The US Supreme Court ruled unanimously Thursday that so-called property tax surplus retention laws are unconstitutional in Tyler v Hennepin County. The opinion reversed a lower court decision in an unusual application of the Takings Clause of the US Constitution’s Fifth Amendment, which guarantees property owners just compensation.
The decision, delivered by Chief Justice John Roberts and with a concurrence by Justices Neil Gorsuch and Ketanji Brown Jackson, was a simultaneous victory for odd bedfellows—both economically disadvantaged homeowners as well as libertarian-oriented property rights advocates. It will require a dozen state legislatures to reexamine their foreclosure statutes.
Geraldine Tyler, the plaintiff, had argued that the Minnesota state law that allowed Hennepin County to pocket a $25,000 surplus following the auction sale of her home for unpaid taxes of some $15,000 should be struck down because it effected a taking of her home equity, a compensable property interest. I was counsel of record on a brief in support of Tyler’s position as it applied to similar tax foreclosure statutes in other states.
Such laws favor the tax collector and impose a draconian downside to investing in one’s home. Wealth creation in the form of home equity can be entirely wiped out based on a minor tax delinquency that is disproportionate to the value confiscated. By comparison, the auction and sale of one’s home for other types of debt, such as a mortgage, require the return of any surplus. Beyond statutes, taking an amount that exceeds the debt feels viscerally unfair, and that view prevailed here.
Home equity may seem an ephemeral concept, but it is a valuable property right, and the court said that it deserves compensation when taken. The Takings Clause bars government from forcing some individuals to bear a burden alone that should be borne by the public. Compelling the transfer of her accumulated home equity to the public fisc would force Tyler to make “a far greater contribution to the public than she owed.”
“The taxpayer must render unto Caesar what is Caesar’s, but no more,” the court said. Here, states with surplus retention statutes can’t “use the toehold of the tax debt to confiscate more property than what was due.”
A key additional question was whether such statutes also violate the US Constitution’s Eighth Amendment, which prohibits excessive fines. In addition to the remedy of taking one’s home and selling it—and keeping any surplus after auction—many local governments charge interest and penalties on unpaid taxes of often 12 to 18%. That is surely deterrent enough for those considering late or non-payment of property taxes.
Where a sanctions law goes beyond the remedial and serves in part to punish, it may violate the Excessive Fines Clause. In their concurrence, Gorsuch and Jackson observed that a sanction such as that imposed by Hennepin County ceases to be remedial where “any relationship between the Government’s actual costs and the amount of the sanction is merely coincidental.”
The case is: Tyler v. Hennepin Cnty., U.S., No. 22-166, opinion 5/25/23
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
David Wilkes is a New York-based property tax attorney and adviser representing major US real estate portfolios for more than 25 years. He is the president of the National Association of Property Tax Attorneys and a former chairman of the Appraisal Foundation.
The author is counsel to Tanya Dwyer, Daniel McEnroe, and Derek Tarson, who filed a brief in support of Geraldine Tyler.
We’d love to hear your smart, original take: Write for us.