Sussex looks at ‘homestead tax’ as option
Sussex County Council members are asking staff to look into the idea of adding a “homestead tax” to help fund dwindling county coffers.
Though the term “homestead tax” most often refers to the exemption of state-resident owners from all or part of a tax on residential property, the idea was initially proposed in Sussex County as an additional property tax on residential property owned by non-Delaware residents. Either way, it would aim to raise county revenues through taxes targeted at non-Delaware-resident property owners.
“Non-Delaware residents do not file Delaware income tax returns. They do not pay Delaware income tax,” County Administrator David Baker noted in presenting the idea to council members on March 31. “They are not contributing the way Delaware residents do toward services that are being provided with Delaware taxes,” he noted, pointing out the costs for paramedic services, for example, which are paid from state, county and local funds but serve anyone living in or visiting the state.
Baker said his staff had estimated that the county could generate $81,000 in revenue per year, per penny of tax. So, if the county were to levy a 10-cent tax, that would generate about $815,000 per year for the county; a 15-cent tax, about $1.2 million per year.
“I’d like to look at this option and some other options and check our government finance officer association and National Association of Counties to see what other options there are,” Baker said.
“It would require a substantial amount of work to institute,” he added, noting the potential requirement for legislation to grant the county the legal authority to add the tax. But, he said, the application form for exemptions could be mailed in July, with tax bills, and presented back to the county, to make sure they would be taxing only non-Delaware residents.
County Solicitor David Griffin said he had some concerns about the legal issues involved, noting that the term “homestead tax” has a different definition in common use than the county has proposed it be used in Sussex.
“In the states that have it, it exists as exemptions from taxes,” he said, noting that such a tax exemption would typically accomplish two purposes:
(1) to exempt a flat amount of assessed value from being considered when the tax rate is applied (such as, on a primary residence, to reduce the home’s value by $50,000 on a $200,000 assessed value before it is taxed); and
(2) to typically exempt the “homestead” property from being attached by lawsuits or foreclosure proceedings.
In the latter element, Griffin noted, “homestead” property owners would have to waive the benefit of the homestead act – its protection from foreclosure and susceptibility to seizure or attachment in a lawsuit – before owners or buyers could get a loan. He said no bank would accept such an exemption in the granting of a loan, since they would be unable to reclaim a mortgaged property if the mortgage was not paid.
“The problem with homestead tax exemptions is they result in money being lost by the county. We would have to make money up from some other source of revenue,” he said.
“What being looked at here is not a ‘homestead tax,’” Griffin emphasized. “It is a two-tiered tax rate: one tier for residents and another, higher, tier for non-residents. And before we could attempt to implement it, we would have to look at the legal implications.”
Griffin noted that state law could stand in the way of such a tax.
“The Delaware constitution says all taxes will be uniform for all classes of citizens in the county,” he said, noting that the county can make exemptions, but that the law “currently doesn’t offer a way the county can create a different assessment rate for residents versus non-residents.”
Griffin said he would have to do some legal research to see if such a change has been made in any county in the U.S., initially by contacting NACo to see if they know if it has been done somewhere and, if so, what the procedure was.
“If there’s no precedent, we would need to conduct legal research on specific methods by which this could be done,” he concluded, noting particularly the issues concerning equal protection of the law.
Cole voices support for tax as option
Council members on Tuesday indicated the option of a higher tax on non-resident property owners might be a tool they’d like to have in their financial arsenal.
Councilman George Cole noted that he and former councilman Dale Dukes both had houses in Florida, which has a “homestead tax” that exempts only Florida-resident property owners, “and it didn’t discourage us from buying those homes.”
Cole said he could see the county setting a higher overall property tax rate and then making an exemption for property owners who reside in Delaware.
“I see this as being proactive, as revenue sources are changing dramatically,” he said. “There has been pressure over the years for reassessment, and we have been told we may have to raise taxes just to reassess.”
“We have to build sewer systems for Fourth of July weekend. We have to paramedic systems for Fourth of July weekend and that extreme number of people,” he said of the required capacity of county services to meet peak needs.
“The towns say they need the transfer tax money, and transfer taxes have been utilized to give grants,” Cole added. “Out-of-town people have always benefitted from those grants.” He particularly noted that the area’s fire and ambulance services, which have always been volunteer services, may have to be switched to paid services in coming years, due to increasing levels of services and financial concerns.
“We’ve always prided ourselves here in Sussex County for our low taxes. We don’t give a lot of services. But if the county has a choice of reducing services versus raising taxes a penny or two…” he said, noting that he hadn’t heard complaints when the county raised taxes in the past and then reduced them shortly thereafter.
“I’m looking at this as a tool,” he said. “And I’d like to keep it as simple as possible,” he added, suggesting the council look at exempting only a primary residence from the tax, which Griffin confirmed the county could do, impacting only non-Delaware residents and owners of multiple properties.
“The rest of the properties could go up. Commercial properties would go up,” said Cole. “I think the bulk of the population would not be impacted negatively by this. They would look at this as another tool that county government uses to improve the quality of life in the county.”
Cole said he would be open to using the “homestead tax” exemption to take an amount off assessments for residents, or to cap tax increases on exempted properties. “In Florida, my taxes went up $800 in one year. If I had been a homesteader, my taxes wouldn’t have gone up that much – though they would have gone up.
“There are many ways to skin this cat,” he added. “Let’s find out what other states are doing and find what would work better here. We might not use it. We might not need it.”
Councilwoman Joan Deaver replied, “After sitting in on [recent budget] workshops, I’m getting the impression that we do need it. It would be simpler than increasing the property tax rate or putting in a caveat on income.
“I own some investment property, so it will hit me, too,” she noted, “but I’m willing. It’s important we protect the people who live here, and that’s their homestead. It meets the goal.”
Full-time renters, ag properties raise concerns
Councilman Samuel R. Wilson Jr. said he had some concerns about the potential impact of the strategy on some born-and-raised-here locals.
“I have people in my district who live here, but they have property they rent, and it impacts them, too,” he said. “You’re not talking about people who live in Washington who came here with a lot of money and come for two or three weeks a year. You’re talking about people who are born and raised here in Sussex County.”
Wilson said he was concerned that increased taxes on investment properties would simply be passed along to tenants who lease those properties, impacting not only non-resident property owners or those owning multiple properties but those who don’t even own any property.
“I don’t think this council would be interested in seeing those people affected,” put in Council President Vance Phillips. Deaver said she felt the county could exempt residential rentals as primary dwellings, and Cole said the county could use the same exemption system for such properties.
Councilman Michael H. Vincent expressed cautious support for the concept.
“I don’t have property in Florida or have multiple properties, but the idea has merit,” he said. “There are ways to work this out. I don’t want to see us raise taxes on people who are working every day and are living in a rented house,” he added. “But we all realize today that we need to look at all avenues of income. There’s a lot of conversation needed to decide how to put it in play.”
Phillips, too, said he felt the idea was one the county should look at to increase revenue.
“As much as I don’t like taxes,” he said, “what I don’t like even more is an inequitable tax policy, and the estate tax for non-residents is paid to the other state and not to Sussex County. I believe idea has merit,” he concluded, suggesting workshops on the issue in the future.
Cole on Tuesday said he expects some complaints. “What the complaints will be is non-residents saying they are not having any impact,” he said, noting that the county does build its sewer systems, roads and other services and infrastructure to accommodate such people.
He emphasized that the county’s current property tax rates are extremely low. The average property tax bill is $101 per year, just $40 per year for a mobile home.
“We haven’t had any complaints about high taxes in this county,” he added. “I’d like to see us pursue it and be proactive.”
Phillips – himself a farmer – noted that the council would have to consider farm buildings, as well.
“They’re already exempted, constitutionally,” Griffin noted. “And when they’re taxed, they ‘shall be taxed as used for agriculture.’”
“When they’re taxed, they’re taxed significantly,” countered Phillips, “and those chickens don’t use the schools.”
The council approved county staff beginning to research the proposal through NACo, to minimize the county’s legal expenses in the research. When they have additional information to provide to the council, the issue of a “homestead tax” will go back on the council’s agenda.