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All property tax bills could jump if retailers win appeals

September 12, 2015

Marion County property owners might face higher tax rates next year as local officials brace for potential losses in revenue from big-box stores that are seeking reductions in their buildings’ assessed values and, as a result, their property tax bills.

But uncertainty still looms over how much the appeals could reduce revenue for local government, libraries and schools or shift those costs to other taxpayers, including other businesses and homeowners.

At issue is the so-called “dark sale” property valuation method, which takes into account recently sold vacant stores or buildings in determining the value of newer, occupied retail locations. Those sales had not previously been used to determine assessed values for big-box stores, but an Indiana Board of Tax Review decision last year involving a Meijer store essentially changed the rules to incorporate the dark sales, sparking a new wave of appeals.

The owners of 29 Marion County properties that meet the definition of a big-box retail store are currently appealing their assessments—which currently total more than $182 million. That led Marion County to ask the state for flexibility in setting next year’s tax rates in an attempt to shore up the operating budgets of local government units.

The state Department of Local Government Finance in late July approved Marion County’s request, effectively letting officials set a higher tax rate by allowing them to withhold more of the county’s assessed value than usual from budget-making calculations.

Marion County Deputy Treasurer Cindy Land said the county was caught in a difficult position. She said it “would be reckless” not to try to protect local units of government from losing money.

“Do we want to make a choice to close libraries on weekends?” Land said. “Do we want to say we’re going to have to make cuts to police and fire services? That’s the reality of it. It has that much of an impact.”

But even local government officials can’t agree on how widespread the impact of dark sales could be.

Marion County Auditor Julie Voorhies maintains the problem could be much bigger than the 29 properties identified by the assessor. In her letter to the state, Voorhies said assessment appeals for more than 700 properties might be “susceptible to” reductions using dark-sale evaluations. Those properties, which include big-box stores as well as smaller retailers and restaurants, total $1.4 billion in assessed value, she said.

“That’s absolutely huge,” said Drew Carlson, chief financial officer for the Marion County auditor. “If this method spreads to beyond the big-box stores, it could get really, really ugly.”

And it already has spread. The Indiana Board of Tax Review in August affirmed a CVS store’s request in Monroe County for a lower assessed value based in part on dark sales.

o'connor-joe-mug.jpg O'Connor

But Marion County Assessor Joe O’Connor disputes that 700 properties could see significant tax breaks. And he said even the existing 29 big-box cases currently under appeal could be settled by reaching a compromise value and subsequent tax bill, which would lessen the impact on the county.

Some, though, might get a larger reprieve by appealing to the Indiana Board of Tax Review, which has given favorable rulings to other stores in the same position.

“What’s occurring is negotiation with the properties about a value that everyone can settle on,” O’Connor said. “How that unfolds maybe will paint a picture of the new baseline for some of these properties.”

Although concern about the impact of the dark-sale decisions has been widespread, only four of Indiana’s 92 counties have requested state permission to withhold more than 2 percent of their assessed values—the amount set in state law—from their tax calculations, according to Dan Jones, assistant director of the Department of Local Government Finance’s budget division.

By exempting more assessed value from their tax calculations, local governments and schools must impose higher tax rates to generate the same amount of money. But it also means counties won’t be hit as hard if companies win their appeals and therefore have their assessed values reduced.

Jones said the counties are creating estimates that are “going to be more realistic.” And he said the moves will “help them avoid a shortfall next year.”

But county officials say there’s no way to tell definitively yet whether tax rates will go up. The budget-making process won’t be finalized until February. Government units could trim their budgets, or they might ask for more money. Both would affect the final tax rates.

Land also said taxpayers can relax knowing that, if they are overcharged now, the money will eventually even out.

“If we’ve collected too much, our budget will just be reduced in a future year,” she said.

In the short term, though, higher tax rates might have more of an impact on commercial taxpayers than residential taxpayers, O’Connor said. That’s because commercial taxpayers have a higher property tax cap. Homeowners are limited to tax bills that are no higher than 1 percent of their property’s assessed values, with a few exceptions. Commercial property owners have a 3 percent cap, so their bills can increase further before they hit the ceiling.

“You’re going to shift that tax burden to the other commercial and industrial property owners,” O’Connor said. “Most [taxing] districts are at the cap at the residential level.”

That could cause a “race to the bottom” among commercial taxpayers, said David Bottorff, executive director of the Association of Indiana Counties. He said the owners of other types of commercial property could then be pressured to try to use the same dark-sale methodology to reduce their assessments.

Which they are. In Hamilton County, not only are 11 big-box properties with a current total assessed value of $102 million under appeal, but so are several Walgreens stores, four banks and a restaurant—all trying to use dark sales to lower their tax rates, said Terry McAbee, director of commercial and industrial assessment.

McAbee and Land, the Marion County treasurer, say they’re among those pushing lawmakers for tighter rules on appraisals of commercial property. Senate Tax Chairman Brandt Hershman, R-Buck Creek, told IBJ in August that he plans to study the issue further this fall.

“We had hoped that a lot of this would have been remedied legislatively, so we wouldn’t be facing this, but it hasn’t,” Land said. “When we know there’s this potential large impact looming over us, I think it’s in the best interest for us to proceed more cautiously.”•

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