Delaware's property tax system was ruled unconstitutional. So what comes next?

Jeanne Kuang Xerxes Wilson
Delaware News Journal

A judge has ruled Delaware's property tax system is unconstitutional, but that doesn't mean your tax bill will immediately change. 

The May 8 opinion by a Delaware Court of Chancery judge declared that the way all three Delaware counties calculate property tax bills violates fundamental laws requiring taxpayers be treated equally, but it didn't provide an immediate remedy. 

It gives the court a stick to force Delaware's three counties to update decades-old property valuations that, paired with local tax rates, are used to calculate individual county and school tax bills. 

That is a process that could take years and may have many variables before taxpayers see change.

Vice Chancellor J. Travis Laster

In ruling the system unconstitutional, Delaware Court of Chancery Chancellor J. Travis Laster said the counties' way of tying property tax valuations to the year when the last reassessment occurred — some four decades in the past for each — distributes the overall tax burden unequally. 

It is a system in which some property owners pay taxes on a low percentage of their property's present-day worth, while others, often those whose houses have not appreciated as rapidly, are taxed on a value closer to the property's true worth. 

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Bringing the system in line with the law and Laster's ruling means counties will likely have to reassess property values to tie them closer to their present market value. Then, both school districts and counties must dial back their corresponding tax rates to bring in the same money – or in some situations, a bit more – as before reassessment. 

The particulars of how that reassessment may happen are now the subject of coming court hearings that could take months or more. 

Last year, Laster split the litigation into a merits phase, which was decided with his May 8 ruling, and a remedy phase, which could see attorneys for the plaintiffs and counties go through a process to exchange information relevant to reassessment before action is taken, according to court documents. 

For now, the counties and the education-advocate plaintiffs are responsible for submitting to the court a schedule for proceedings aimed at determining a remedy.

In other states where judges have struck down local taxing systems on similar legal grounds, some governments have appealed, delaying changes for years.

Through a spokesman, New Castle County Executive Matt Meyer said there are "numerous grounds" for appeal, but "no decision" has been made.

New Castle County Executive Matt Meyer

He said he is committed to both "fixing" the system and keeping local taxes among the "lowest in the region," but said the ongoing coronavirus pandemic must be considered. 

"We should not be ordered by the court to saddle taxpayers with undefined tax increases or to spend tens of millions of taxpayer dollars on a reassessment while many of our residents are wondering how to buy groceries this week," Meyer said in a written statement.

In his May 8 opinion, Laster wrote the pandemic will play into the "timing of a remedy." 

Officials for Kent and Sussex counties have not stated whether they intend to appeal the decision. Since the ruling, no county officials have granted an interview to discuss how they see this new phase of litigation playing out or what they will prioritize. 

The group of education advocates that brought the lawsuit and Wilmington Mayor Mike Purzycki, whose government had joined as a plaintiff in the lawsuit, also declined to discuss the path forward. 

While the ruling has the potential to be wide-ranging — potentially touching every taxable property barring those in a municipality that doesn’t use county tax valuations — it has precedent elsewhere.  

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Courts in other states have struck down individual county tax valuation systems on the same grounds. The variables involved in those court-ordered reassessments could be part of the discussion in Delaware. 

Mike Suley, an assessment official in Pennsylvania’s Allegheny County during two court-ordered reassessments, said it’s common for counties to “kick the can down the road” in the form of an appeal.

In both those cases, as well as two recent ones in neighboring counties, appeals to the Pennsylvania Supreme Court were unsuccessful.

“Taxpayers perceive a reassessment as an increase and elected officials perceive a reassessment as a way to get booted out of office,” he said.

Based on his experience, Suley said to expect a time frame of about six years from the beginning of a lawsuit to the payment of the new tax bill. 

There are also questions about the mechanics of the reassessment and the cost. 

Beyond employing modern values for properties, reassessment professionals say the most accurate way for governments to update tax valuations requires an inspector to go property to property to compare records to what is on the ground.  

This can be expensive and will take the work of a hired assessment firm.

Meyer, the New Castle County executive, said firms that conduct reassessments quoted prices between $15 million and $27 million and gave a three-year timeline for completion in his county alone.  

Others speculate that the legal problem could be fixed by using current values without a property-by-property inspection. 

Regardless, local politicians have pointed a finger at the state to help pay for it. Many state politicians for years have avoided association with the property tax question.

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Some have said the cost can be paid for by extra money the government can take in after a reassessment. 

Sussex County Administrator Todd Lawson.

Professionals also say a reassessment should occur on a regular and set basis. Delaware is one of about a half-dozen states that doesn’t already do that. 

Other jurisdictions that have been ordered to reassess did so once and were pulled back into court years later and forced to do it again.

In Allegheny County, homeowners sued in 1996 to fix frozen property values. A court-ordered reassessment was done in 2001. About a decade later, the county was forced to reassess again when the state Supreme Court found those values were being used to overtax poorer neighborhoods.

The Pittsburgh Post-Gazette found in 2012 that the latest reassessment did not fully equalize the tax burden across the county. Owners also turned out in droves to appeal, a reassessment result often feared by politicians.

How much new revenue a government or school district should take in from a reassessment is likely to be controversial. 

In general, property values across the state have appreciated since the last reassessment. But when local governments bring taxable values back to reality with a reassessment, the law says they must also reduce the tax rate so they don't bring a comparable amount in new tax revenue.

County governments are allowed to keep only a 15% windfall for one year to pay for the reassessment. Schools are allowed to keep 10% of the proceeds going forward. Any change would likely take action from the Delaware General Assembly. 

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Suley said this built-in revenue increase could make a reassessment a tough pill to swallow for those whose home values are likely to jump. 

Taxpayers “are going to be angry from the reassessment, but they’re going to be angrier from what's on top of that,” Suley said.

In Pennsylvania, counties outside Philadelphia are required to make reassessments revenue-neutral. When the Pittsburgh school district made a profit off a reassessment in 2001, a judge found the windfall illegal and the district put the funds in escrow for future years.

There is also the question of whether and how to blunt potential tax increases for individuals. 

As it stands, some properties, often those most valuable, are getting an artificial tax break while others, often with less valuable properties, are bearing an unfair burden relative to their property’s actual worth. 

A common refrain is that one-third of people who are currently underpaying will see their bills rise, one-third who are currently overpaying will get a break and one-third will stay about the same after a reassessment. That could be skewed if more people are underpaying than overpaying. 

Meyer, whose administration has fought the lawsuit challenging the system, has said a reassessment needs to occur, but not at the order of a judge. 

Last year, he said he worries a reassessment process overseen by the court will not consider homeowners whose values have risen most and could see a jump in their tax bills, or recent homebuyers who will struggle with their monthly mortgage under a higher tax bill. 

Others say fairness for those who have been shouldering an unfair tax burden should take precedent. 

“It was dramatic,” Suley said. “But for everyone whose property goes up, there was someone who was paying $5,000 a year and is now paying $2,500.”

Contact Xerxes Wilson at (302) 324-2787 or xwilson@delawareonline.com. Follow @Ber_Xerxes on Twitter. Contact Jeanne Kuang at (302) 324-2476 or jkuang@delawareonline.com. Follow @JeanneKuang on Twitter.