Delaware Outdated Property Values Cause Unequal Tax, Chancery Says

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The Delaware property tax system’s use of decades-old valuations for tax purposes unconstitutionally treats taxpayers unequally, a chancery court chancellor has said, ruling in favor of organizations that asserted the system undervalues properties and undermines school funding.

Finding that Delaware’s three counties don’t comply with the state law requirement that all property be assessed at its true value in money, Delaware Court of Chancery Vice Chancellor J. Travis Laster on Friday ruled that the counties’ assessment methods, which rely on values from up to 46 years ago, treated owners of similar properties unequally.

The ruling hands a win to Delawareans for Educational Opportunity and the NAACP Delaware State Conference of Branches, which had asserted that the assessment system impaired school districts from being able to collect adequate revenue. The court also ruled in favor of the city of Wilmington, which had intervened in the case to assert that New Castle County had failed to provide accurate assessment data.

The counties use an indefinite-base-year method of assessment, meaning they use values assessed in a base year to levy taxes. If a property or property attribute — like a solar panel — did not exist in the base year, the county estimates what that property would have been valued at in the base year. Because the counties’ base years are all from several decades ago, the valuations are now outdated and owners of similar property may pay very different effective rates based on how much the present value of their property has appreciated from the base year, Vice Chancellor Laster said.

“Owners whose properties have appreciated more pay a lower effective rate than owners whose properties have appreciated less,” Vice Chancellor Laster said. “The counties’ outdated assessments conceal a reality of nonuniformity beneath a cloak of uniformity.”

The city of Wilmington also proved that New Castle County’s use of the outdated valuations violated the county’s obligations to provide accurate assessments, according to the opinion.

Vice Chancellor Laster asked the counties and the opponents of the current system to submit by June 22 a schedule to discuss remedies. He noted that the coronavirus pandemic has placed financial pressures on many households, local governments and other entities. The implementation of changes to the system, particularly the timing of such changes, would have to account for such pressures, he said.

“While the effects of the pandemic do not mean that the counties can continue indefinitely to operate a local tax system that violates the Delaware Constitution and the Delaware Code, the effects of the pandemic likely will introduce additional and significant considerations for the remedial calculus,” he said.

The opponents of the current system brought the case as part of a broader challenge to the state’s funding of its public school system. According to the NAACP and Delawareans for Educational Opportunity, the public school system fails to provide adequate opportunities for disadvantaged students, like students from low-income households or students who do not speak English as a first language. Part of the problem stems from the funding system for the schools, according to the two groups.

A third of the funding for public schools comes from local taxes and when school districts impose taxes, they must use assessment rolls from the state’s three counties. A problem with the county assessment rolls translates into a problem for districts attempting to fund themselves with local taxes, Vice Chancellor Laster said in the opinion.

Delaware law does not specify when a county must reassess its properties for taxation purposes. New Castle County’s last general reassessment was in 1983, Kent County’s was in 1987, and Sussex County’s was in 1974. New Castle assesses properties at 100% of their base value; Kent assesses them at 60%; and Sussex assesses them at 50%.

Vice Chancellor Laster noted that the state high court has held a property’s true value in money is the same as its fair market value. While he conceded this did not mean the true value in money and fair market value must always match perfectly, he said the evidence that the current assessed values did not accurately represent present fair market value was “one-sided and overwhelming.” Evidence showed that Sussex’s assessed values reflected just 8% of fair market value and Kent’s reflected 20%, according to the court.

“Although the base-year methodology remains a theoretically viable approach in the abstract, the indefinite-base-year method that the counties employ has reached the point where it generates arbitrary assessed values divorced from any reasonable approximation of present fair market value,” the vice chancellor said.

Peta Gordon, counsel for opponents of the assessment system, told Law360 the decision would result in property owners in the state paying their fair share of tax.

“The property tax system in DE currently is regressive because properties have increased at a disparate rate in the intervening decades since each county conducted a general reassessment, with less affluent areas paying more than their fair share of taxes,” Gordon told Law360.

Gordon noted that state law caps property tax increases to 10%, but the effect on individual taxpayers would vary, with some seeing increases and others seeing decreases.

Saul P. Morgenstern, who also represented the system’s opponents, said school funding would be more equitably distributed as a result of the decision.

A related case against state officials was bifurcated from the case against the counties. In that case, the groups claim the state does not provide sufficient funding to provide disadvantaged students with an adequate education. A trial in that case is scheduled for November.

Mike Brickner, executive director of ACLU of Delaware, cheered the ruling in a statement, saying that “fixing the counties’ inequitable and outdated system of property tax assessment is an important step toward ensuring that education funding in Delaware is fair and adequate.”

Chip Guy, representative for Sussex County Administrator Todd Lawson, declined to comment on active litigation. Representatives for the other two counties did not respond to requests for comment.

The NAACP Delaware State Conference of Branches and Delawareans for Educational Opportunity are represented by Saul P. Morgenstern, Peta Gordon, Jessica Laguerre and Travis W. Clark of Arnold & Porter Kaye Scholer LLP,Richard H. Morse of the Delaware Community Legal Aid Society Inc., and Karen Lantz from the American Civil Liberties Union of Delaware.

The city of Wilmington is represented by Gary W. Lipkin, Brian E. O’Neill and Alexandra D. Rogin of Eckert Seamans Cherin & Mellott LLC and Rosemarie Tassone-DiNardo and Aaron C. Baker of the City of Wilmington Law Department.

New Castle is represented by Mary A. Jacobson, Adam Singer and Nicholas J. Brannick of the New Castle County Office of Law.

Kent is represented by William W. Pepper Sr. and Gary E. Junge of Schmittinger & Rodriguez PA.

Sussex is represented by Herbert W. Mondros and Helene Episcopo of Margolis Edelstein.

The case is In Re: Delaware Public Schools Litigation, case number 2018-0029-JTL, County Track, in the Court of Chancery of the State of Delaware.

Posted by Law360

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