Not just Trump: Battle over property taxes is a common problem

Property taxes are an important source of funds for public safety, schools, and other community services. But assessing them can be tricky. 

Fred Prouser/Reuters/File
A contractor loads a bathroom vanity cabinet onto his truck after purchasing it at a Lowe's store in Burbank, Calif. Big-box stores have unique layouts and building characteristics that often make them unsuitable for other uses, which can make them difficult to assess for tax purposes.

In addition to his income tax troubles, Donald Trump has been engaged in a high-profile battle over property taxes. But he’s not the only business owner in this situation. It turns out that big-box stores are in the midst of their own battles over assessments, or how properties are valued for tax purposes. A recent article about “dark stores” sheds some light on the story.

How do property tax appeals affect local public finance?

Property taxes provide nearly half of local governments’ own-source general revenue and are an important source of funds for public safety, schools, and other community services.  Determining taxes owed starts with assessing a property’s value – a process that can be more art than science.

One local government entity, usually the county, is responsible for assessing property tax values, even if a property is ultimately taxed by multiple jurisdictions, such as the city, school district or local hospital district. Most local appraisers estimate value with one, or a combination, of the following methods:

  1. Sales of comparable properties (“comps”) in the local real estate market
  2. Cost of construction less depreciation
  3. Income produced by a property

Methods vary, however, by jurisdiction and property type, and each local real estate market is unique. These conditions make local tax assessments vulnerable to appeal by property owners who claim their property is overvalued and hence overtaxed.

Some big-box stores, for example, are appealing their assessments and asking governments to rely on comps, but with a twist: They argue that vacant big-box stores (“dark stores”) are the closest comps.

Why? Big-box stores have unique layouts and building characteristics that often make them unsuitable for other uses. And some retailers impose deed restrictions on their own properties that prevent competitive retailers from using their space. These idiosyncrasies limit potential buyers and depress the property’s market value. And that means a retailer’s “dark store” assessment is far lower than traditional assessments, which take into account a store’s income generation. Stores have made this argument in assessments appeals in AlabamaIndianaMichiganTexas, and Wisconsin. In the township of Marquette, Michigan, Lowe’s successfully appealed and reduced its taxable value from $5 million to $2 million.

But the effect of tax appeals on local public finance itself remains a black box. There’s little data available on how often appeals are successful and how court judgments affect local tax assessing jurisdictions – and even less on implications for overlapping local governments like school districts.

Some studies suggest that appeals may benefit some property owners more than others. A 2011 study from the Furman Center for Real Estate and Urban Policy found that in New York City a majority of property tax reductions went to large rental or commercial properties, with an insignificant share of reductions going toward smaller residential properties.

Owners of other unique properties, such as industrial facilities, also use appeals to reduce their tax liability. In Jefferson County, Texas, where over half of the taxable property value is industrial, the local appraisal district reported a 2013 losing of $1.8 billion or 7 percent of its taxable value, due to assessment appeals.

Can local governments prevent these appeals? Firms often successfully appeal based on states’ uniformity laws, which require that properties with similar characteristics be taxed at similar rates. Taxing operational big-box stores differently than similarly situated vacant properties – simply because they are home to profitable businesses– may violate state uniformity standards.

In 2015, Indiana attempted to resolve these disputes by establishing special assessment standards for big-box stores, since uniformity rules typically only apply within property classes. The state repealed these provisions in 2016, however, presumably due to persisting concerns about constitutional uniformity requirements. Lawmakers in Michigan have introduced similar legislation, but no bills have passed. However, in June 2016, a state appeals court instructed the Michigan Tax Tribunal to reconsider its dark-store assessment approach and examine other appraisal methods, such as cost-less depreciation.

Ultimately, successful appeals reduce an important source of revenue for local governments. The art of property assessment remains a moving target for local governments attempting to forecast revenues and pay for local services.

This article first appeared in TaxVox.

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