Supreme Court case could impact county property tax revenue in 21 states

Key Takeaways

On April 25, the Supreme Court heard oral arguments in Tyler v. Hennepin County, a case challenging Minnesota’s statutory property foreclosure scheme, which allows local governments to keep the surplus proceeds after selling property forfeited due to tax delinquency. A ruling in favor of the petitioner will have significant repercussions for county governments in 20 states and D.C., which have similar statutes. NACo joined an amicus brief through the Local Government Legal Center (LGLC) arguing that the ability to keep surplus proceeds from the sale of forfeited property is an important enforcement mechanism that discourages property tax delinquency and the numerous administrative costs it imposes on local governments. More fundamentally, the LGLC brief argues that principles of federalism protect states from federal interference in their tax constructs.

While it is customary for local governments in all states to seize and sell property when owners are delinquent on their taxes, 13 states and the District of Columbia allow local governments to keep the entire sales price rather than only keeping the proceeds necessary to satisfy the debt: Alabama, Arizona, California, Colorado, Illinois, Maine, Massachusetts, Minnesota, Nebraska, New Jersey, New York, Oregon and South Dakota. In Alaska, Idaho, Nevada, Ohio, Rhode Island and Texas and, localities may keep surplus proceeds for a particular public use, while in Montana, state law permits local governments to keep the surplus proceeds from the sale of non-residential properties.

Tyler v. Hennepin questions the constitutionality of state tax schemes that allow local governments to keep the surplus proceeds from the sale of property forfeitures. The case centers on a lawsuit brought forth by Geraldine Tyler, who owed Hennepin County $15,000 in unpaid property taxes, interest and penalties for a condo she did not reside in. After the county sold the condo for $40,000 and kept the proceeds above and beyond Tyler’s $15,000 debt, Tyler sued, arguing that she was owed the $25,000 surplus under the Fifth Amendment’s Taking Clause, which bars the government from taking private property for public use without adequately compensating the property owners, as well as the Eighth Amendment’s ban on excessive fines. After conflicting lower court rulings, the Supreme Court agreed to hear the case.

The LGLC’s brief in support of Hennepin County disputes that the practice of seizing surplus equity is unconstitutional based on the principles of federalism, legal precedent and the facts of the case. Critically, a ruling for Tyler could create a perverse incentive for homeowners to stop paying property taxes so that the county or city incur the costs associated with selling the home yet funnel the entirety of the profits back to the delinquent taxpayer. Property taxes are an essential revenue source that allow county governments to provide critical services to our residents, and delinquency undermines this process. Keeping surplus equity is an essential mechanism for local governments to recoup the many costs associated with vacant property and forfeiture sales, which often do not fully compensate for the lost revenue stemming from unpaid property taxes.

Should the Court rule for Tyler, impacted states will likely need to revisit their property forfeiture statutes to limit or remove the ability of localities to keep surplus proceeds.

NACo will continue to monitor action on this case (expected in June 2023) and the potential implications on county governments.