Monday, April 7, 2014

Rational Taxation


Lathrop et al. v. Town of Monkton, 2014 VT 9.

There are two certainties in life: death and taxes.  For the second, every town in Vermont has, to the chagrin of landowners, a posse of listers ready to mount up and find ways to increase property assessment values, but for those who think they can out run such Ox-Bow incidents, there lies another certainty to contend with: the tax appeal. 

One of the creative ways that the Town of Monkton has to extract value out of properties is to tax land for the potential that it has for “subdivision and further development.”  In 2011, when the underlying appeals in today’s case were taken, a landowner in Monkton could subdivide his property if it: 1) was naturally divided by a road; 2) contained multiple contiguous lots created by deed before zoning was introduced in 1978; or 3) had a subdivision permit from the Development Review Board.  Categories one and two are taxed as having one house site.  Category three is taxed as having the potential for two or more house sites. 

As you might imagine, the appellant taxpayers in this case all had subdivision permits and were handed an uncomfortable tax bill for multiple house sites even though their parcel only had one actual house site.
 

The Monkton Board of Civil Authority denied taxpayers’ appeals of their 2011 assessments.  Taxpayers appealed to the state appraiser.  During the proceedings, one taxpayer refused to produce documents the Town requested, claiming they were in the public record and did not need to be submitted in advance of the hearing.  Even though he could have, the appraiser did not dismiss Norris’ appeal.  Instead he gave the Town opportunity to respond and submit comments after it reviewed Norris’ documents at the hearing.

After the hearing, the state appraiser reversed the assessments in favor of taxpayers.  He found the Town’s distinction between the subdivision permit parcels and the road or contiguous lot parcels to be arbitrary, and determined that the Town was not treating all properties in the Town fairly or equitably.  The Town appealed to the SCOV.

On appeal, the Town asks the SCOV to determine two things: whether the appraiser’s decision to not sanction taxpayer Norris should be reversed, and whether the appraiser erred in determining that taxpayers were treated unequally.

On the first issue, the SCOV makes a quick conclusion: yes, the appraiser could have and probably should have sanctioned Norris and dismissed his appeal, but it won’t reverse the appraiser.  It doesn’t matter whether documents are public records, a taxpayer has to disclose all relevant documents in an appeal.  But it was not an abuse of the appraiser’s discretion to let the Town comment on Norris’ documents after the hearing rather than dismiss the appeal.

On the second issue, the SCOV has to dig into some constitutional law.  Property taxes must be “uniformly assessed”—no taxpayer should be required to pay more than his share of the tax burden.  Case law dictates that this is accomplished by listing properties at fair market value, which is based on the “highest and best use” of the property.  Whether or not a property has potential to be developed into more than one lot is something listers can consider when assigning a property value.

The problem is that the first two categories of subdividable land in Monkton—naturally divided by a road, or contiguous parcels conveyed before 1978—are not taxed for multiple lot value, whereas the third category—parcels that have a subdivision permit—is taxed for multiple lot value.  According to taxpayers this resulted in unequal treatment of properties that were otherwise similarly-situated, in violation of the Equal Protection Clause of the federal Constitution, and the Proportional Contribution Clause of the Vermont Constitution.

The standard the SCOV applies to this question is a modified form of the familiar rational basis standard: a classification of taxpayers will be upheld if it is reasonably related to the purpose for which it was established, it is fairly and equally applied among similarly-situated classes of taxpayers, and the town had “any reasonable policy or purpose” for making the classification.

The SCOV concludes that the Town had a rational basis for making the distinction at issue here.  True, all three types of parcels could potentially be sold as subdivided lots.  But parcels that already have subdivision permits can be safely assumed to be ready for subdivision.  The permittee has already gone through the process of determining exactly how many home sites can be carved out of the parcel, demonstrating that subdivision is the “highest and best use” of the property.  A permittee can also demonstrate that, despite the permit, the property lacks development value, so it is possible to challenge the assumption.

By contrast, road-divided or contiguous parcels, while potentially subdividable, have not been demonstrated to be so, and may in fact not be.  The SCOV gives an example of a lot that is in part unbuildable, too small, or landlocked.  It is not necessarily true with these parcels that subdivision is the “highest and best use” of the property.  The Town had a rational basis for making this distinction, the SCOV concludes, and it is reasonably related to its purpose, even if it appears to unfairly target subdivision permittees. 


This is technically referred to as the SCOV cutting the municipality some slack, but it is fully consistent with the SCOV’s recent case law in this area that has affirmed the right of listers to mount up and use some creativity and statutorily sustained cunning to bring in the tax dollars equivalent to the highest and best use.  Hi ho, and away!

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