Tax Lien Certificates Offer Stability During Unstable Times

New York Times writer Jack Healy's story (Tax Bills Put Pressure on Struggling Homeowners) published August 18, 2009 offered only a portion of the reality of tax certificate and tax lien sales as local government revenue recovery mechanisms.  First,let me agree with the story's premise that any debt shouldered by citizens who find themselves in a state of economic duress is not a pleasant situation.  It is, however, a situation that really demands clarification.  The sale of a tax bill is just that---the sale of a tax debt and not the sale of the property to which the tax bill or tax lien attaches.  The property tax is one of the most despised of all taxes in the United States,but it is still the financial engine that drives most local government budgets.  These are budgets that provide for our children's public education, teacher pay hikes,fire trucks, police officer training and equipment along with paving our roads, repairing our bridges and funding thousands of other nondescript government positions that help maintain a civilized society.

 

Cities and counties across America are empowered by their respective state legislatures to impose,collect and enforce the collection of property taxes because of the importance and demand for services by the citizenry.  Yes,sanctions do occur,when,for whatever reason, we fail to honor our commitment as taxpayers.  Just ask anyone investigated by the Internal Revenue Service for failure to file a tax return.  Penalties will surely follow.  Local governments are no different.  They are required by their state constitutions to impose and collect property taxes for the benefit of their communities.  If the monies are not paid the citizens suffer and public education (i.e. our kids) is still the largest portion of most county and municipal budgets.  So, what are the options if property owners fail their obligations to pay ad valorem real estate taxes?  The typical financial tools at hand for local legislative and tax levying agencies include increasing the tax or millage rate to make up for the shortfall created by  those property owners who have not paid.  This simply transfers the tax burden from one group (tax delinquents) to another (timely taxpayers).  Cutting or reducing existing services is also an option,albeit not particularly popular.  Depending upon the local government's credit rating, the option of borrowing monies may be available.  This choice increases the communities debt burden and still does not bring in the original missing revenue from property owners who use the city,town or county services, but are not paying for them.  Hence, the use of tax lien sales whose rules are established by state statute for the sole purpose of collecting delinquent property tax dollars.  It is important to point out that even the interest rates charged on delinquent taxes are set by each state jurisdiction that authorizes the use of lien sales by local governments.

 

Tax lien sales have been in use for decades in the United States.  In a very real sense these sales are formal invitations to the investing public to accept the risk inherent with paying the debt of another and in the case of tax lien sales it is almost always about accepting the risk that some individual,company or legal entity,about which the investor has no prior knowledge,will,in fact,repay the monies paid on their behalf.  Obviously,this is not a risk many individuals or funds are willing to take,but I can tell you that there are hundreds of local tax revenue officials across the nation that are thankful for those risk takers who do show up and participate at the advertised tax lien auctions.

 

Finally,it should be noted that the properties which find their way to the delinquent tax list are made up of all types of property including vacant,commercial,retail,office,subdivision lots,alleyways,office parks,movie theatres and a bevy of irregular shaped parcels with no ingress or egress. 

 

Mayor Michael Bloomberg said it best when in a March 14,2006 press release he stated "Lien sales help the City maintain equity in the property tax system by assuring that conscientious and timely taxpayers are not overburdened and forced to pay for those individuals who disregard their tax obligations.  Lien sales also permit the City to continue to reduce its role as landlord to delinquent properties and remove the City from the business of foreclosing on delinquent property."

 

Howard C. Liggett
President

Distressed Real Estate Consulting Services,Inc.

Pensacola,Fl