Update on Property Tax Issues: November 2018

By Paul Sanderson & Jerry Grad | International Property Tax Institute 

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 Europe and the USA.

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).

As far as Europe is concerned, this month’s report includes articles on Greece, Italy and the United Kingdom. With regard to the USA, articles include the announcement by Amazon on HQ2. Vatican hit with €4bn property tax bill

 

Greece: Property taxation damages Greece’s economy

The existing property tax framework in Greece hampers the expansion of its real estate sector, finds a report published on Monday in Athens.

The study by the Foundation for Economic and Industrial research (IOBE) noted that the introduction of the Single Property Tax (ENFIA), including its supplementary tax concerning ownerships of more than 200,000 euros, at the height of the country’s economic crisis has reduced yields in property sector investments, diminished transactions and discouraged investors from acquiring more properties in Greece.

It said that abolishing one of the taxes would boost the country’s output and employment. The economic impact of property taxation is estimated at an annual 6 to 9 percent of the country’s GDP, and a total of 70,000 to 100,000 jobs, the report pointed out.

It also entails the loss of tax revenues between 2.3 – 3.3 billion euros (2.6 – 3.7 billion U.S. dollars) per year from economic activity reduction. If the government abolished the supplementary property tax, the report estimated, it would bolster property prices by 5.1 percent and increase the country’s GDP between 1.1 and 1.4 billion euros, or by 0.6 – 0.7 percent, every year till 2022. It would also add some 33,000 jobs over the five years after abolition.

The report highlighted that with ENFIA in place, “investment in real estate becomes less attractive in terms of returns the greater the total value of a taxpayer’s assets is. Yields even turn negative when an owner’s total property exceeds 870,000 euros.”

It worried that this would discourage the acquisition of additional property. European Commission data showed that in 2016 Greece had the fourth highest ratio of property taxation in the European Union, at 3.2 percent of its gross domestic product. (1 euro = 1.12 U.S. dollars)

 

Greece: Lower property tax to boost consumption and real estate in Greece

Investment spending on construction projects across Greece dropped to 9.0 billion euros in 2017, from 33.6 billion in 2007, the Foundation for Economic and Industrial Research (IOBE) said, according to ANA.

In a survey announced on Monday, IOBE noted investments on home building accounted for 0.6 pct of GDP in 2017, from 10.8 pct in 2007, while investments on other construction projects accounted for 2.0 pct of GDP in 2017.

Economic recession negatively affected investments on homes throughout Europe, but the drop in Greece was three times greater. Building activity remains stable at a very low level, with a total of 14,000 building permits issued in 2017, from 79,000 in 2007. The number of transactions involving real estate assets was down 4.5 times compared with 2005 levels, while apartment prices fell 41 pct in the 2007-2017 period (the second largest drop in the EU-28).

IOBE said that property taxes accounted for 8.5 pct of tax revenue (2015 figures), up from an OECD average of 5.8 pct. The survey said that prices were down around 19 pct for the majority of buildings with an official value of up to 200,000 euros due to high property taxes. Property tax revenue totalled 5.7 billion euros in 2016, or 3.2 pct of GDP, from 1.9 pct of GDP in 2004.

 

Italy: Europe’s top court has ordered Italy to recover taxes unpaid by Vatican-owned non- commercial properties.

The European Court of Justice’s (ECJ) €4bn judgement on Wednesday covers the years 2006-2011 and will affect Vatican schools, hospitals and other properties. Previously, Italian law enabled the Vatican and other religious orders to avoid property tax so long as the building in question contained a chapel.

In 2012 the European Commission ruled in favour of a Montessori school based in Rome that argued it faced unfair competition by the untaxed status Vatican-owned schools enjoyed. However, due to “organisational difficulties” the EU institution said it would not retroactively collect the tax due.

Edoardo Gambero, one of the lawyers that represented the Montessori school in court told news agency ANSA: “This is a historic decision. “The European Commission must now order Italy to collect the taxes or face infraction proceedings.”

 

United Kingdom: Councils face £500m bill after ATM business rates ruling

Councils face an estimated combined bill of up to £500m to refund supermarkets after the Court of Appeal ruled that cash machines should not be assessed separately for business rates.

Retailers Tesco, Sainsbury’s and The Cooperative Group, along with ATM operator Cardtronics Europe have won their challenge to a 2010 decision by the Valuation Office Agency to create separate entries for the sites of supermarket cash machines.

Property consultancy firm Altus estimates that the backdated bill which businesses will be due via rebates at £382m, while property consultancy Colliers put the figure at £496m.

Robert Hayton, Head of U.K. business rates at Altus Group, said: “This landmark ruling and the tax rebates that will flow from it will have massive implications for councils and their budgets under business rate retention which could potentially impact upon local services.”

Jerry Schurder, head of business rates at Gerald Eve, said: “Due to the VOA decision, councils didn’t have any choice in the matter. “Arguably they have had a windfall as a consequence. However, they were fully aware of the challenge and presumably prudent councils will have made some sort of provision against the risk of having to pay refunds that will be due.”

Schurder said that there were around 50,000 appeals which could now be granted as a result of the Appeal Court decision. The judge in the case found that a decision in 2016 by the Upper Tribunal (Lands Chamber) had erred by not overturning the original 2010 decision.

He said: “I cannot see how it could have concluded, on the evidence before it, that in the case of any of these ATM sites, internal or external, the bank was in rateable occupation of the site as paramount occupier.”

The judgement said that the creation of business rates for cash machine sites had not been accompanied by a reduction in the rateable value of the supermarkets hosting them. The VOA has 28 days to petition the Supreme Court to review the decision, and a statement from the office said: “We are considering the implications of the Court of Appeal decisions.”

John Webber, head of business Rates at Colliers International, said that supermarkets would have removed many of their bank machines from their premises had the VOA won the case. He said: “We hope no further taxpayers’ money is wasted in pursuing this unnecessary and unfair claim.

“There was a real fear that if the VOA had been successful this would have opened up the floodgates to assess up to 400,000 vending operations which would have been calamitous for both retailers and those operators. “Hopefully, this puts the VOA zealots back in the box and they get on with dealing with the outstanding appeals instead of cooking the golden goose named ‘retail’.”

 

United Kingdom: Why councils should be wary of business rates reforms

News today that Britain’s high streets are facing their toughest trading climate in five years with a net loss of more than 1,000 shops so far this year does not come as a surprise. Indeed, the chancellor was responding to similar concerns when he announced a cut to business rates bills for smaller businesses not currently benefiting from existing small business rates reliefs at last week’s Budget.

The Treasury was quick to confirm that councils will be compensated for the £1bn cost of this tax relief, but that is almost beside the point. In recent years successive chancellors have repeatedly proved unable to resist the temptation of tinkering with business rates to address a perceived unfairness or unintended consequence of the current system. The regularity with which this has been happening over the past few years should make local government think twice about plans to fund councils through the full localisation of business rates for two reasons.

Firstly, it suggests business rates in their current form are unfit for the modern world. The disparity in rates (not to mention taxes, but that’s another story) paid by internet-based businesses and those with a more traditional presence in our towns and cities is one of the most obvious areas in need of reform. The government has proposed a new digital sales tax but detail is light and the idea has been rejected by the British Retail Consortium as “tinkering”. They are calling for a wholesale reform of the system.

Secondly, the government’s continued ability to “tinker” with business rates at a national level gives lie to the very concept of localisation of business rates. The recent Hudson review of local government finance processes at the Ministry of Housing, Communities & Local Government highlighted the complexity of the tax: set nationally, collected locally and spent by both national and local government. This has led to confusion amongst business, with councils unfairly shouldering much of the blame for the rate rises following last year’s revaluation for example.

The full localisation of business rates as currently proposed, with increases set nationally and required to be revenue neutral overall, will only add to the confusion while the level of redistribution required between councils will further undermine the notion of localisation.

Amongst the stated aims of the government’s fair funding review currently working up options for council funding beyond 2020 is to increase transparency and simplicity of the local government finance system. The Hudson review noted that the introduction of business rates pilots was a major driver behind the near doubling of variables required to calculate the local government finance settlement this year.

It seems unreasonable to ask local government to hitch its future to an increasingly impenetrable system creaking under the pressures of the modern world and piled high with a mish-mash of reliefs and exemptions over which it has no control. Localisation in name only hardly seems worth the bother.

 

USA: Amazon HQ2: tech giant splits new home across New York City and Virginia

Amazon has announced it will open new offices in New York City and Arlington, Virginia, capping a year-long contest to host the tech giant’s new headquarters that drew bids from hundreds of US cities.

The company plans to spend $5bn on its two new headquarters, with 25,000 employees each in Long Island City in Queens, New York, and in Arlington, outside Washington DC. Amazon also plans to open a new center handling transportation and order fulfillment in Nashville, which it says will employ about 5,000 workers.

Amazon had received more than 200 proposals from cities across North America vying to host the new headquarters, which will be in addition to its base in Seattle.

“We are excited to build new headquarters in New York City and northern Virginia,” said Amazon’s CEO, Jeff Bezos. “These two locations will allow us to attract world-class talent that will help us to continue inventing for customers for years to come.”

Amazon’s search, launched more than a year ago, brought in 238 bids from cities across North America, from heavy favorites like the eventual winners to smaller spots like Frisco in Texas and Danbury in Connecticut.

The competition brought it not just lucrative subsidy offers, but a rich trove of data about demographic patterns, infrastructure plans and workforce details.

Amazon narrowed the competition to 20 finalists in June, with cities such as Atlanta, Boston, Dallas, Los Angeles and Newark left in the running.

New York state has agreed to kick in $1.525bn in subsidies, the company disclosed in its announcement. That includes a tax credit worth up to $1.2bn, and a cash grant of $325m from the Empire State Development agency.

The company is planning to take up 4m sq ft of office space in Long Island City, a Queens neighborhood across the river from Manhattan. In addition, Amazon is applying for tax benefits through two city programs that give breaks to any company that relocates to the boroughs outside Manhattan or builds new industrial and commercial space.

Those programs could bring Amazon another $1.3bn in business tax credits and property tax breaks. The company agreed to donate space on its new campus for a tech startup incubator and a new public school.

At the Virginia site, about three miles from downtown Washington DC, Amazon is set to receive $573m in subsidies. That includes cash grants of $550m from the state of Virginia and $23m from Arlington, based on its promises to create high-paying jobs.

They will open another 4m sq ft of office space at a location they are calling National Landing, a newly coined name that includes parts of Crystal City and Pentagon City. The company says it will spend $195m on improvements to the Crystal City and the Potomac Yards metro stations, a pedestrian bridge connecting National Landing and Reagan national airport, and other infrastructure projects.

The Seattle-based tech giant is set to start hiring at both locations next year. It says average salaries will top $150,000 at both sites. “This is the largest economic development initiative that has ever been done by the city or the state,” New York’s governor, Andrew Cuomo, said at a press conference on Tuesday. “Either you are creating jobs, or you are losing jobs. Either you are part of the economy of tomorrow, or you’re part of the economy of yesterday. This is a competition.”

But the company has faced a backlash for conducting an extensive headquarters search, and soliciting generous subsidy offers from cities around the country, only to settle on two of the highest-profile metropolitan areas on the east coast. “The whole exercise was just to create more pressure for more tax breaks,” said Greg LeRoy of Good Jobs First.

Local politicians are vowing to fight the project, with a protest planned for Wednesday in Queens. “Amazon is a billion-dollar company. The idea that it will receive hundreds of millions of dollars in tax breaks at a time when our subway is crumbling and our communities need more investment, not less, is extremely concerning to residents here,” said Queens congresswoman-elect Alexandria Ocasio-Cortez.

New York and Virginia also both pledged to help the company get approval to build helipads at its new campuses. Cuomo and New York City’s mayor, Bill de Blasio, pushed back against criticism of the subsidies, saying they expected to make back nine times as much in tax revenue. “We make money doing this,” Cuomo said.

The project is set to be approved by a state agency, circumventing the vote by city lawmakers that would typically be required, Cuomo confirmed. Nashville is getting a consolation prize in the headquarter contest, and the state and city are giving Amazon $102m in cash subsidies and tax breaks. The new Amazon center there is planned for downtown Nashville, along the Cumberland river.

 

USA: What the Amazon tax breaks really mean

I think the easiest way to understand Amazon’s HQ2 and the specific question of cities handing out tax subsidies is to abstract away from the particular details of Amazon’s package.

A normal way for governments to raise revenue in the United States is with property taxes. If you build a gigantic new office tower somewhere, then you are going to owe a lot of property taxes to the local government.

So if you’re smart and have good lobbyists, you’ll say, “Hey, we were thinking of building a huge office tower in your city, but your taxes are so high. Maybe instead of paying the 8 percent property tax rate that’s on the books, we could pay 2 percent instead for the first 20 years.”

The city may well agree to this proposal because 2 percent of a giant office tower is still a lot more than 8 percent of a parking lot. What’s more, bringing your office tower to town is going to generate a lot of sales tax and income tax revenue while probably helping to bolster property values across the board. So while reporters are going to write, accurately, that your company got millions of dollars in tax breaks in order to build your office tower, the city still ends up with more tax revenue than it would have had if you hadn’t come to town.

So you can’t really say things like, “Instead of handing out millions in subsidies to Jeff Bezos, we should invest in the subway.” The subway doesn’t need a tax break; the subway needs actual money. And the tax breaks don’t represent money in hand that could be spent. Which doesn’t mean that the tax breaks are good!

One basic issue here is that competition between cities has regressive impacts. Opening a big office tower generates a lot of economic surplus. It’s good for the company, but it’s also good for the host city. In these Amazon-style competitions, the company pits cities against each other to see which one will cede the largest possible share of the surplus back to the company. Those subsidies aren’t an actual cost to the city that wins the competition, but they do represent a lost opportunity to share the economic surplus more broadly.

I don’t have an elegant solution to the problem of municipal competition, except to say — as I have said before — that the federal government ought to start playing a larger role in these situations to try to prevent cities from racing to the bottom.

What we want is a healthy form of competition where companies try to locate in cities that provide a high quality of public services relative to their tax revenue, so that cities have an incentive to try to govern themselves well. The current dynamic not only allocates too much surplus to rich companies, it undermines that healthy form of competition. Amazon doesn’t need to care whether New York City has cost-effective government or not; it just opts out of paying the costs.

But the very fact that mayors are inclined to hand out these subsidies should teach them a lesson about tax policy.

The virtue of land value taxes

The specific logic of Amazon subsidies is, when you think about it, exactly the general logic of Henry George’s old idea that we should tax land value rather than property value. Under Georgeism, in essence, everyone gets a “tax break” for investing in new physical structures because there is no taxation of investment in new physical structures. It’s only passive ownership of the land that gets taxed.

This obviously wouldn’t solve all the problems associated with cities’ competitive bidding for business favors. But the fact that cities are inclined to make these kinds of bids and aren’t necessarily wrong to do so ought to prompt some deeper thinking on their part about the extent to which their tax codes are or are not aligned with their actual policy goals.

 

USA – Wisconsin: Walmart pushes for a tax reduction in Muskego using the ‘dark store’ strategy

Add Muskego to the list of places where Walmart has again gone shopping for a better deal on property taxes, thanks a loophole in the state’s tax code known as the “dark store” challenge.

Already facing a lawsuit from 2017, Muskego is now mulling its response to a second challenge from the nation’s largest brick-and-mortar retailer, this time in an effort to adjust the store’s 2018 tax assessment at W159 S6530 Moorland Road by reducing its property valuation.

According to the 2017 filing by Wal-Mart Real Estate Business Trust, the real estate arm of the giant retailer, the Muskego Walmart store was overvalued at $11,338,500 against what it claims should be a $7.8 million value.

While the 2018 case is relatively new — Warchol said the city was formally served notice of the lawsuit in the past week — the summons and complaint filed Sept. 20 goes even further. It says the property should be assessed at $5.7 million.

In both instances, Walmart is asking for a refund on any property taxes already for those two years to reflect the lower property values.

In most cities, property taxes for homeowners and others go up to make up for the loss of revenue after the dark-store change happens, which is one reason it has grown so controversial.

It’s an uncommon concern in Muskego, but one which has been repeated by Walmart — as well as Target, Kohl’s, Menards, The Home Depot and Blain’s Farm & Fleet, among others — throughout the state since a legal strategy took hold several years ago.

A quick database search of Wisconsin Circuit Court Access online shows more than a dozen new cases opened in 2018 by Walmart alone in Wisconsin.

Part of information presented at a Committee of the Whole, and then in closed session, on Nov. 13 was intended to bring the Muskego Common Council up to date on the dark-store strategy used by big-box retailers to lower their property taxes, said City Attorney Jeff Warchol.

Using a strategy that has proved successful in Wisconsin courts, big-box businesses have argued that such properties should be assessed based only the value of the building itself, as if it were a vacant or “dark” property, excluding the business operations going on inside. Meanwhile, assessors have been basing the value of the property on the value of the store with a going business inside.

Area officials say it is a known tax loophole, one which the League of Wisconsin Municipalities is lobbying legislatures to close.

The result of successful court cases, as well as the settlements communities have been forced to make knowing the futility of fighting the challenges, is that the tax reduction realized by big-box stores in effect shifts the tax burden onto other property taxpayers, especially residents.

In Waukesha alone over the past three years, the settlements and court decisions involving Target, Menards, Walmart and Blain’s Farm & Fleet have cost the city $800,000, according to the city assessor’s office, Waukesha Mayor Shawn Reilly noted at a July 17 common council meeting.

Like Muskego, the village of Mukwonago faced a 2017 challenge by Walmart, as well. The retailer claimed the store at 250 E. Wolf Run was overvalued at $14,637,600 against a $9,250,000 dark-store value.

Warchol, who has served as Muskego’s city attorney for the past three years, doesn’t recall this specific dark-store strategy being used locally to date — that is, prior to Walmart’s action. (He noted that Kohl’s challenged its tax assessment several years ago, though not under the same legal approach.)

In Muskego’s case, the latest challenge is in its early stages, with the city meeting in closed session Nov. 13 to consider the litigation. Given that the city has been served two actions — one for 2017 and one for 2018 — by Walmart, Warchol said the city is considering processing both cases as one.

“Nothing is reduced to writing,” he said. “There is talk of settlement. We’re going to find out what they want.”

Warchol said the city will consider what step it should take next after conferring with attorneys from Walmart.

 

USA – California: Realtors resurrect defeated ballot measure to expand Prop. 13

On Nov. 6, California voters resoundingly rejected Proposition 5, which would have expanded property tax breaks for senior and disabled homeowners.

The measure garnered less than 41 percent of the vote. It was defeated in 57 out of 58 counties. Yet, Prop. 5 may not be dead.

The California Association of Realtors plans to resurrect the initiative, launching a new petition drive for the 2020 ballot.

“We are not in any way dissuaded by the vote on Prop. 5,” said Alex Creel, CAR chief lobbyist. “We got 41 percent of the vote, and we did not run any campaign.”

CAR has filed its intent to gather signatures with the state but has yet to start circulating petitions. But one new provision added to the 2020 measure — closing a loophole on commercial real estate property taxes — already is rubbing backers of a rival initiative the wrong way.

“I think it’s shameful that they would make a second attempt to pass Prop. 5 after voters overwhelmingly rejected it,” said Veronica Carrizales, a policy director for Los Angeles-based California Calls, part of the coalition supporting the rival ballot measure.

Realtors, she said, are widening tax breaks for some homeowners “to serve their own interests.”

At issue is whether to expand property tax benefits under Prop. 13, the landmark 1978 tax measure that capped property tax hikes for residential and commercial real estate at 2 percent a year.

Currently, homeowners who are 55 or older or severely disabled can keep their original Prop. 13 tax rate when selling their homes and buying a new one. But they can do so only once, and only if buying a home that’s the same price or less than their old home. Current rules also limit the benefit to those staying in the same county or moving to one of the 10 counties accepting such transfers.

Under Prop. 5, senior and disabled homeowners would have been able to move anywhere in the state, as often as they like and even buy a more expensive home — all without losing their old Prop. 13 tax rate.

The Realtors’ new 2020 initiative keeps those “portability” provisions intact. But it also adds two others: Eliminating Prop. 13 tax-rate transfers on inherited homes used as rentals or second homes. Closing a loophole that allows commercial real estate buyers to avoid higher taxes after a sale. Normally, tax assessments rise to market values after real estate changes hands.

‘Terrible idea’

But commercial property tax reform already is on the November 2020 ballot.

The rival measure, which qualified for the ballot in October, would eliminate Prop. 13 protections for most commercial properties while preserving it for residential real estate.

Under this “split-roll” initiative, commercial property tax bills would rise steadily, keeping pace with market value gains.

But CAR is part of the effort to derail that measure, split-roll backers say.

“We expected this kind of tactic,” said Helen Hutchison, president of the California League of Women Voters, a key backer of the split-roll initiative. “Our opponents will do anything they can to confuse voters in an attempt to block our initiative.”

Split-roll backers maintain the new Prop. 5 isn’t any better than the old one, even with the two new provisions.

And they argue the Realtor’s commercial property provisions are “a useless gesture,” saying large corporations will just find new ways to skirt higher property taxes after a sale.

“Prop. 5 was a terrible idea,” said Shamus Roller, executive director of the San Francisco-based National Housing Law Project and co-author of the state Voter’s Guide argument against Prop. 5. “What they’ve done with the 2020 initiative is take a terrible idea and put some halfway decent ideas on top of that. It doesn’t make the original idea any less bad.”

 

Housing shortage

Prop. 5’s tax provisions were designed to stimulate a market facing a severe housing shortage, Creel said.

While it would do little to increase homebuilding, it would encourage more homeowners to put their houses on the market, boosting sales by an estimated 43,000 a year, or more than 10 percent of all existing single-family home sales. That, in turn, would create more opportunities for younger families to buy homes.

“While we don’t love our houses, we love our (lower) property taxes,” Creel said, explaining why many seniors don’t move. Portable tax rates would “help older people sell their home, … (and) it helps everyone on that housing ladder move up a rung.”

Carrizales questioned CAR’s motives, speculating the trade group merely is trying to increase commissions by boosting sales, which have run an average 19 percent below pre-recession levels during the past six years.

“Prop. 5 was about increasing more sales, increasing profits for (members) of the California Realtors association,” Carrizales said. “I think the voters saw through that.”

Christopher Carlisle, another CAR lobbyist, denied that claim. “If this is a scheme to generate more commissions, it’s not a very good one,” Carlisle said. “We have half a million real estate licensees in the state, and we’re only generating 43,000 new commissions.”

 

Tax boosters

The state’s Legislative Analyst Office report on Prop. 5 concluded the measure would cost schools and local governments an estimated $1 billion annually in revenue.

Creel acknowledged CAR — which filed its new initiative with the state three months before the election — is seeking to offset Prop. 5’s tax revenue losses by adding provisions that would boost tax collections.

For example, the current law lets children keep their parents’ low Prop. 13 tax rate when inheriting their homes — a provision designed to help children stay in their parents’ residences. But roughly two-thirds of those homes end up as rentals or vacation properties, the legislative analyst reported. Eliminating tax breaks for homes not used by children as their primary residence would generate about $1 billion a year, the legislative analyst estimated.

Officials speculated closing the commercial property reassessment loophole would raise tens of millions to hundreds of millions in new revenue each year.

“We knew we had problems with (Prop. 5) due to the negative legislative analyst report,” Creel said. “Rather than put all our eggs in one basket, we decided to go ahead with another initiative in 2020 that would not have all the negative fiscal impacts.”

In addition to the initiative, CAR also is seeking changes through the state Legislature, which could place a measure on the ballot in March 2020, rather than in November.

Creel said CAR understands it may take more than one attempt to pass tax-rate portability. CAR was part of the fight to pass the 1995 Costa-Hawkins Act limiting rent control. That took 11 years to pass.

“We’re no strangers to the long fight,” Creel said. “We’re just starting.”

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