Delaware homeowners pay taxes that aren't based on actual value of their property
In 2017, Patricia and Paul Minnigh fled higher taxes in Maryland and paid $354,000 for a newly built retirement home near Millsboro.
The home has four bedrooms, sits on less than a quarter-acre lot nestled into the cookie-cutter subdivision with views of their neighbors on each side. The couple paid $242 in Sussex County government taxes last year.
Their home is about a 35-minute drive from the Delaware ocean resorts where local developer Chris Schell, a founding sibling of the Schell Brothers home building empire, spent $2.35 million on a six-bedroom complex on Rehoboth Bay just south of Dewey Beach earlier this year.
That two-story home is a 10-minute walk from the Bottle and Cork and a five-minute walk from the Atlantic Ocean. It has a boathouse, attached apartment, a private sandbar and bay views from outdoor decks all the way up to the rooftop.
It carries an annual county tax bill of $132. That is a little more than half of the county tax charged to Minnigh’s more modest home, despite the Dewey house being worth well over six times more.
Patricia Minnigh said her larger tax bill feels like the middle class supporting the rich.
“It infuriates me," she said. "It’s definitely unfair."
This inequity exists because Sussex County taxing officials consider the Dewey property to be worth $59,500, about 2.5% of its purchase price, and the Minnigh’s property to be worth $109,000, about 31% of its purchase value.
School taxes use the same valuations but are not noted here because homes are in different districts.
Schell did not respond to a request for comment.
This is not an isolated case nor a sweetheart deal for a man whose company has built and sold hundreds of homes in the beach area.
It is a systemic issue stemming from the fact that Delaware's three counties haven't updated the property values used for taxing purposes in some four decades.
It has led to a situation where some residents – often those with the most valuable homes – are taxed pennies on every dollar of their home's actual worth, while others pay taxes based on closer to the full value of their property.
It produces head-scratching comparisons like this throughout Delaware: From the oceanfront beach mansions to the rural expanses of Sussex County and from northern New Castle County’s Chateau Country down to blighted streets in Wilmington.
These disparities exist among new and old homes, from town to town, neighborhood to neighborhood and in some cases block to block.
Critics say it has created a taxing system that gifts a hidden tax break to the wealthy, a break paid for by the relatively property poor. If you believe one's tax bill should rise parallel with their property wealth, it is an unfair situation.
"If in fact you have a property that’s very valuable then you should pay property tax that’s commensurate with that value," said Wilmington Mayor Mike Purzycki. "If you pay less, somebody else is paying more and that’s the problem."
The inequity flows from how residents' properties are valued.
Delaware's three county governments are responsible for creating a list of taxable properties and calculating the value of the land and structures on it. To calculate one’s tax bill, that value is paired with school district and local government tax rates, which are mostly standardized for taxpayers in a given jurisdiction.
The problem is there hasn’t been a comprehensive update of those property valuations in 45 years in Sussex County, 36 years in New Castle County and 33 years for Kent County. Some cities have updated, but county governments and local school districts, which take in the most property taxes, use the outdated figures.
Even homes built since that last reassessment are assigned best-guess estimates of what they would have been worth the year the county conducted the last comprehensive update of tax values. When an addition is put on an old home, it is revalued, but at an estimate tied to the last year of reassessment.
And so, the gulf between the value assigned by local tax officials and what a property would actually fetch on the open market widens every decade as government leaders have steadfastly avoided bringing those figures back in line through a process known as reassessment, which most other states conduct regularly.
Pretty soon, though, the counties may not have a choice.
A lawsuit in Delaware's Court of Chancery claims local politicians’ failure to update tax valuations has created classes of tax “winners and losers.”
If the plaintiffs win, Delaware could become the latest in a series of governments that have been forced by a judge to reassess property values to make the system fairer.
The property tax challenge was filed by education activists and is part of a larger complaint over public school funding. They claim the property tax system is not only unfair to individual taxpayers but it has also hamstrung funding for each of the state’s school districts.
The lack of reassessment leaves schools struggling to keep up with regular inflation and less able to invest in their most needy students, said Dan Atkins, executive director of the Delaware Community Legal Aid Society, co-counsel with the American Civil Liberties Union of Delaware for the plaintiffs in the lawsuit.
“What's more, refusing to reassess means that the people who own the least expensive properties pay disproportionately more in taxes than the people who own the most expensive properties," Atkins said.
Because of the complexity of the lawsuit, fairness in the state's property tax system is being tried separately as other aspects of schools' funding move through the court.
The end goal of the property tax portion: Have the courts force the counties to reassess.
'True value in money'
The lawsuit names the financial officers in each county as defendants. Its first argument is that the tax assessments used by those officers run afoul of Delaware law that requires properties be taxed based on their "true value in money."
The Delaware Supreme Court has held that "true value in money" is a property's present fair market value — or how much a willing buyer would pay a willing seller for the property in normal circumstances.
But through the decades, no one has enforced that requirement and the figures used by government for taxing aren't close to today's market value.
The plaintiffs hired a property tax assessment expert to compare tax valuations to recent sales, a close representation of market value, in order to calculate how far off the assessments are.
Richard Almy, whose reports have been used in court cases overturning other governments' property tax assessment systems, found that the median property is assessed at 17% of its fair market value in Sussex County and 34% of its market value in Kent County. His estimations for New Castle County were thrown off by calculation error exposed by the defendants in court.
A University of Delaware demographer who computes those percentages annually for the state most recently found that properties in New Castle County are assessed at about 30% of market value.
Delaware courts have not set precedent for how close assessed values need to be to market values to satisfy the “true value in money” requirement.
In other states, courts that have ordered reassessments ruled that standards set by the International Association of Assessing Officers, a nonprofit research and education organization for property assessors, are the way to measure whether an assessment system is legally sound.
That group says a property’s assessed value needs to be between 90% and 110% of its actual market value.
Almy looked at each county and each school district and found that the average and median property tax assessments in each is not near what the assessing organization deems acceptable.
If properties were reassessed closer to today's market value, that doesn't mean people's tax bills would go up across the board. Local governments have to adjust the corresponding tax rate down so as not to take in a comparable windfall of new revenue.
But plaintiffs argue that the current departure in assessments from market value is a problem for school districts, which are allowed to keep 10% of any increase in revenue derived from a reassessment.
If property values were regularly reassessed, school districts would see their tax collections gradually grow alongside the value of the real estate market, helping them keep up with the ever-rising cost of running schools, plaintiffs argue.
Instead, school districts are required to rely on referenda to raise the tax rate as taxing values stay flat. Those referenda often fail, forcing districts to find other ways – cutting programs and laying off staff – to balance budgets. As school districts more frequently ask voters for more money, the public infer that taxes are being wasted, the plaintiffs argue.
Regular reassessment would mean fewer referenda and more money to help students dealing with trauma or other personal hurdles, said Jea Street, an education advocate, New Castle County councilman and head of one of the groups formed to bring the lawsuit.
"I'm under no illusion that it will make it perfect, but it will make it a lot better," Street testified in court.
The plaintiffs also took depositions of taxing officials from each county. In court filings, they say the officials admitted that their taxing values do not correlate with current fair market value.
Delaware Chancery Court Vice Chancellor J. Travis Laster, the judge presiding over the education lawsuit, offered a viewpoint on the issue in an opinion ruling on a lawsuit about a school district referendum in 2017.
"It should be obvious that assessing properties as of 1983 is a far cry from determining their 'true value in money' as of the current year," Laster wrote.
'Winners and Losers'
Such a system wouldn’t malign individual taxpayers if everyone were paying taxes based on the same percentage of their properties’ true value – even if it is only a fraction of that value.
But now, some pay taxes based on wildly different percentages of their property's actual value.
The more a home has appreciated since the last reassessment, the greater the gulf between that property’s tax assessment value and its actual value. So higher-priced homes often have the most generous tax breaks.
Sometimes, variations from property to property have to do with the condition of a home or the type of homes that were most pricey during the last reassessment.
Homes built since the last reassessment are assigned values which are an estimate of what they would have been worth when the county they are in last reassessed. Assessors in New Castle County use 1980s construction costs, land values and comparable sales from that era, an official testified in court.
It's a process critics say leads to tax values that don't reflect reality because so much has changed since the 1980s.
For example, in the 1980s, Middletown didn't have suburbs, Del. 1 wasn't a freeway and Chrysler and General Motors still manufactured cars in Newark and Newport. All these things affect current property values, but are difficult-to-impossible to account for when using 1980s assessed values for taxing purposes.
Home and land prices in some parts of the state have appreciated in value must more than others since the last reassessment. That leads to unfair tax burdens.
Take three homes near each other in Wilmington for example.
An elegant, 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.
Down the banks of the Brandywine are the Carriage House Row townhomes.
Kevin Donovan and his wife downsized from a suburban home and purchased a townhome there for $600,000 in 2015. It is assessed at $281,600 – nearly 50% of its market value – and the Donovans' owed $13,335 in city, county and school taxes last year.
So, despite the Donovans' townhome being worth half that of the million-dollar colonial, the Donovans have a 27 percent higher tax bill.
"There is a huge inequity," Donovan said.
By percentage, it gets worse.
Back up the hill at 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 mansion has double the taxes than the condo, but it is worth approximately 12 times more on the open market.
"It’s just so manifestly wrong," said Purzycki, whose administration joined as a plaintiff in the property tax portion of the education fairness lawsuit.
The fact that individual residents are taxed on sometimes wildly different percentages of their home's actual worth is a violation of Delaware law as well as the state's Constitution, the plaintiffs argue.
The uniformity clause in Delaware’s constitution requires that “taxpayers for the same class residing within the same tax district be treated equally.”
Delaware courts have also not yet set a standard for how much deviation is legally acceptable. Other courts have leaned on the standards set by the international assessment organization.
In each county, assessed values are a fraction of market value. For an assessment system to be considered uniform, the assessment research group says tax values should be close to the same percentage of market value from property to property.
Almy testified that each county has more deviation than considered acceptable in his comparison of market and assessed values. More expensive homes often get the benefit, he said.
"High priced properties are assessed at a lower percentage of their market value than lower cost properties," he testified.
The defendants did not submit an expert report to rebut Almy's findings, but questioned the viability of his conclusions by trying to poke holes in his methods.
In an interview before the lawsuit was filed, Sussex County Administrator Todd Lawson, the county's top appointed official, said fairness comes from the fact the county uses a standardized process across taxpayers, a process that isn’t concerned with market value.
Further, taxes are so low that he hasn't heard anyone begging for reassessment.
In court filings, the plaintiffs have argued those methods, while standardized within the counties, produces results "that have no correlation to fair market value" so "properties of similar characteristics are not taxed similarly."
The counties’ primary defense has been that the plaintiffs and the city of Wilmington do not have legal standing to ask the court to compel a reassessment.
They say the education plaintiffs can't show that property tax assessments are germane to their organizations' purpose or that a lack of reassessment has caused education harm. Likewise, the city doesn't have a right to sue over property taxes on behalf of its residents in this instance, the defendants say.
“This court made clear its view that real property in the three counties of Delaware should be reassessed,” attorneys for New Castle County government wrote in court filings. “However, this is not the right case, and these are not the right plaintiffs or defendants, to achieve that goal.”
New Castle County Executive Matt Meyer, whose law department fought the lawsuit, said some people are being treated unfairly by the current system, that reassessment should fix that, but a lawsuit isn't the path to getting there.
"Was the judge elected to make that decision?" Meyer said.
He said he's concerned about the outcome if the court gets involved crafting a reassessment. In the third year of a four-year term, he said his administration has been studying the challenge.
"I'm not saying never reassess," he said. "I'm saying we need to do this."
The trial took place in mid-July. Laster must decide whether the plaintiffs have standing, whether he deems Almy's conclusions are reliable and whether that and depositions of county officials show the current system violates the law.
The plaintiffs are asking for an injunction to prevent the unfair levying of taxes. That likely means things will stay the same while the counties negotiate with the courts and plaintiffs on how to rectify the inequity – likely by conducting a reassessment in the coming years.
What that means for individual tax bills is hard to project.
Because reassessments are somewhat revenue-neutral – other than the 10% increase available to school boards and a one-year windfall for county government to pay for the reassessment – it is unlikely that everyone's tax bills will change drastically.
The commonly repeated idea is that one-third of people who are currently getting a break will see their bills rise, one third who are currently overpaying will see a decrease and one-third of property owners will stay the same.
In the coming days, The News Journal will explore how behind-the-scenes reassessments of corporate office space in Wilmington brought the city into the lawsuit, why a reassessment hasn’t happened yet and more about what it may mean for your tax bill.
Reporters Jeanne Kuang and Brandon Holveck contributed to this story. Contact Xerxes Wilson at (302) 324-2787 or firstname.lastname@example.org. Follow @Ber_Xerxes on Twitter.