Account Ability: The Property Tax Assessment and Collection Systems

This article is one in a series about how to strengthen the V.I. government’s finances without raising tax rates. Each deals with a specific proposal.

Generally, in other places, property tax receipts are slowly rising and constitute a major part of a local government’s financial base. Neither statement can be said of the USVI.

Were one of the islands’ leaders to go to a committee of bond holders, or to federal officials, seeking debt relief, they would have to admit under questioning that:

● annual property tax receipts in the islands appear to make only a modest contribution to the territory’s budget and seem to be falling;

● assessments of individual properties are often remarkably too low and yet occasionally too high;

● billings have not been sent out consistently for the same tax period each year;

● there is a complex network of seven different government approved tax credits – for a variety of reasons – meaning some real estate owners pay virtually no taxes;

● there have been no successful sales of tax-delinquent properties since at least 2005;

● a shocking third of all properties are at least partially in default;

● as a result of all this, there is at least $120 million in unpaid property taxes, penalties and unpaid interest on those unpaid taxes – double the size of the expected property tax receipts in the most recent budget year.

All of this is in an environment in which the property tax rate, even without the credits and the often-low assessments, is a very modest 0.377 percent (38 cents for every $100 of assessed value of a home). This is a tax rate matter so, given the nature of this series, we will not examine it.

After this information had been elicited, the policy makers on the other side of the table might well say: “Why don’t you really try to collect your property taxes, and then come back to us with a request once you can show that you have your house in order.”

The islands’ representative would be put into a difficult, if not impossible, position by the facts in the case.

Let’s look at the first six variables sketched above.

Property Tax Receipts. The current budget (Fiscal Year 2017) of the territory calls for $667.8 million in revenues, of which property tax receipts are expected – note the term – to be $60 million, so property tax receipts are hoped to be about 9 percent of the total revenues, a fairly modest contribution. Actual receipts for a given fiscal year, according to past budgets, have never topped $51 million a year.

Here are the actual property tax receipts of recent years. Four times the V.I. government has collected two years’ worth of taxes during one fiscal year. In those cases we split the revenues evenly to create approximations in the millions of dollars and rounded:

      2006    $26           2011    $51

      2007    $44           2012    $51

      2008    $44           2013    $41

      2009    $51            2014    $45

      2010     $51           2015    $45

These totals were drawn from the annual budget messages of the governor and are in terms of actual collections, not the projected ones that tended to be larger.

It is our contention that these numbers could have been considerably higher, and should be higher in the future if property tax collections are given the care and the political will they need.

Assessments. USVI tax assessments, according to our reading of the explanation currently on the Office of Tax Assessor’s website, are based on data that is four to eight years old. This is a quotation:

“The 2013 property tax bills are based on new property values which reflect the USVI real estate market as of January 1, 2013. The recently completed revaluation was conducted by the Tax Assessor’s Office as required by law. The values are based on neighborhood sampling that took place from 2009 to 2012 with a time adjustment to bring them to January 1, 2013.”

Perhaps the website is reflecting the current reality. Or perhaps the assessments for more recent years are based on more recent data. At minimum the website needs updating, but we suspect that it is not the only thing.

No assessment system, even if up to date, perfectly represents the values of real property; this is a game of, one hopes, talented and neutral approximation. What assessors worry about most are the outliers, properties that are either remarkably over-assessed or remarkably under-assessed. In the case of the first, there are appeals mechanisms that bring these problems to light, as the aggrieved homeowners seek redress.

But there is no such automatic review and reassessment on the under-assessed properties; the owners obviously do not complain.

With that truism in mind we spent some a little time using the territory’s “Geospatial Information Systems Viewer,” to examine a few individual property assessments, examining mostly high value properties on or near the shoreline. After reviewing only nine properties we found at least three serious under-assessments. For privacy’s sake we’ve scrubbed the names and other identifying information from our report as well as rounding some of the numbers. This is what we found:

      – St. John – 5 bdrm, pool, large house on a promontory with ocean front on 3 sides. Sold in 2013 for $3M, 32 percent more than the approximate assessed value ($2,270,000). Tax about $8,500

      – St. Thomas – 4 bdrm, pool, almost as large as the first one, with 200 ft. of waterfront. Sold in 2015 for $2M+, 100 percent more than the assessment ($1,060,000). Tax, about $4,000

      – St. Croix – 6 bdrm, about twice the size of the previous two, on 6 acres with “excellent view”. Sold in 2005 for $1.5M, 119 percent more than the assessed value of $680,000. Tax $2,600.

We are making two points here: one is that there are at least some seriously under-assessed properties, maybe many; and two, something should be done on a continuing basis to rectify this, particularly as many assessments remain unchanged for years.

Perhaps there should be a government agency, independent of the assessors, whom would be incentivized to publicly challenge such low assessments. However, we suggest another approach, at least for now.

One of the underused, perhaps totally unused, resources of the USVI is the independent work done by grad students in economics, business and government, a subject we’ll return to in another article.

We suggest that as a thesis topic one or more grad students seek out these under-assessments, publish his or her finding online, and then, ideally, argue for larger assessments in a public setting, one established by the tax authorities, and then report the authorities’ final decisions.

In this way under-assessments, not currently recognized or published in any organized way, will one hopes, be corrected. Even better the scrutiny will increase the public pressure to address the problem at its root. Lastly, if at all successful, the initiative will give these grad students a taste of volunteer work in the public sector, a good thing in and of itself.

Billing Cycles. In my experience, if you own a home you get a bill, for the current year, on a totally predictable date every year, and you budget against its arrival (or your mortgage lender does this for you).

This sort of dutiful but dull reality is not the USVI experience. As near as we can make out from a distance there was a serious gap in the billing process in the years 2007 through 2009, but some collections were made anyway in those years, and in some cases the taxes due in those years were collected as much as four years later. The record seems to suggest the following sequence:

Fiscal Year Activity during that year

      2005      collected for 2004

      2006      collected for 2005

      2007      situation unclear

      2008     situation unclear

      2009      situation unclear

      2010      collected for 2006

      2011      collected for 2007 and 2008

      2012      collected for 2009 and 2010

      2013      collected for 2011 and 2012

      2014      collected for 2013

      2015      collected for 2014 and 2015

      2016      collected for 2016

Failing to keep a regular billing and collections routine was not only hard on the Treasury, it may have caused some taxpayers to fall out of the steady rhythm of payments.

The Seven Tax Credits. The most current list of these credits provided on line by the Lieutenant Governor’s Office show seven different ways that different amounts of tax credits may be issued against the tax bill. A property tax owner can apply for the general homestead credit – if they live in the house in question – and one other.

Each of the credits covers different amounts, but the one most used – general homestead – comes to $400. This more than takes care of the first $106,000 of assessed value, as the residential tax on the value would be $399.62.

Each of the veterans, seniors and disabled credits, for those living in the houses in question, would more than double the $106,000 assessment break mentioned above. Other credits are available to V.I. farmers, and to a (presumably small) number of people living in houses that meet the Americans with Disability Act requirements, such as ramps instead of steps in the front of the house, doors wide enough to accommodate wheel chairs, and the like.

The seventh is an interesting one, it is the “Class 1 inheritance tax credit,” and it is good for 20 percent of the taxes otherwise owed. It may be used by those who have inherited five acres or less of unimproved property. We presume the intention was two-fold: promote environmental protection and reduce the monetary pressure that often pushes islanders off of land their families have long held.

All of these tax credits would become, relatively, less a drain on the Treasury were the property tax rate to be increased, and the assessments brought and kept up to date.

Sales of Tax Delinquent Property. Nothing encourages timely tax payments as much as the credible prospect of seeing a big notice on your door, saying that the property had been seized for back taxes.

Unfortunately there have been no such forced tax sales in the USVI for more than a decade. Of course, the 2012 and 2013 auctions had to be reversed. They not only cost the government much time and money, but also tarnished its reputation in multiple ways. This is an important and complex enough issue to be the subject of a subsequent article.

The lack of such sales undoubtedly helped create the situation reported below.

Over One Third of Properties in Arrears? We’ve been told by Ludence Romney, the tax collector, that over 30,000 properties are behind in their taxes to some extent. That’s a remarkable number given that the territory has less than 80,000 taxable properties.

Clearly, many property owners have little to no fear of the tax collector and we can see why. Some fundamental changes must be made if the property tax is to play the useful role it ought to in shoring up the islands’ finances.

Proposal: That the V.I. government very publicly start taking its property tax enforcement duties seriously, so as to begin to change the culture of tax avoidance and delinquency. Thankfully, a step in the right direction was the announcement in September that auctions of some delinquent properties will resume by June. Unfortunately, such deadlines have been missed before.

Regardless, when so many property owners are in arrears, and since they have the option to recover (aka “redeem”) their property up to a year after it has been auctioned off, thousands may opt to take their chances and continue in their ways. Hence more than auctions are required. For starters the V.I. government needs to be willing to spend money to collect money, as echoed by Gov. Mapp’s suggestion that 5 percent of property taxes be dedicated to the collection effort. While the percentage can be debated, the concept is sound. The Lieutenant Governor’s Office should, for example, hire a dozen or more collectors of delinquent taxes, train them to be assertive and start a competition to see who can raise the most money for the territory.

Simultaneously, get started on a rapid new assessment program, start a grad student review process for current under-assessments, and, above all, start collecting back property taxes by docking income tax refunds and other government payments, as described in our Feb. 20 “Account Ability” article. None of this will be easy for the taxpayers or the politicians but it – or something equally difficult – must be done, given the territory’s debts and very weak position in the bond market.

Prediction: The more effort that is made in these areas, and the wider the variety of actions, and the greater the support from the political class, the better the chances will be for increased revenues, more manageable debts, and greater financial cooperation from afar.