Property Tax Appeals Flood Cities and States

Cities and states, already straining to balance budgets, are in for another shock in 2011 as hordes of property owners appeal tax assessments, demanding lower levies that reflect battered real estate values. Less property tax revenue means more pressure on local governments to cut services, especially public schools and police and fire departments that rely heavily on those taxes.

U.S. home prices have tumbled 30.5 percent below their April 2006 peak, according to the 20-city S&P/Case-Shiller index as of Oct. 31, the latest available figure. That matches the decline in values during the Great Depression's darkest days, from 1925 to 1933, according to Yale University economist Robert J. Shiller, who helped develop the index.

In Michigan, where Governor-elect Rick Snyder has warned that hundreds of towns face financial crises, tax appeals are overflowing at the office of Patricia L. Halm, head of the state Tax Tribunal. "We're just getting swamped," says Halm, 54, who was appointed to the Lansing-based administrative court in 2003. "We're constantly buying new file cabinets to hold all the cases. We even have six surplus file cabinets in the courtroom."

The state's backlog of tax appeals involving levies above $100,000—mostly commercial and industrial properties—shot up to 14,236 this year from an annual average of about 6,000 during the past decade. The backlog of claims for most residential properties, or those with tax bills below $100,000, was at 28,558 at the end of September, the most in the 13 years the state has kept detailed records. An appeal involves the property owner submitting an appraisal and other records to local or state appeals boards or courts to support the claim that a tax assessment is too high.

Clark County, Nev., which includes Las Vegas, had 8,300 appeals last year, up 38 percent from the year before and more than three times the number of appeals in 2008, says Rocky Steele, assistant director of assessment services. "It was a big year, the biggest we've ever had," he says. The county's taxable real estate value for the 2010-2011 fiscal year fell to $184 billion from $263 billion the prior year. The reduction will cost the county about $514 million in lost taxes. Almost all the hotel casinos and major property owners received reductions, Steele says.

Across the country, the situation is similar. New Jersey homeowners, who pay some of the nation's highest real estate taxes, filed a record 18,147 appeals in Tax Court during the fiscal year ending June 30, up 80 percent from fiscal 2007. In Atlantic City, where 11 casinos account for 74 percent of the property tax base, the city has exhausted a reserve for tax appeals that in 2006 held $26 million, according to a Nov. 4 report from Moody's Investors Service (MCO). All Atlantic City casinos have pending property tax appeals, says Moody's, which reduced the city's credit rating to three levels above speculative grade.

The outliers are Miami-Dade, Broward, and Palm Beach Counties in Florida, where appeals are declining. They have lowered assessments by about 22 percent from 2008 to 2010 after years of steep drops in home prices.

As the appeals wind through the legal process, assessors will have to adjust taxes to reflect market values, and property tax receipts will have to come down, says Michael A. Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago. "If the appeals are largely successful, they will generate a lot more."

The bottom line: As real estate values plunge, many homeowners are appealing property taxes, adding to the financial woes of cities and states.

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