Delaware property tax system unconstitutional; major changes expected statewide

A judge has ruled that Delaware’s property tax system is unconstitutional, potentially triggering significant changes in annual tax bills for the first time in decades.

Chancellor J. Travis Laster ruled Friday that property values used by all three counties are so different than the properties’ actual market values that some unfairly pay more taxes and some get a discount compared to a property’s actual value.

This violates fundamental laws that require residents to be taxed equally, Laster ruled.

“By continuing to use the decades-old valuations when preparing their assessment rolls, the counties treat owners of similar properties differently,” Laster wrote in a 149-page opinion.

The ruling sets the stage for counties and the plaintiffs that sued them to debate how to make the state’s property tax system fair in the eyes of the courts, changes that likely may not take place for more than a year.

The plaintiffs, a group of education funding activists and Wilmington officials, are seeking a court-ordered reassessment of every piece of real estate in Delaware.

That would mean a costly, months-long process in which assessors visit each property and update its value in current housing market conditions.

The result could be property tax increases for those who are currently underpaying relative to the market value of the property, and decreases for those who are overpaying.

USE OUR CALCULATOR: Are you a winner or loser in property tax system?

Any seismic shifts in the tax rolls would be tempered by state laws which curb the amount of additional revenue that counties, cities and school districts can bring in after a reassessment.

The mechanics of how the reassessment would occur and potentially how cost increases for some could be blunted will be hashed out in the court over the coming months. Laster’s opinion asks attorneys for both sides to submit a schedule in 45 days to govern that debate.

The property tax assessment system is used to calculate both tax bills for school districts and county government and are the backbone of revenue to pay for services.

Laster noted disruption in the system could affect both government services and those who might have to pay more, making the debate in the remedial phase important.

Penalties for not paying property taxes are currently suspended because of the ongoing coronavirus pandemic.

“The effects of the pandemic likely will introduce additional and significant considerations for the remedial calculus, particularly regarding the timing of a remedy,” Laster wrote.

Plaintiffs challenged the taxing system as part of ongoing litigation claiming Delaware’s school funding system fails to provide enough resources for disadvantaged students.

The News Journal wrote about the question of fairness in property tax assessment systems last year, detailing the problem, why it has festered and giving readers a way to calculate where they stand relative to their fellow taxpayers.

THE FULL STORY: Delaware’s unequal, outdated property tax system on trial

The problems that Laster ruled make the current system unconstitutional stem from property values being assessed at a projection of what they would have been worth the last time each county reassessed all of its properties. That assessment value is then paired with the school district or county’s tax rate.

The last general reassessment occurred in 1983 in New Castle County, 1987 in Kent County and 1974 in Sussex County. Delaware is one of about a half-dozen states that does not require regular property reassessments.

Fairness problems are created in the ways tax assessors dial back a property’s value to a projection of what it would have been worth in those “base” years. Since then, some areas and types of properties have grown rapidly in value. Others have not or decreased. This creates disparities between the value residents are taxed on and actual market value.

A QUICK TOUR: Examples of Delaware’s unequal property tax system

The end result can lead to odd comparisons where one person is paying a tax bill that is based on the full value of their property and others, often who own more expensive properties, are being taxed based on single-digit percentages of their home’s value.

For example, take three homes within walking distance in Wilmington.

The first, a three-story stone colonial in the city’s upscale Highlands neighborhood, sold for $1.25 million in 2016. Its assessed value is $205,000 – about 16% of market value – and its owner was billed $9,732 in city, county and school taxes in 2018. Now go down the banks of the Brandywine to the Carriage House Row townhomes. One unit there was bought for $600,000 in 2015. Assessed at $281,600 – nearly 50% of market value – the owners owed $13,335 in city, county and school taxes last year. So, despite the Carriage House Row townhome being worth half that of the million-dollar colonial, the townhome has a much higher tax bill.

Now go back up the hill at the Dorset condominium building along Pennsylvania Avenue. A unit sold for $98,500 months before the stone colonial changed hands. That condo unit is assessed at $96,400, almost 100% of its market value. The Highlands mansion has double the taxes of the condo, but it is worth about 12 times more on the open market.

The plaintiffs, in trial last July, presented a study from a tax assessment expert showing property tax values to be a fraction of market value in all three Delaware counties. The proportion of one’s tax assessment value and market value can vary so greatly from property to property, it’s considered unacceptable by professional assessing standards, the expert said.

County assessment methods have been largely untouched over the decades, even as academics, education funding advocates and News Journal reports warned the gulf would only grow between actual property values and the ones used for taxes.

WHAT’S TAKEN SO LONG? Delaware’s politicians haven’t acted

The counties have defended their methods as fair by saying all property owners’ values are dialed back to the same “base” year.

Laster described that argument as a “cloak” to “conceal” inequity in the system.

In the past three years, Delaware courts have allowed modern factors to trickle into how select properties – mainly Wilmington office buildings – are assessed. New Castle County officials now must consider how building depreciation and office vacancy rates affect commercial property values, allowing owners of struggling city buildings to lower their tax burden.

A city attorney described these new methods in a letter to county officials as a “time-machine approach” that “attempts to value the property in a condition (including depreciation, obsolescence, and occupancy as they currently exist) but in economic circumstances and in a market that existed in 1983.”

County officials themselves have struggled to apply that formula to the individual property assessments they oversee.

“Every property in New Castle County would have that same situation,” Board of Assessment Review member Steve Larimore said during a meeting in February. “They’re all different than what they were in 1983.”

Wilmington officials, who use the county’s values to impose city taxes, said the issue has caused havoc in its tax base, prompting them to join the property tax fairness portion of the lawsuit.

New Castle County Executive Matt Meyer’s law department fought the lawsuit, primarily by poking holes in the tax assessment expert’s methods and arguing the plaintiffs did not have legal standing to sue.

Laster ruled the plaintiffs are harmed by the lack of reassessment and have legal footing to challenge in Chancery Court.

Meyer told The News Journal last year he agreed a reassessment was needed, but not at the order of a judge.

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