Supreme Court Will Define a ‘Just’ Tax Foreclosure Compensation

The US Supreme Court’s decision to take up the issue of whether “just compensation” in a tax foreclosure means either fair market value or whatever price the government happens to get at auction carries major implications for property rights and local government practices.

A sensible solution would be to use the auction price as a baseline for compensation only when it falls within a specified range of the property’s appraised value.

The government already holds extraordinary power to seize and sell a person’s home to recover even de minimis tax debts. The only real constitutional limit to that power is that the government must justly compensate the property owner for what it takes beyond the owed debt. This is the central tension at the intersection of tax policy and property rights.

The question in Pung v. Isabella County is whether “just compensation” has become synonymous with “good enough compensation,” as determined by a valuation process the government alone controls. If the court wants to preserve both procedural efficiency and fairness, it will have to decide whether auction results deserve deference in every tax sale.

Tax foreclosure auctions aren’t “the market” in any traditional sense. They’re orchestrated and organized by local governments—the same entities that are enforcing the debt and deciding how aggressively to sell the property. The government determines how much to spend on advertising, how far in advance, when and where to hold the sale, whether it’s online or in person, and even whether to set a minimum bid or reserve price.

Decisions made at the outset can raise questions about the degree to which the ultimate auction price reflects the property’s market value. When a municipality or county government decides to list thousands of properties for sale in a single afternoon with minimal promotion, the result is less an efficient marketplace and more like the tax sale equivalent of a clearance rack.

The effect is compounded, as buyers know they have leverage in the exchange—the government just wants to move the inventory to someone who will remain current on their tax bill.

The issue is structural; local treasurers are tasked with clear delinquencies, not maximizing equity recovery for property owners. The faster they can close the books on a property, the better their internal metrics will look. There’s no financial incentive for them to care if the property sells for a competitive price or a steep discount as long as the tax debt is covered.

When a court then later says “just compensation” is owed to a former owner, and that compensation is based on an auction price, the process is effectively letting the taker set the price for what it took. If that doesn’t fly in the face of the Fifth Amendment Takings Clause, it certainly defangs it.

The court can’t be expected to render a ruling that prevents every bad sale, but it does need to close the loophole that rewards governments for undervaluation with rapid turnover and no liability.

Photographer: Timothy A. Clary/AFP via Getty Images

The Supreme Court has already begun drawing the contours between the rights of a local government to collect on a tax debt and the property rights in equity of the owner. In Tyler v. Hennepin County, the court held that a local government can’t simply keep the surplus proceeds from a tax foreclosure sale—an obvious but necessary opening salvo. Pung implicitly asks what comes next; or, if the Constitution forbids the government from keeping the surplus, what constraints are placed on the government in calculating that surplus.

The US Court of Appeals for the Sixth Circuit had answered in Pung that “just compensation” equals the auction price minus the tax debt, regardless of how depressed that price may be. If the Supreme Court lets that logic stand, governments will have a structural constitutional loophole: The lower they sell the property, the less they owe the former owner.

If they happen to get fair market value for a property sale, that’s fine. But they have no incentive to spend more time or effort than necessary to move the property.

A reasonable middle ground needn’t be invented from whole cloth. Property law already tolerates only narrow deviations from fair market value for property tax purposes. Many states require tax assessments You’ll see Kansas, Kentucky, Louisiana, Missouri and Massachusetts all fall in that range as well. to track “true cash value” for properties within a fixed range—often 5% to 15%—precisely to prevent local government valuations from drifting too far from market realities. That same principle should govern compensation when the government compels a sale.

A fair compromise would be to use the auction price as a baseline for compensation only when it falls within 10% of the property’s appraised value—giving deference to the auction price as a determiner of fair market value when the auction price falls within a reasonable band.

Outside of that range, the law should assume the sale—entirely in the hands of the local government—was too rushed or poorly managed to reflect genuine market rates. In a traditional market, price variance may reflect competition. But in a tax foreclosure, it more likely reflects sale process design. Insufficient advertising, bundling of properties, or setting unrealistic terms can distort the competitive process. The burden should fall on the government to prove the lower-value sale reflected fair value, not on the former owner to prove it didn’t.

Governments can still run tax sales and clear delinquencies. But if they want the courts to treat the price as “just compensation,” they’d be incentivized to run the auction like a real market sale, not a liquidation event. If a county can’t manage to sell within 10% of what the property is worth, that isn’t a failure by the taxpayer—that’s a problem with the government’s sale process.

The importance of a fair outcome in Pung isn’t really in affirming appraisal methods but in ensuring accountability. By keying compensation to a process they control, local governments insulate themselves from risk. They can undersell a property, collect the tax debt, mark it as a success, and move on. Meanwhile, the former owner is left holding the loss, their home equity dissolved by administrative convenience right when they most need access to it.

The court can’t be expected to render a ruling that prevents every bad sale, but it does need to close the loophole that rewards governments for undervaluation with rapid turnover and no liability. Requiring compensation to reflect fair market value, or at least come within striking distance of it, restores diligence, accuracy, and respect for the property rights that rest in the balance.

The case is Pung v. Isabella County, U.S., No. 25-95, petition for writ of certiorari 10/3/25.

Andrew Leahey is an assistant professor of law at Drexel Kline School of Law, where he teaches classes on tax, technology, and regulation. Follow him on Mastodon at @andrew@esq.social

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