How property tax appeals shift the financial burden

An area of concern in recent years has been real estate tax assessment appeals in Illinois. These appeals influence both relative tax burdens and tax rates. Before deciding whether these concerns need to be addressed and how to go about it, it is important to have a common understanding of the appeals process and how appeals influence the tax burden.

First, real estate taxes are paid in proportion to a property’s value, so the ability to appeal an incorrect assessment is fundamental to a fair system of taxation. In Illinois, assessment appeals can occur before tax bills are paid by appealing to the local assessor and board of review. These appeals shift the tax burden between taxpayers. Like slicing a pie, if my piece is smaller, someone else’s piece is larger. So long as an appeal is filed at the board of review, appeals can proceed after tax bills are paid either at the state-level administrative agency, known as the Property Tax Appeal Board, or in circuit court. Successful appeals after tax bills are paid result in refunds that are taken from taxing agency’s current year collections. Given all these avenues of appeal, the problem is not a lack of opportunity to appeal.

Second, there are important differences between appeals of residential and commercial properties. The main difference is the quantity and quality of the evidence of value. There are always more sales of residential properties than commercial and industrial properties, and residential properties tend to be more similar to one another. As a result, it easier to use the sale prices of comparable residential properties to identify an accurate market value.

The difficulty of finding sales of truly comparable commercial and industrial properties results in valuation experts also analyzing the income-producing capability of commercial and industrial properties. However, the income-producing capability of a property is largely in the eye of the beholder. Rent and expenses, capitalization rates and business value are just a few examples of where opinions can diverge. This is the first indication of a problem. Reasonable people can disagree on the value of commercial and industrial properties, and small differences of opinion on one factor can lead to large swings in a property’s value.

Finally, there is the impact of assessment appeals on tax burdens and tax rates. Reported evidence indicates that, at least in Cook County, commercial and industrial properties—and to a certain extent, affluent homeowners—are more likely to successfully appeal their assessments, which results in higher tax burdens for less-affluent homeowners. Additionally, there is an entire industry of appraisers, analysts and attorneys to assist taxpayers in appealing their assessments. Given that there can be large swings in the opinions of value for commercial and industrial properties, successful appeals of commercial and industrial property shift the tax burden onto homeowners.

Successful appeals after taxes are paid reduce the money available to local governments to pay for public services. In simple terms, if a successful assessment appeal results in a $10 refund, a local government that levies $100 will only receive $90. These refunds, as well as limitations like the Property Tax Extension Limitation Law, create an economic incentive for local governments to levy at the maximum amount allowed. Additionally, a recent amendment to the Property Tax Code now adds the amount of prior-year refunds to the levies of local governments. This has the potential to increase tax bills by hundreds of millions of dollars in the coming years.

Given all this, there seems to be a vicious cycle. High taxes encourage taxpayers to appeal their assessments. Successful appeals shift the tax burden onto others and force local governments to increase taxes even more. Higher taxes lead to more appeals, and so on and so forth. One way to combat this is for those involved in assessing and appealing assessments to reach agreement on acceptable ranges of value for properties and to stop appealing assessments that are within those acceptable ranges.

Scott Metcalf is a partner at law firm Franczek in Chicago.