The case that almost upended local property tax collections
The U.S. Supreme Court held the fate of local government revenue in its hands
Local governments breathed a collective sigh of relief on Tuesday when the nation’s highest court rejected and remanded a case that challenged the entire process by which municipalities auction off a property to recover unpaid and delinquent property taxes.
The judgement in Pung v. Isabella County was unanimous and emphatic about the total lack of legal standing for property owner and petitioner Michael Pung’s case.
“For hundreds of years, English and American law have allowed the seizure and sale of property as a tax-collection method, provided that the government return any surplus proceeds to the debtor,” Justice Alito wrote in the majority opinion. He added that “neither history nor precedent supports Pung’s contrary argument,” which would “impose unprecedented burdens on jurisdictions that wish to collect unpaid taxes and might well make tax sales impractical.”
The court vacated the case, sending it back to the Sixth Circuit Court in Michigan, which had previously ruled in favor of the county.
What was at stake
The case was closely watched in property tax circles but flew somewhat under the radar nationally—despite its potentially catastrophic implications for localities if SCOTUS had ruled the other way.
The dispute started in Isabella County, Michigan, where property owner Michael Pung fought a county tax assessment because he believed he was entitled to a particular type of tax exemption. The county’s argument was, in part, that he didn’t file the right paperwork to prove he was eligible.
Pung refused to pay the $2,200 tax bill he owed so finally, the county put the property up for a foreclosure auction. It sold for $76,000, the county kept what it was owed on taxes and fees from the sale proceeds, and sent the remainder to Pung.
The whole point of buying a property at an action is that you can get them for cheap so, unsurprisingly, Pung’s property sold for way less than market value. The buyer who purchased it ultimately flipped it for $194,000—more than doubling the initial investment (though not including additional investments from the buyer to make it sale-ready).
Pung argued he should have been reimbursed the after-tax proceeds from the market value of the property, not the auction rate. In other words: He thought the county should have operated like a professional realtor, spending time and taxpayer money marketing his property so that it would sell it for more than the “we just want to get rid of this to the highest bidder” auction price. And that the county should go through this additional hassle all just to recoup a couple thousand in taxes.
Chaos averted
If you’re wondering how the HECK this makes sense in any world, you’re not alone. We recently spoke on the Public Money Pod with Adam J. Cohen, an attorney and expert in property tax law, about the case before the ruling was issued and his stark take was this case had the potential to not only seriously frustrate property tax enforcement but also to cripple municipal government funding all across the country.
“It would result in a system where the municipalities would owe more money than they recovered from the tax foreclosure,” he said. “In this case, it sold for 40% of fair market value [and you’d] have to write him a check for 60% of fair market value to sell a property for him to recover $2,200. It would never happen.”
But today’s decision, he said in a follow up statement, “was a complete victory for the government. All of the challenges, including fair market value compensation and proportionality in the foreclosure, were rejected.”
Here are some other key takeaways from that conversation.
This isn’t the first time the high court has dabbled in property taxes.
In 2023, SCOTUS issued an opinion that did change local property tax debt and collection. That case, Tyler v. Hennepin County, concerned Geraldine Tyler (then 94 years old) and the condo she’d moved out of for health reasons and had stopped paying property taxes on. By 2015, she 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. SCOTUS agreed and now all jurisdictions have to refund the proceeds of a tax sale after the debt is collected.
Anything other than total victory for the county could have spelled disaster.
Even a compromise ruling, Cohen said, would have added “complexity and litigation to every manner of tax and other debt enforcement at the government level. For example, if the court set some sort of proportionality or reasonableness standard for the price, it would turn every tax collection into constitutional litigation.” Another version of more hassle than worth the revenue recovered.
Auctioned properties are discounted because of risk.
It’s not just that the tax delinquency devalues a property. Those who buy properties at a public auction are getting a discount because there are other inherent risks associated with the purchase, including:
The property owner could sue the purchaser or the government. Either way, the property takeover gets stalled.
Buyers may also be forced to evict the owner (more common in residential purchases).
These properties can be hard to insure or to get financed for a quick remodel and flip.
So--all the more reason that no one would pay market value for a property that came with that much baggage.
You can listen to the full episode here: The Future of Property Tax Collections? With Adam J. Cohen