Tax Lien Sales are Not a Vital Tool for Recovery; People Are
April 8, 2020
We are in an unprecedented situation, and our concerns first and foremost should be about keeping people safe and, to the extent that it is the safest decision for that individual or family, in their homes.
In response to the current COVID-19 crisis, it has been reassuring to see the federal government and many state and local governments focus on policies and funding designed to keep people in their homes so they can slow down the spread of COVID-19 – policies like moratoria on evictions, mortgage foreclosures, and tax foreclosures. We applaud our partners and leaders at all levels of government who have prioritized the lives of their residents above all other concerns.
Even as these efforts to protect our health continue, state and local government leaders across the country are already being tasked with making incredibly difficult decisions about how to address the economic and fiscal impacts of the pandemic, which will surely include how to address the significant and critical loss in flexible operating revenue for local governments due to diminished tax collections. The decisions made now and in the coming months about how to address these critical gaps will have an impact on generations to come.
The Center for Community Progress has had the great privilege of working with hundreds of government and community partners across the country to design and implement effective, efficient, and equitable solutions to vacant, abandoned, and deteriorated properties. One important lesson we’ve learned is that the practice of selling property tax liens to private investors as a means of trying to collect some portion of unpaid taxes upfront is far more attractive to local governments when under extreme financial duress .
We saw this in the wake of the Great Recession. Many states and local governments were seeking to fill significant and immediate revenue gaps due to a sudden drop in local property tax collections. Governments faced the prospect of waiting for years to eventually foreclose on properties for non-payment of local taxes, which meant hard decisions on which services to eliminate in the coming years.
In the face of this fiscal crisis, tax investors rode into town, offering instant infusions of cash by agreeing to buy up all the property tax debt. Some governments, many of whom didn’t have the knowledge of more effective enforcement alternatives or were under immense pressure to fill budget gaps immediately instead of taking a more effective and equitable long-term approach, took the offer.
Invariably, and as many of our government and community partners have learned the hard way, this deal comes with serious long-term drawbacks:
- By selling off the property tax debt, local government loses the opportunity to develop more equitable solutions for those behind on their property taxes. Homeowners occasionally face financial hardship. Governments often have the legal authority to enter into payment plans, and possibly even lower penalties and fees. Many exercise these rights, knowing that when owners retain control of their home and preserve their equity, it benefits the homeowner, the neighborhood, and the community. Tax lien purchasers, on the other hand, have an incentive to extract as much wealth from the homeowner facing hardship; and in some rare cases, move quickly to foreclose on the debt, strip the homeowner of their equity, and flip the asset for a significant payout. Homeowners are left to work directly with tax lien purchasers, without oversight or accountability from the local government. And the history of tax lien sales and our experience suggest this harmful extractive system negatively impacts communities of color the most.
- By selling off the property tax debt, local government loses the powerful legal authority to foreclose on a vacant and abandoned property, bring it under public control, and steward it back to productive and more equitable uses consistent with community goals. The enemy of every vacant and abandoned property is time – and once these tax liens are sold to a private investor the chance of transferring said property to a new responsible owner is delayed even more. Most tax lien purchasers have no interest in owning the property and therefore little interest in taking title to the property or in seeing the property transferred to a responsible end user, such as a land bank or other local nonprofit organization, to support affordable housing or other community goals. To make matters worse, many tax sale certificates for vacant and abandoned properties that are offered for sale are not purchased, and continue to recycle through the process year after year, accruing more liens and rendering the property even more inaccessible to the private market. Since these certificates represent just the municipal lien on the property, and not the actual property itself, the local government functionally has no legal rights to own, control, or manage these properties yet still incurs the costs to maintain and respond to public safety issues long after the property owners have walked away. of thousands of dollars in revenue annually. Now more than ever it is critical that all the revenue from the delinquent tax collection and enforcement system go not into the pocket of a private investor but back to the City coffers to fund the provision of critical municipal services for all residents.
- By selling off the property tax debt, local government loses the right to collect the interest and penalties that are due to the taxpayers at large, which is particularly important given the public safety costs that local governments continue to incur on vacant and abandoned properties that are in some form of limbo once a tax lien is sold. At the end of the day, private investors (which can include hedge funds, private equity firms, corporations, and individuals) don’t engage in the practice of purchasing tax liens as a municipal service or property acquisition strategy; their priority is to make a profit off of servicing the debt. For example, according to an analysis of tax lien sales in Poughkeepsie, New York, more than 90% of all tax liens sold by the City to investors were redeemed (paid) by the owner in the sample year. The report conservatively calculates that the City, by using the tax lien process, is forgoing hundreds of thousands of dollars in revenue annually. Now more than ever it is critical that all the revenue from the delinquent tax collection and enforcement system go not into the pocket of a private investor but back to the City coffers to fund the provision of critical municipal services for all residents.
Not surprisingly, as local governments’ finances started to rebound after the Great Recession, we found a common desire in the field to end the sale of tax liens, as the inequities, harms, and false claims of increased revenue had become all too obvious to local government leaders and community groups. We’ve worked with a number of these public officials and advocates, in New York and Maryland and elsewhere, to unwind these decisions, and reinstate more equitable collection and enforcement systems that center people while still meeting a community’s fiscal needs.
Now is the time for all of us to collectively develop and advocate for funding sources that local governments can use to plug the inevitable and possibly significant budget gaps due to a drop in the collection of property taxes (and other revenue items, like sales tax, casino receipts, income taxes, etc.). Although the recently passed CARES Act will provide states and municipalities a share of $150 billion federal dollars to help cover expenditures made as a result of the public health emergency, more will be needed from Congress in Phase 4. State-level support for local governments will also be critical. More funding is also needed for homeowners and local, responsible landlords, so they have the resources to continue paying tax bills and maintaining their homes.
Even if the federal government and the states provide more flexible funds to local governments to plug the holes left from declining revenues, it probably won’t be enough. Local governments are strongly encouraged to explore and exhaust all short-term borrowing instruments or other financial strategies before making the mistake other local governments previously made in the wake of disasters and under fiscal stress.
For those local governments that are currently selling tax liens and for those considering this option, the Center for Community Progress is here to help you explore alternative strategies. We can provide examples of communities that have created more efficient, effective, and equitable systems for delinquent property tax enforcement by selling the tax-delinquent, vacant, and abandoned property to new, responsible owners instead of selling the debt and keeping the property and community in decline. These alternative strategies preserve family wealth, decrease the prevalence of vacant and abandoned properties, and maintain a critical funding source for municipal services.
There is no question that COVID-19’s impact on local government finances will again leave many local leaders vulnerable to the empty promises of the tax lien investors. We urge our local government partners to apply the same priorities and values to the decisions for how to address the economic impact of COVID-19 as they’ve applied to decisions about how to protect the health and safety of their residents: centered around people, and ensuring their health and success today, tomorrow, and in the months and years to come.
For more information on delinquent property tax systems and tax lien sales, please contact the National Technical Assistance Team at [email protected].
 Each state has different laws that govern the enforcement of delinquent property taxes. However, for those jurisdictions that sell tax liens, once a property is considered delinquent on property taxes and attempts by the local government to collect the tax debt (which, depending on state and local laws, may include other unpaid public liens such as liens for housing and building code enforcement costs and fines) have proven unsuccessful, the amount of delinquency is offered for sale as a “tax lien” or “tax sale certificate” on the private market to any and all purchasers.
 A 2017 survey of counties across Maryland found that tax lien purchasers pursued a deed to properties in which they purchased the tax lien certificate about .02% of the time. This information was gathered as part of the taskforce created by the General Assembly to study tax sales in Maryland: https://msa.maryland.gov/megafile/msa/speccol/sc5300/sc5339/000113/022600/022602/20180151e.pdf.
 For more information on the analysis of tax lien sales in Poughkeepsie, New York, please view the report from The Benjamin Center at SUNY New Paltz here: https://www.newpaltz.edu/media/the-benjamin-center/db_21_going_going_gone_tax_lien_auctions_hidden_costs_and_missed_opportunities_for_the_city_of_poughkeepsie.pdf.
 For more information on the analysis of tax lien sales in Rochester, New York and Baltimore, Maryland, please view the reports from the Center for Community Progress here:
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