Paul L. Caron

Friday, August 20, 2021

Weekly SSRN Tax Article Review And Roundup: Roberts Reviews Property Tax Privateers By Bradley & Baskett

This week, Tracey Roberts (Cumberland; Google Scholar) reviews a new work by Christopher G. Bradley (Kentucky) & Cameron Baskett (J.D. 2021, Kentucky), Property Tax Privateers, 40 Va. Tax Rev. __ (2021).

Roberts (2020)"Property tax privateers" are third-party investors that buy property tax liens in bulk, frequently at a steep discount, from local governments. They then foreclose on those liens, often pocketing not only the full value of the lien (plus interest, fees, and costs), but also most of the homeowners' equity in the home. While a homeowner's tax delinquency may initially have been no greater than $100, the impacts to the household include the expulsion of vulnerable individuals from their family home, loss of what is often the family's sole source of wealth, dislocation, and homelessness. In addition, these foreclosures undermine several of the key goals and uses of property taxes: fostering community, stability and support through particular amenities. At the same time, the bulk sales offer very little in the way of local benefit, since the government is likely to have received only a fraction of the value of the lien and foreclosure rarely spurs increased investment. The authors advocate for reforms to limit the foreclosure rights of third parties who purchase tax liens. Under their new rule, privateers would be permitted to foreclose on liens against a homeowner’s primary residence only when the homeowner sells the home or moves out of the home on a long-term basis.

First, I would like to laud the authors for bringing attention to these sharp practices and those who are engaging in them. The authors note that privateers are often anonymous LLCs with hedge fund sponsors. The complexity of the ownership structures and the anonymity extended to corporate shareholders and  limited liability company members tend to shield them from the political or social consequences of these foreclosures. The Corporate Transparency Act requires corporations, limited liability companies, and other entities doing business in the U.S. to disclose their beneficial owners to Financial Crime Enforcement Network (FinCEN). Banks and other financial institutions are also required to make these disclosures. While the primary purpose of the law is to enforce money laundering laws, the law permits states to obtain this information for law enforcement purposes. While disclosures for existing entities will not be required for another two years, it would be interesting to see whether these disclosure rules could empower states to look more closely at the practices surrounding foreclosures of properties subject to bulk sales of tax liens.

Second, I appreciate the authors’ willingness to “go big.” The authors contrast their approach with other, narrower proposals that would regulate collection practices or limit foreclosures based on need. They “worry that other interventions (1) amount to little more than first moves in a never-ending game of cat-and-mouse that under-funded regulators and vulnerable property owners are unlikely to win, and (2) leave important aspects of the underlying problem unaddressed, such as those related to local government accountability and to the reliance on regressive and often discriminatory property tax laws and assessment practices.” The authors instead call for “more sweeping and clear-cut reform.” I would encourage the authors to go even bigger. A simpler, and possibly better, policy might be to exclude the tax liens on owner-occupied homes from bulk sales altogether. This would achieve the authors’ goals of requiring politicians to take responsibility and remain accountable to their constituents for the consequences and the political ramifications of their actions. Local governments would retain the ability to foreclose on the tax liens for these homes, but if these tax liens were removed from the bulk sale process, local governments would be forced to take a “hard look” before proceeding with the foreclosure process. For economic reasons, governments would also likely limit their foreclosure to those homes with high value tax liens and sufficient real property values to justify the foreclosure. This would limit the adverse impacts for several reasons. First, homeowners with significant equity are likely to have other options (such as access to loans) to cover property tax deficiencies. Second, voters have less sympathy for homeowners that sit on their hands for a period long enough to allow the property taxes to swallow the value of the home. On the other hand, if the reason the homeowner failed to respond was a lack of notice of the deficiency, due process rights provide protections. Finally, local governments would likely delay in collecting on the other lower value tax liens at the time the homeowner sold or otherwise transferred the property, when those collections may occur at lower cost to the government and have less impact on the original homeowner.

In addition, a proposal to exclude owner-occupied homes from bulk sales would be amenable to drafting as a uniform act that could be promoted for adoption by state legislatures. The tactics and profiteering that the authors describe have a striking resemblance to those that have plagued heirs’ property. Under the common law in most states, when landowners die without a will, their heirs inherit as tenants in common. Some of the co-tenant heirs may live out-of-state and may no longer retain a connection to the land where their relatives continue to live and work. Nevertheless, speculators and developers purchasing the fractional interests of the remote relatives may call for partition and force the sale of the land, depriving those who have remained on the land of their homes and livelihoods. Professor Thomas Mitchell has extended broad relief to countless families throughout the United States by drafting the Uniform Partition of Heirs’ Property Act. The act gives co-owners the opportunity to buy the shares of heirs who want to sell their interests in the land. The act permits courts to partition the property between the owners in-kind or to sell the property and divide the proceeds equitably, but it requires that the decision be informed by non-economic as well as economic factors. These considerations include the sentimental, cultural, and historic value of the land and the housing impacts to other co-tenants. Finally, the uniform act provides for sales to be conducted on the open market rather than at auction to garner a higher sale price. Halting the bulk sales of owner-occupied homes, or slowing them by requiring local governments to conduct them, may also lead to the development of other resources and strategies to assist the most vulnerable families. For, example, after the development of the Uniform Partition of Heirs' Property Act, former Alabama Senator Doug Jones added provisions in the 2018 Farm Bill to allow owners of heirs’ property to qualify for Farm Service Agency farm numbers and to become eligible for loans, disaster relief, and legal assistance through U.S. Department of Agriculture.  To date the Uniform Partition of Heirs Property Act has been adopted in 19 states throughout the U.S.

Finally, the possibility of disparate racial impacts should be a prominent concern, given the many ways that tax policy associated with homeownership has been applied in a discriminatory manner or has had discriminatory effects, as Dorothy Brown discusses in The Whiteness of Wealth. In 2020 Troup Howard  (Utah) and Carlos Avenancio-León (UC San Diego) uncovered significant evidence of discriminatory property tax assessments after examining over ten years of tax assessment and sales data for 118 million homes around the country. Furthermore, Richard Rothstein explicitly raises the spectre of discriminatory tax lien foreclosure in The Color of Law, citing studies of Albany, Boston, Buffalo, Chicago, Fort Worth, and Norfolk that document the higher effective property tax burdens borne by African Americans, and reports of Baltimore, Chicago and Cleveland tax-lien repossessions that burden African Americans disproportionately.

Bradley and Baskett have generated an excellent study that might be bolstered only by an even bolder agenda. Of course, an analysis of state-by-state tax lien bulk sales data, homestead and other exemptions, and tax lien foreclosure practices would clarify the financial benefits of existing practices to local governments as well as the harms they cause to their communities. Unfortunately, much of this information is currently inaccessible, suggesting that a first step may be to open access to this data. As Louis D. Brandeis, another noted Kentuckian, explained, “sunlight is said to be the best of disinfectants.”

Here’s the rest of this week’s SSRN Tax Roundup:

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