Agents of the V.I. Tax Assessor’s Office are on island, making visits to residential properties to measure their size, assess their views, and calculate their value in preparation of the next round of property taxes. It’s part of a territory-wide reconfiguration of the tax rolls.
It is possible home owners could see tax bills double, triple, or worse, when the new valuations are issued. That’s because a 1936 federal law requires the VI’s to adhere to this formula: 1.25% of 60% of the value of a property.
For instance, a house with a market value of $1.2 million, under this formula, could have its property tax rise from $1,800 to $9,000.
The VI government and Del. Donna Christensen are now urging Congress to repeal the law and allow the VI government to create its own system for calculating taxes. A committee of the U.S. Senate has voted to approve repeal of the federal tax law.
"The law has become a burden on our people, especially property owners on St. John, where property taxes have been skyrocketing," said At Large Sen. Craig Barshinger. He said the territory should be allowed to develop its own tax code.
About the only good thing in the state of Kalifornia was the passage of prop 13.
I am attaching a copy of a statement I submitted to the Senate Resources Committee with respect to Representative Christensen’s attempts to repeal the federal property tax statute. I provides some background that is ignored in the Government’s press releases and might help correct some mis-impressions regarding the inevitability of tax increases. The problem is not in the 1936 law, the problem is the Legislature and the Executive Branches not doing what they are supposed to.
S.1829 is unnecessary and is not in the best interests of the people of the Virgin Islands.
In 1936 Congress provided the Virgin Islands with a fair and equitable system of real property taxation, one that requires that all property owners be treated equally. Over the years the V.I. Legislature has simply ignored the requirements of 48 U.S.C. § 1401, et seq., and has repeatedly enacted special interest legislation in violation of federal law. Now that a District Court and the Third Circuit have ruled that the Government is violating federal law the proposed fix is to simply repeal the law that the local Government is violating.
The sole justification that the V.I. Government has offered in favor of S.1829 is that property taxation is traditionally a matter of local concern elsewhere in the United States and, therefore, the V.I. should be freed from federal oversight of its own property tax system. This argument ignores the fact that the Virgin Islands is not a State, but a Territory. It further ignores the fact that Congress has a constitutional mandate to exercise oversight of the Territory and it cannot fulfill its obligations by turning control over to the local Government and simply washing its hands of any further involvement.
Because of the inability of the local Government to adequately manage its affairs, the trend in recent years has been for more, not less, federal legislative and judicial oversight of the Virgin Islands Government. For example, the Department of Housing is currently operating under federal control. Delegate Christensen has also introduced legislation to create the position of Chief Financial Officer to oversee all aspects of local financial matters. The V.I.’s prison system and sewage treatment system are both operating under oversight of the District Court, and the present property tax system is being brought into compliance with federal standards pursuant to an injunction issued by the District Court.
It is also important to note that Congress has already given the Virgin Islands a significant degree of local control over the property tax system. Since 1936, 48 U.S.C. § 1401***, has given the Virgin Islands total authority to set the millage rate; that is, the dollars of tax per thousand dollars of assessed value. However, the Virgin Islands Legislature has never exercised this authority in the nearly seventy years since § 1401 was enacted. The complete abdication of responsibility by the Legislature in this regard was noted by Judge Moore in the Berne case that invalidated local laws enacted in violation of the federal statute: ‟Although this case involves the role and methodology of the Executive Branch acting through its Tax Assessor, it is equally important to acknowledge that the Legislature has utterly failed to understand and perform its role in this process.” Joe Hunt, the Special Master selected to oversee the present revaluation and reassessment process, has also noted: ‟The revaluation will create a significant increase in the tax base and tax bills unless the standing property tax rate is reduced. Common practice is to calculate a ‘revenue neutral’ tax rate and then adjust that rate as may be necessary to fund the jurisdiction. Reluctance by the Virgin Islands’ legislative body has been a source of criticism and is not consistent with typical property tax policy.”
There can be no question that the Legislature is aware of its ability to adjust the millage rate to achieve a revenue neutral tax. In 2003 the Legislature adopted Act 6586 which, among other things, required a Tax Study Commission to ‟analyze and make recommendations for the adjustment of the 1.25 percent millage rate and . . . submit a report and its recommendations to the Governor and the Legislature within 180 days after the effective date of this Act.” There is no indication that the Commission was ever appointed, that it ever undertook any analysis of the tax rate, or that it ever made the required report, even though it was due over two years ago.
The failure of the Legislature to adjust the millage rate to achieve a revenue neutral tax structure has resulted in what is known as a ‟rate-based” tax system. The International Association of Assessing Officers (IAAO), in a paper titled ‟Standard on Property Tax Policy” issued in 2004, (all citations herein are to paragraph sections of this paper; this document may be viewed at http://www.state.mt.us/revenue/legislativeinformation/propertyreappraisal/finalreport/
Addendum%20Q.pdf ), at ¶ 5.2.1 criticized such a system:
Assessing officers should discourage or offer alternatives to rate-driven property tax systems. Taxing units that generate revenue [through a rate-driven tax system] justify taxpayer fears that reappraisal will probably raise their taxes and give credence to the idea that the assessing officer is controller of the magnitude, not just the distribution, of the property tax. Such taxing units are also able to hide windfalls they may reap by arguing that they did not increase their rate of taxation. Rate-driven property tax systems fail to meet the test of open and visible property taxation. (emphasis added)
If the Virgin Islands Government is truly concerned about the upcoming dramatic increase in assessed values because of the recent real estate boom in the Islands, then it should do what virtually every other jurisdiction under the American flag does: it should lower the millage rate to insure that property tax revenues continue at their historic levels. The failure of the Government to do so for nearly seventy years is inexplicable, as is its failure to even consider adjustment of the millage rate as a solution to the upcoming problem.
Lieutenant-Governor’s Richards’ statement to the Committee in support of S.1829 clearly demonstrates that, instead of controlling tax policy through adjustment of the millage rate, the Government intends to set tax policy by granting exemptions targeted to specific groups. Two examples he gave were institution of a 10% cap on tax increases and a 95% exemption for agricultural property. However, the IAAO has also soundly criticized such a system of preferential exemptions:
Legislative bodies often provide measures to shift the property tax from certain groups of taxpayers. Such measures nearly always increase the property tax on non-favored groups and generally should be limited. Failure to understand this aspect of tax-shifting measures results in a hodgepodge of controls, the true effect of which becomes lost and may even shift more taxes to favored groups. (¶ 5.3).
With respect to caps on tax increases (also known as ‟welcome stranger” taxes), the IAAO also noted:
Limits that constrain changes in assessed or appraised value of property may appear to provide control but actually distort the distribution of the property tax, destroying property tax equity and increasing public confusion and administrative complexity. Owners whose properties are increasing in value more rapidly than the permitted rate of increase (say, 5 percent) receive a windfall at the expense of those whose properties are decreasing in value or are increasing at lower rates. In effect, valuation increase limits result in lower effective property tax rates for owners of desirable property and higher effective property tax rates for owners of less desirable property. (¶ 5.4.3)
In fact, because high value properties historically tend to appreciate faster than low to middle value properties, a cap on tax increases actually disproportionately benefits upper income groups and results in a higher effective tax burden on low and middle income groups. This is exactly the opposite of the effect that the Government wants to achieve.
The Association also is critical of the grant of exemptions to specific groups. The IAAO has stated:
Property tax systems fraught with numerous exemptions typically have high rates, which are necessary to raise revenue with an artificially constrained tax base. High rates lead to additional complaints about the property tax. Numerous exemptions lead to increased administrative costs, and the property tax system becomes more questionable and distorted from the original ad valorem principle.
Classification does afford some protection from reappraisal effects for protected classes. However, classification violates the economic principles of ad valorem taxation because properties tend to be taxed at more or less favored percentages of value, based on political, not economic, conditions. Classification may also violate federally or constitutionally mandated protection from discrimination.
In fact, absent specific authorization in a State constitution (or in the Revised Organic Act, which is the ‟constitution” of the Virgin Islands at the present time), it appears that a differential cap on property tax increases violates federal equal protection principles. See Allegheny Pittsburgh Coal Co. v. County Commissioner of Webster County, West Virginia, 488 U.S. 336, 109 S.Ct. 633, 102 L.Ed.2d 688 (1989).
In short, S.1829 would give free rein to the V.I. Government to replace a system that complies with IAAO standards and the Uniform Standards of Professional Appraisal Practice with a system that is almost universally recognized as violating fundamental principles of ad valorem property taxation, and that very likely would not withstand an equal protection challenge in district court.
A more rational approach, and one that accommodates the interests of all the citizens of the Virgin Islands, is for the Delegate to submit the Government’s proposed differential tax system to Congress as a proposed amendment to § 1401. If those amendments are warranted, and if they withstand a frank and open dialog about their wisdom and practicality, then they can be implemented with full Congressional oversight over the process. Such an approach allows Congress to fulfill its constitutional mandate to oversee the Territory, provides for local input into the future structure of the property tax system, and assures all the citizens of the Virgin Islands that the past abuses of the system by our Legislative and Executive branches do not occur again.