I compiled this post from a variety of sources: Foundation for Economic Education (FEE.org), Pacific Legal Foundation (Pacificlegal.org), Greatfallstribune.com (Mt.), Detroitnews.com and SSRN.COM.
Uri Rafaeli’s story is heartbreaking to read: Uri is a retired 83-year-old Michigan engineer, and in 2014 he accidentally underpaid, by $8.41, the property taxes on a home he rented out. But instead of notifying him of the issue and helping him, his county government seized the home and sold it at auction for $24,500. The county (Wayne) then kept all the proceeds—leaving Rafaeli with nothing.
There is a word for this practice: theft. And Wayne County is not the only one winning big on the minuscule mistakes of the little guy: it’s every county in Michigan and in a dozen other states, as well. In the case of Erica Perez, whose home was taken and sold for $108,000 to satisfy a debt of $144, the notice was mailed to the wrong address—even though the county had the correct address on file.
In Alabama, Colorado, Maine, Massachusetts, Michigan, Minnesota, New York, North Dakota, Oregon, and Wisconsin, governments not only keep the value of unpaid property taxes and interest from the sale of a seized home—they also keep the surplus value rather than returning it to the property owner. In Arizona, Colorado, Illinois, Massachusetts, and Nebraska, private investors often reap the gains of home equity theft.
The situation in Michigan, where Uri Rafaeli lost his property, illustrates the scope of the abuse. Between 2013 and 2018, local government entities in Michigan foreclosed on more than 150,000 properties for unpaid taxes. In Massachusetts, municipalities took more than $56 million in home equity from property owners in a single year, according to a study by University of Massachusetts School of Law Professor Ralph D. Clifford, which is summarized here:
The predominant method for collecting delinquent real estate taxes in Massachusetts is the use of the “tax deed” as authorized by Chapter 60, Sections 53-54. Under the authorized procedures, each municipality’s tax collector can execute and record a deed that transfers fee simple title to the real estate to the municipality subject to the taxpayer’s statutorily created redemption right. If the redemption right is or cannot be exercised, all of the taxpayer’s rights in the property, as well as other’s rights created by encumbrances such as mortgages, are terminated by the foreclosure process provided for in the statute. Importantly, the municipality does not obtain title to the taxpayer’s land by foreclosure; instead, it merely frees itself of any remaining claim by the taxpayer.
The problem with the tax deed procedure is that it fails to provide both procedural and substantive due process to the taxpayer. Procedurally, although adequate notice is given, title to the taxpayer’s real estate is taken by the government without a hearing. Based on an unreviewed decision by a municipal tax collector, the taxpayer immediately loses title to the land. Substantively, by using a tax deed, the municipality engages in the taking of property without providing reasonable compensation. The value of the land taken for payment of the tax debt is not evaluated in the context of the debt owed. Empirical evidence shows that the property’s value significantly exceeds the debt owed, giving the municipality the ability to collect almost fifty dollars for every dollar of delinquent real estate tax owed, on average. Each year, approximately $56,000,000 is unconstitutionally appropriated from taxpayers.
Why would governments do this? Pacific Legal Foundation found two reasons:
- Local governments can pad their budgets with stolen equity. In Detroit, there’s a budget line every year for expected windfalls from home foreclosures.
- Some politicians use the system to reward their friends and family with homes priced below market. In Michigan, local officials funnel auctioned properties to their family and connected businesses at a discount.
Thousands of bargain hunters who register to buy foreclosed homes from the Wayne County Treasurer each year recently have been competing against family members of the official who runs the auction, in violation of county rules. As chief tax collector, Wayne County Treasurer Eric Sabree leads one of the largest government foreclosure auctions in the nation. It has transferred ownership of more than a quarter of Detroit properties since Sabree started as deputy treasurer in 2011. Treasurer’s office rules ban family members from participating in the auction, which seizes properties from homeowners with late taxes and sells them to the highest bidder.
- In Montana, before the practice was banned, local treasurers sold foreclosed homes to preferred private investors.
In Montana, property tax lien assignments become available after the taxes have gone delinquent for no fewer than two months. At that point, anyone with an interest in the property; be it a neighbor, rival or property investment company, can come in, pay the back taxes and obtain a lien on the property attached to them.
Once a tax lien has been sold, state law guarantees the holder of that lien a 10 percent annual return on their investment – plus an additional two-percent per annum that goes to the county to cover administrative costs. If the owner of the property does not reimburse the lien holder for the entire amount of the accumulating debt within three years, then a tax deed is issued turning ownership of the property over to the lien holder. Property tax collection in Montana is unique in that it relies upon the profit motive of private individuals to enforce compliance.
According to the National Consumer Law Center, every state in the country has laws authorizing the creation of a lien against residential property when the taxes don’t get paid. The laws are not uniform, but their most punitive outcomes can be devastating. We can hardly blame President Trump for these thefts, though I imagine the mediated reality establishment will find a way. But all the guilty states, with the exception of North Dakota, are very blue, having gone for the Democrat presidential candidate in 3 (3 states) or 4 (the rest) elections since 2000. Shocking!