Judge rules Delaware property tax system unconstitutional; major changes to residents' bills could follow

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.

Vice Chancellor J. Travis Laster wrote on Friday that all three counties calculate tax bills with property values that are so outdated some taxpayers get an unfair discount while others pay taxes on a larger share of their property’s actual worth.

Those inequities violate the state constitutional requirement that property owners be taxed equally, Laster said in a 149-page ruling in Delaware's Court of Chancery.

"By continuing to use the decades-old valuations when preparing their assessment rolls, the counties treat owners of similar properties differently," Laster wrote. 

The ruling could eventually affect every property that is taxed in Delaware, and begins a debate on how to make the state's property tax system fair in the eyes of the courts. 

Laster's opinion asks attorneys for both sides to submit a schedule in 45 days to govern that discussion, which is likely to be litigated in court before any residents see changes to their tax bills

Laster's full, 149-page ruling can be read at the end of this story.

The plaintiffs, a group of education funding activists and Wilmington officials, want property values to be reassessed — a potentially costly, months-long process in which assessors visit each property and update its value in current housing market conditions. 

It could lead to property tax increases for those who are currently underpaying relative to the market value of the property, decreases for those who are overpaying and some tax bills changing very little.

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

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

Delaware's three counties assess property values, which are generally applied to county, city and school tax rates to calculate tax bills. Those taxes are a third of the state public schools' revenue. 

Laster wrote that disruption in the system could affect government services — as well as those who might have to pay more — making the coming debate in the lawsuit's remedy phase important.

"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. 

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

It is unclear now if the defendants will appeal the ruling to the Delaware Supreme Court.

Spokesmen for New Castle County Executive Matt Meyer and Sussex County Administrator Todd Lawson, whose counties are defendants in the suit, declined comment on the ruling shortly after it was issued.

Kent County Administrator Michael Petit de Mange did not respond to a request for comment.

Wilmington Mayor Mike Purzycki, whose administration joined the plaintiffs challenging the current system, said he did so with "confidence" the court will "right this wrong" of "some residents paying two and three times their fair tax amount."  

"I could not be any more pleased with Vice Chancellor Laster's decision," Purzycki said in a written statement. 

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

"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," said Mike Brickner, executive director of the American Civil Liberties Union of Delaware, in a written statement Friday. The ACLU was one of the plaintiffs.

If regular reassessments occurred, the plaintiffs have said, school districts could take a relatively small increase in revenue. Instead, districts resort to often doomed referendums to keep up with rising costs. 

Odd comparisons

The system creates tax disparities among residential property owners.

The News Journal wrote about fairness questions in Delaware’s 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 taxpayer.

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.

Tax assessors currently 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 the actual market value of their property. 

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 those who own more expensive properties, are being taxed based on single-digit percentages of their home’s actual value.

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 its 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 townhome there was purchased for $600,000 in 2015. It is assessed at $281,600 – nearly 50% of its market value – and 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 to the Dorset condominium building along Pennsylvania Avenue. A unit in that building sold for $98,500 months before the stone colonial changed hands. That condo unit is assessed at $96,400, about 100% of its market value. 

The Highlands mansion has double the taxes than the condo, but it is worth approximately 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 compared it its actual, market value can vary so greatly from property to property, it's considered unacceptable by professional assessing standards, the expert argued. 

'Time-machine approach'

The counties’ 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. In his ruling, Laster described that argument as a "cloak" to "conceal" inequity baked into the system. 

It also creates a legally-difficult situation for tax assessors and those tasked with hearing tax appeals. 

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 burdens.

LOST REVENUE: With latest ruling, city may see largest loss yet from tax appeal

A city attorney recently described these new methods in a letter to county officials as a “time-machine approach” that attempts to factor in present-day building conditions "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.

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

'DEATH BY 1,000 TAX APPEALS':Why Wilmington is fighting for reassessment

Meyer and New Castle County'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 both harmed by the lack of reassessment and have legal footing to challenge it in Chancery Court. 

"The fact that school districts are forced to conduct referendums is itself part of the harm," he wrote.

One such referendum is pending before voters in the Christina School District, which has approved nearly $10 million in cuts should the tax hikes fail.

Meyer told The News Journal last year he agreed a reassessment was needed, but not at the order of a judge. He has said he was sympathetic to those that may see tax bill increases.

Concerns over those impacts will potentially be part of the discussion in court.

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.