In the last City Council agenda fixing session, a split emerged over the issue of property taxes. Much of the council stressed how hard it would be for seniors and those going through hard times to keep up with the high interest rates – and they make a good a point.
However, the purpose of these seemingly elevated interest rates is not to just make people struggle. There is a reason the rates are so high, some of which seems to have been misunderstood at the last meeting. I’ll try to explain (says the man who’s never paid property tax in his life).
These rates really are the standard
First of all, as Tax Collector David Marshall said, these rates are the standard. To make sure, I contacted the tax offices of Paterson, Scotch Plains, Linden, and Elizabeth. All four municipalities had the same rate as Plainfield – 8% interest on the first $1,500, 18% on anything above $1500, and an 6% annual penalty. The annual 18% interest is the maximum allowable under NJ law. Glimpsing at the websites of other towns and cities in the area, it’s clear that these rates prevail. Nationally, the rates are said to fall between 12% and 36%.
Not all delinquents are seniors or unemployed
The majority of the City Council painted those who do not pay their tax bills on time as senior citizens or those struggling with this economy. Many are, without a doubt. However, there are all sorts of properties and all sorts of delinquents – including businesses and absentee landlords, even slumlords.
The city is not a bank
As eluded to by Councilwoman Rebecca Williams, these interest rates are a deterrent to delinquency. To put it another way, they are a deterrent to borrowing from the city. As interest rates ease closer to the single digit interest rates that banks offer, the tendency to borrow from the city grows. With lower interest rates, instead of taking out a $10,000 loan, the owner of a large property could simply neglect to pay two quarterly bills. These conditions would be sure to make the tax collection rate go down below the already problematic 94%. The credit rating would fall as well. No city can afford to be used as credit, especially with no approval process for the borrower. Delinquency obviously cannot be banned, but high interest rates can be imposed as a deterrent.
Tax lien investors
Mayor Mapp made the point that tax lien investors would not bail out the city in the event of lower interest rates. I was beyond skeptical of this seemingly ridiculous claim – after all 10%, rather than 18%, would still a very good return on an investment, right? I looked into it and it turns out that despite nationally high rates on delinquent real estate taxes, after all expenses, investors only pocket 4 to 7 percent interest on their risk. This is relatively high but much lower than 18%.
In fact, investors fight over tax liens in competitive auctions. My understanding is the higher that as these investors bid, they lower the interest rate for the owner of the lien – which just happens not to just give the city more money, but helps that particular property owner. Sometimes interest rates are lowered into the low single digits, which the tax lien investor would collect along with the 6% annual penalty at the end of each year. Let’s not pretend the motives aren’t sinister. While these investors do accept lower interest rates, they are betting against the future payments of the property owner and hoping to cash in on the full 18% along with the 6% penalty come the next lien, which they would own by default.
I am the last person to worry about this sort of investor income – those who sometimes profit on citizens’ hard times. However, in our system, lien investments are, unfortunately, often the only way that cities are bailed out and get the money that they need to provide services. This should not be the case, but it is.
What to do?
One cannot argue for lowering the interest rates in a vacuum, without the context around it. This is not something that can be done as a knee jerk reaction to high percentages on a Monday evening, or treated as a spur of the moment decision.
If the City Council would like to reform the way taxes are collected and leave way for leniency towards seniors and other vulnerable people, firstly, a new system would have to be implemented that differentiates one owner from another in the mind of the tax office. Lines and thresholds would have to be drawn and there would need to be a way to find out how needs-based the property owner is to merit a lower rate. Most importantly, a way would have to be figured out to accomplish any changes without encouraging more property owners to delay payments, essentially borrowing from the city and lowering the tax collection rate even further. It’s complicated.
Resolving this issue is the type of proposal on which people run campaigns, requiring a total overhaul of the way things are done that is seemingly unprecedented in our area. I applaud and encourage anyone who tries to find a better way, but for now these interest rates should be held as they are. I am interested in seeing tomorrow night’s resolution, or lack thereof.
I invite anyone, especially those more in the know than I am, to add their knowledge and point of view to this issue.
On another note, you may not have seen me at the Frontier’s MLK breakfast. Unfortunately, I had to work.