Additional Tax Appeal Relief Has Arrived

by Matthew D. Jessup on September 30, 2011

The Division of Local Government Services indicated today that municipalities may, for the first time, finance with refunding bonds or notes the amount owed to a taxpayer as a result of a successful tax appeal and applied as a credit against future taxes to be paid by such taxpayer (taxpayer credits). Previously, municipalities were able to finance only the amount actually paid by the municipality by check back to the taxpayer.

Specifically, the Division will allow municipalities to finance 3/4 of the amount of taxpayer credits. The logic is that, even though the entire taxpayer credit is being given to the successful taxpayer in the 4th Quarter, that taxpayer credit is a product of the overpayment made by the taxpayer in Quarters 1, 2 and 3.

This, of course, presumes that the tax appeal is settled after the 3rd Quarter tax payment is made by the taxpayer. It is unclear whether a tax appeal settled after the 2nd Quarter but prior to the 3rd Quarter would result in only 2/4 of the credit being eligible for financing.

But, there’s no such thing as a free lunch.

Approval by the Local Finance Board to finance taxpayer credits comes with four conditions:

1.   The municipality must show that, absent financing the taxpayer credits, the municipality would end the fiscal year with a deficit in operations (this would be a projected deficit, since the Local Finance Board’s approval of these financings must occur no later than the November Local Finance Board meeting).

This condition is unfortunate. Those municipalities that have large amounts of taxpayer credits but do not meet this condition will be forced to spend their surplus funds instead of financing the taxpayer credits over several years. In this economic environment, with rating agencies already downgrading municipal credits at alarming levels, this unnecessary use of surplus will be a “credit negative” (to use a rating agency phrase) and lead to increased costs of borrowing for municipalities.

2.   The municipality may finance tax appeal credits only one time. Choose your year wisely.

3.   The municipality will be required to undertake a revaluation or reassessment, as appropriate.

4.   The municipal governing body must adopt a resolution acknowledging that all new hires through the end of the next succeeding fiscal year be approved by the Division.

Municipalities will be required to complete a Division-issued form asking a series of questions regarding each new hire, including who is being hired, at what compensation, whether the hire will be civil service, why the hire is taking place (someone’s retiring, new position, etc.). The Division will scrutinize each new hire thoroughly.

This is not a perfect solution, as noted above. In addition, it is troubling that each municipality may finance taxpayer credits only once. Even if a municipality immediately undertakes a revaluation or reassessment, those procedures take time, and the intended effect of eliminating or drastically reducing the number of tax appeals won’t be felt the next year. The municipality will likely have the same taxpayer credit problem in the next year, with no real, viable solution.

That said, the inability of municipalities to finance taxpayer credits over a multi-year period was putting enormous financial pressure on many municipal budgets. The Division’s solution will go a long way towards eliminating one of many financial pressures faced by municipalities.

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