the Grundsteuer and do I have to pay it?

It’s the tax on the ownership of land and buildings. And almost all of us pay it, either directly or indirectly. The tax is levied on everyone who owns a property. But even if you are a tenant, you still probably pay, as landlords almost always pass the cost onto tenants in the form of Nebenkosten (supplementary costs) in their contract.

One tax expert told mortgage specialists Hypofriend that property tax for an 80 square meter apartment in Berlin (Altbau, located in a 1,500 square meter property and in good condition) amounts to €260 per year.

Research by the Institute for the German Economy shows that the Grundsteuer on a typical apartment is €299 each year.

Owners of whole apartment buildings often have to pay four-digit amounts.

Why is it important?

For local governments, property tax is one of the biggest sources of income. It makes up 15 percent of their tax revenue, contributing to the building of community facilities such as roads and swimming pools.  According to the Federal Statistical Office, revenue from property tax last year totalled €14.2 billion – all going to local governments.

How is the tax currently calculated?

How much you pay depends on the assessed value of the property, the property tax rate and the assessment rate set by the local government where you live. Germany has 11,000 local municipalities, so there are lots of variations on the typical amounts that people have to pay.

For houses with the same basic tax rating for example, the final tax due could end up being €100 in one municipality and €1000 in another.

Why does it have to be changed anyway?

There’s been debate for years about the fairness of the tax. Why? Well, the tax is based on an estimate of the value of a property which is seriously out of date.

Properties were last valued for the tax in west Germany in 1964 and in east Germany in 1935. So when your local Finanzamt calculates the tax, they are doing so based on the value of your property over half a century ago.w

It’s fair to say the value of homes has changed somewhat since then. For instance an apartment that was stuck next to the Berlin Wall in 1964 could now be in one of the trendiest neighbourhoods in Germany.

It’s been on the agenda with the government for a while. A majority of states even suggested a new way of assessing the tax back in 2016.

The proposal back then prescribed that property value would be replaced by a calculation based upon size of property, location, transport connections and cost of build.

But both Bavaria and Hamburg blocked the change, fearing that it would lead to a rise in taxes for their residents.

How will the tax be calculated in the future?

This will depend on the state where you live. Finance Minister Scholz wants a general rule that will see the value of the land and the average rent play a role in the calculation.

At the same time, however, there is to be an opening clause in the bill which will allow individual states to introduce their own regulations. Bavaria, for example, wants to use only the size of the property for the calculation. No matter which model a federal state chooses, the local governments still have the last word on assessment rates.

Will anyone have to pay more – or less – tax?

This is hard to predict. Scholz has said that the “good news” for taxpayers is that overall there won’t be higher rates.

But it is likely that, in individual cases, some people will have to pay more than before, and others less. The details are hard to predict because of the varying collection rates by local governments and how they will be adjusted after the change.

Which model is best for residents in Germany?

This is controversial. With the Scholz model, all houses and undeveloped land would have to be regularly revalued. This is not only costly and time-consuming for local authorities, but as property values and rents continue to rise, the property tax would automatically increase.

But the model proposed by Bavaria also has disadvantages: a farm in the north-east of Bavaria would have to pay just as much tax as a property of the same size but much more valuable in the centre of Munich. Many consider this unfair.

What happens next?

Despite criticism, especially from the Free-Democrats, the Bundestag has voted for the reform.

Once the new law has passed through the Bundesrat too, which is considered certain as the details of the reform have been agreed with the federal states, the government will have a transition period to carry out the assessments necessary to start levying the tax accordingly, with plans to launch the new tax in 2025.

Those five years are needed because it will take some time to reassess all of the country’s some 36 million properties.

What does reform mean for tenants?

People who live in locations where rent has gone up significantly in recent years, such as large cities, may have to pay more because the average rents in locations is to play a role in how to calculate property tax.

However, the German Tenants’ Association wants the property tax removed from costs that tenants have to pay so that they no longer have to pay it.

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