Why Should Delaware Care?
New Castle County homeowners would have seen their annual property tax bills rise again if a lawsuit by landlords across the county had been successful in pausing or reversing recently split rates. Renters may now also face higher costs now that the landlords were denied.
New Castle County property owners can expect to receive their long-awaited redone annual tax bills after a judge denied a challenge by a coalition of landlords that the split rates they depend on were unconstitutional.
In late September, homeowners were waiting to receive a revised county tax bill issued following a split of residential and commercial rates for school taxes when a coalition of commercial landlords and hotel owners sued the state, county and its six school districts last month, claiming a recently enacted state law allowing northern Delaware school districts to tax business properties more than residential ones “is unlawful many times over.”
Delaware Vice Chancellor Lori Will issued her ruling Thursday that disagreed with that argument.
“The question before me is a legal one,” Will wrote in a 60-page opinion. “Does HB 242, or the way the County and school boards are implementing it, violate the United States Constitution, the Delaware Constitution, or state statutes? For the reasons explained below, I conclude that it does not.”
The law at the center of the landlords’ suit, House Bill 242, was part of a slew of bills passed during a one-day special session of the Delaware General Assembly in August meant to provide residents with temporary relief from the tax bill sticker shock that followed the state’s first-in-40-year property reassessment earlier this year.
After that reassessment, the property tax burden in New Castle County shifted more toward homeowners and away from commercial property owners, sparking especially significant backlash from New Castle County residents.
Some residents saw their tax bills double or triple, while some major commercial properties actually saw tax reductions. High-profile examples of the latter, such as Amazon’s state-of-the-art Boxwood distribution facility and JPMorgan Chase’s city headquarters only further deepened homeowners’ criticisms.
That tax burden shift was due, in part, to the fact that school districts were not legally allowed to split their tax rates between residential and commercial properties, like the city of Wilmington and New Castle County were able to do.
House Bill 242 changed that, allowing school districts in New Castle County to split their rates. Each of the six districts quickly followed suit, raising tax rates upward of 80% on commercial properties to move more of the overall burden away from homeowners.
What did the landlords argue?
The coalition of plaintiffs in the lawsuit – including the Delaware Apartment Association, the Newark Property Association, the Delaware Hotel & Lodging Association, and the First State Manufactured Housing Association, which represents the interests of mobile home park operators – argued that state legislators overreacted to the public backlash.
Lawyers for the landlord coalition said HB 242 violates the Delaware constitutional requirement that the government tax similarly situated people or entities in a manner that is reasonably uniform.
They also claimed that New Castle County – which collects property taxes for itself, schools and municipalities – had arbitrarily deemed certain properties as commercial, and others residential.
While the defense team acknowledged that misclassifications had happened, they said New Castle County’s error rate of less than 1% was acceptable.
Aside from questioning the constitutionality of the split tax rates, the landlords’ lawyers also argued that HB 242, while providing relief to homeowners, will negatively impact renters across the state.
In order to avoid “financial ruin,” many landlords will have to raise rents to make up for the increases in their tax bills, the plaintiffs warned. And the tenants who will have to pay those higher rents will be less likely to afford that cost increase.
“HB 242 eases the tax burden on New Castle County homeowners by concentrating the burden on county residents who rent,” the landlords argued.
The Delaware State Housing Authority reported that nearly 40% of Delaware renters have incomes below 50% of the area median income – or $33,000 for a two-person household.
According to Apartments.com, the average rent in Delaware has risen 2.6% in the last year to reach $1,515.
Will’s decision
In throwing out the landlords’ case, Will explained that their arguments of HB 242 being unconstitutional do not hold water.
State lawmakers’ concerns about the hardship the reassessment had placed on homeowners coupled with their belief that that companies would be better positioned to absorb a one-time higher tax bill were both “rational reasons” for the state to create a split tax rate, Will wrote.
In response to the landlords’ claims about arbitrary property classifications, Will concluded that those “simple administrative mistakes” do not rise to the level of a systemic or pervasive – and therefore unconstitutional – flaw in the tax system.
“Our Constitution does not demand perfection from a tax system,” Will wrote. “The isolated examples of misclassification are correctable administrative errors, not evidence of a system deliberately designed to be non-uniform.”
Democrats look ahead, Republicans call a ‘mulligan’
After Will’s dismissal, lawmakers from both parties pointed to the ongoing hearings of the joint legislative committee tasked with investigating the impacts of Delaware’s property reassessment as a vehicle for future action. Those proposed next steps, however, were vastly different.
In a joint statement, Democratic leadership from both the State House of Representatives and the State Senate said their work will continue.
“But even with today’s victory, our work is not done,” the lawmakers said. “Delaware taxpayers deserve fairness, transparency, and reliability – and we will deliver on that.”
The statement does not include specific actionable steps, but it does say lawmakers are in the process of scheduling the reassessment committee’s next meeting.
Two Republican representatives, though, called for a mulligan on the entire reassessment process.
Reps. Mike Smith (R-Pike Creek) and Kevin Hensley (R-Middletown/Odessa/Townsend), both members of the joint legislative committee, released a statement Thursday night calling for New Castle County to not accept Tyler Technology’s work and repeat its property reassessment. The county should maintain its previous property valuations and tax rates until then, they said.
“We need to toss the most recent reassessment, continue the investigation, learn from the mistakes that were made, observe the best practices employed by Kent and Sussex counties, and redo this thing,” Smith said.
The representatives said they would work “across the aisle” with other members of the committee to make their proposal a reality, saying they are open to the state financing a portion of their proposed reassessment redo.
But with New Castle County tax bills now cleared to go out to property owners – with an upcoming due date of Nov. 30 – and the joint legislative committee currently without a set date to next meet, it is unclear how their proposal could come to fruition.
Jacob Owens and Karl Baker contributed to this report.
