Not just Trump: Battle over property taxes is a common problem
In addition to his income tax troubles, Donald Trump has been engaged in a聽聽But he鈥檚 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聽聽sheds some light on the story.
How do property tax appeals affect local public finance?
Property taxes provide nearly half of local governments鈥� own-source general revenue and are an important source of funds for public safety, schools, and other community services. 聽Determining taxes owed starts with assessing a property鈥檚 value 鈥� 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:
- Sales of comparable properties (鈥渃omps鈥�) in the local real estate market
- Cost of construction less depreciation
- 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聽vacant聽big-box stores (鈥渄ark stores鈥�) 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聽. These idiosyncrasies limit potential buyers and depress the property鈥檚 market value. And that means a retailer鈥檚 鈥渄ark store鈥� assessment is far lower than traditional assessments, which take into account a store鈥檚 income generation. Stores have made this argument in assessments appeals in聽,听,听,听, and聽. In the township of Marquette, Michigan, Lowe鈥檚 successfully appealed and聽.
But the effect of tax appeals on local public finance itself remains a black box. There鈥檚 little data available on how often appeals are successful and how court judgments affect local tax assessing jurisdictions 鈥� 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聽聽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聽, also use appeals to reduce their tax liability. In Jefferson County, Texas, where over聽聽is industrial, the local appraisal district聽聽or 7 percent of its taxable value, due to assessment appeals.
Can local governments prevent these appeals? Firms often successfully appeal based on states鈥� 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 鈥� simply because they are home to profitable businesses鈥� may聽.
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聽, however,听聽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聽聽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 .
