Property Tax Post: Is Property Tax Next in Line for an Overhaul?


n

Normally, as each year comes to a close, most local taxing authorities are preparing to notify taxpayers of their upcoming property tax obligations and to collect those payments. Because of the recent passage of Pub. L. No. 115-97, local taxing authorities in high-tax states are closing out the year looking for creative ways for taxpayers to take advantage of the current federal state and local tax (SALT) deduction that will be capped at $10,000 after 2017.

Despite best efforts by some high-tax states to help taxpayers prepay 2018 property taxes before the end of the year, on Dec. 27, 2017, the IRS issued guidance indicating that prepaid property taxes cannot be deducted if, in fact, the prepayment for the 2018 levy was based on an estimate rather than an actual property tax assessment, as Bloomberg Tax’s (subscription required) has reported. Nevertheless, some high property tax states, like New York[1] and New Jersey[2] and are still looking for a work-around. In New York, Gov. Andrew Cuomo (D) issued an executive order requiring local-level authorities to both deliver tax warrants and receive prepayments. New Jersey, on the other hand, issued its tax bills around July 2017; the payments are due in 2018, making it more likely that folks in New Jersey can take advantage of prepayment in order to preserve the federal deduction for the 2018 property tax paid this year.

Newly emerging issues concerning the cap on SALT deductions raise questions about whether states and local governments will start the new year looking for a more permanent solution to ease property tax burdens for individuals without reducing the essential revenue that cities, counties, and municipal governments rely on to fund public services, and without driving out businesses who will migrate elsewhere if they are subject to a significant increase in property taxes. The answer is not going to be simple. In addition, other variables will play into the property tax equation making any potential 2018 fix challenging for state legislatures.

One of significant challenges that states and localities will likely face in balancing the equities is dealing with the changing landscape of the economy as brick-and-mortar retailers shutter their doors. Additionally, stemming from that issue, many states are also dealing with emerging “dark store” property valuation litigation. For those who have not heard the buzz, “dark store” litigation emerged as a result of some big box retailers seeking to reduce property taxes by requesting that operating stores be valued as if vacant or dark. The National Law Review states that “[t]hese challenges can have a dramatic impact on municipal budgets as local governments are forced to increase property taxes for other property owners to compensate for the lost revenue.” Thus, while the death of retail is likely to erode property tax revenue on its own, cities and counties may take a greater hit if, in fact, courts and tax tribunals agree with the “dark store” theory.

The recent change in the federal tax code, the death of retail, and money spent litigating valuation issues, among other things, may force local taxing authorities in some states to reassess their property tax systems in order to continue providing essential services. But, in light of Pub. L. No. 115-97, looking to homeowners for the revenue is probably not the answer, considering the newly imposed deduction caps. Local governments could arguably ease homeowners’ tax burdens by increasing exemptions or credits for individual taxpayers, but cities and counties will need a plan to make up for the loss in revenue. Such a plan may include reconsidering existing property tax exemptions and finding other sources for raising revenue (e.g., income, sales, or excise taxes), to shift the heavy reliance on property taxes. Whatever state and local governments decide on, 2018 promises to be an exciting tax year.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think the new year will bring a shift in property tax policy?

For more information on the impact of Pub. L. No. 115-97, examine Bloomberg Tax’s Tax Reform Roadmap, showing detailed comparisons between pre-reform law and the impending changes, with pertinent cites attached.

Get a free trial to Bloomberg BNA Tax & Accounting's State Tax solution, a comprehensive research service that provides deep analysis and time-saving practice tools to help practitioners make well-informed decisions.


[1] On Dec. 22, 2017, New York Gov. Andrew Cuomo (D) issued an executive order authorizing county legislative bodies to issue and deliver warrants for collection of taxes and authorized officers to receive payments on each business day including and following receipt of the warrants. Property taxes for the 2018 levy can be paid through Dec. 28, 2017, in person and through Dec. 31, 2017, online or by mail if postmarked on or before December 31.

[2] Gov. Chris Christie (R) signed an executive order of Dec. 27, 2017, directing municipalities to accept payments for 2018 property taxes which, pursuant to N.J. Rev. Stat. §54:4-66(a), are payable in February, May, August, and November. Bills are mailed annually around July.