The U.S. Supreme Court Could Upend Local Property Tax Laws

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Welcome back to the Public Finance Update! I’m Liz Farmer and this week I’m looking at a U.S. Supreme Court case that has financial implications for counties. The property tax and seizure case argued before the high court last week has led to some unlikely alliances—bringing together all parts of the ideological spectrum.

The case, Tyler v. Hennepin County, Minnesota, is about how much autonomy the U.S. Constitution allows state governments who have lawfully seized property from owners who are delinquent on their taxes. A ruling against Hennepin County in this case could limit how and when other local governments can execute a tax foreclosure and what they’re allowed to do with the sale proceeds.

The case concerns a one-bedroom condominium in Minneapolis that Geraldine Tyler, now 94 years old, purchased in 1999 and lived in for more than a decade. In 2010, according to her brief, “she left her home out of concern for her health and safety and moved to an apartment building for seniors in a safe and quiet neighborhood.” Although she continued to pay her property taxes on time for a while, she stopped paying them starting in 2011.

By 2015, Tyler owed $2,300 in taxes on the condominium plus nearly $12,700 in fees and interest. Hennepin County seized her home, sold it for $40,000, paid off her tax debt and then kept the $25,000 in remaining equity. 

Tyler sued the county in 2019, arguing that Hennepin County violated the takings clause of the U.S. Constitution’s Fifth Amendment when it seized her condominium and kept the surplus. The clause states that "private property shall not be taken for public use, without just compensation." Her brief to the Supreme Court also argued the county’s actions violated the excessive fines clause in the Eighth Amendment. 

Lower courts have sided with the government, noting that there was “adequate notice” to the property owner before the sale. But during oral arguments last week, the justices appeared to side with Tyler, who is being represented by the conservative Pacific Legal Foundation.

Justice Ketanji Brown Jackson, a Biden-appointee, said that the home-forfeiture scheme “feels very punitive” in light of the potential for “massive differences” in how much equity the county could retain based solely on the particular value of a home. Meanwhile, conservatives Justice Brett Kavanaugh and Chief Justice John Roberts pushed back on the government’s argument that the property at stake here is not the sale proceeds but the title to the condo, which is “taken” when the county seizes the title for failure to pay taxes.

"What's the point of the takings clause?" Roberts asked. "I mean that was something that was pretty important to the framers.”

Framed As a Commerce Issue

Minnesota is one of 13 states (including Washington, D.C.) that have tax foreclosure laws allowing the government to keep all the proceeds from a sale.

A handful of other states, such as Connecticut, keep the remaining equity but still allow a property owner to claim it for a certain amount of time following the sale. 

According to Pacific Legal, roughly 8,950 homes were sold because of unpaid taxes between 2014 and 2021 and the former owners in those 13 states received little or nothing.

In its court filings, Hennepin County pointed out that Connecticut’s practice, which gives property owners up to 90 days to claim the sale proceeds, doesn’t differ much in reality from what Minnesota allows. The forfeiture legal process in the state takes over three years, with multiple notifications provided to property owners.

Either way, property owners “must take action to preserve their property,” the brief said. “Petitioner articulates no reason why Connecticut’s limited post-forfeiture ability to claim a surplus is constitutional, but not Minnesota’s extensive pre-forfeiture opportunities to preserve one’s equity.”

But this case has everyone’s hackles up as it touches on issues such as equity, older homeowner rights, freedom of commerce, and punitive fines and fees. The cross-ideological alliances that have formed against Hennepin County argue that letting the county keep the proceeds not only hurts homeowners, but damages property and business interests generally. Nor should the government “fund itself via windfalls” taken from parties who lack the wherewithal to fight City Hall.

“The current tax foreclosure regime in Minnesota threatens the free and fair deployment of capital as well as the taxpayer's right to a fresh start,” the Cato Institute argued in its amicus curiae brief. “The windfall afforded a single creditor holding a de minimis claim by Minnesota's tax foreclosure scheme is irreconcilable with those foundational commercial principles.”

Legal aid nonprofits couldn’t agree more. “Underpinning federal and state commercial law are the principles of commercial reasonableness, equality of distribution, and equity and fairness among creditors,” wrote Pioneer Legal in its amicus brief. “Minnesota, and the 13 other states that have similar tax foreclosure laws, defile these principles.”

Harvey Bezozi, a tax expert and certified public accountant based in Florida, said the commerce arguments may win the day with a court that has previously ruled in favor of states’ freedom to govern when it comes to womens’ reproductive health and gun ownership.

“The justices may, given some of their questions during oral arguments, side with Tyler here thinking her case is more like a commerce dispute,” he said.

Counties Watching Closely

In 2020, the Michigan Supreme Court struck down a law similar to Minnesota’s after a hearing that shared many of the same attributes as Tyler v. Hennepin County. In the case struck down by the court, an Oakland County homeowner owed less than $9, but the state sold his home for $24,500 and pocketed the proceeds. 

Interestingly, the Michigan Supreme Court found that the law violated the state’s constitution but that it did not violate the U.S. Constitution’s takings clause. Michigan ultimately amended its foreclosure statute to allow homeowners to get the surplus proceeds. 

The Michigan Association of Counties is worried that a broad ruling in favor of Tyler could force more substantial changes upon tax frameworks that fund local government services or turn them into unwitting real estate agents for abandoned properties.

Michigan was just one of two states aside from Minnesota that submitted an amicus brief in support of Hennepin County. In the brief, Dykema Law Offices argues that state property tax issues are best left to the states and that states should decide the balance between procedural fairness and the necessity of tax collection.

“Michigan has already addressed this issue [of home equity in foreclosure actions] in its own Supreme Court and legislature, according to its state constitution and laws,” Ted Seitz, a member at Dykema, told the publication Minnesota Lawyer after oral arguments last week. “There is no need for federal intervention here.”

The court’s decision is expected in late June.