Section 42 dispute in a familiar place

by Clay Chandler

Published: February 4,2013

The dispute over the methods used to calculate tax liabilities for Section 42 housing developments is essentially where it was this time last year.

The litigation brought by cities and counties against the Department of Revenue awaits a court ruling, and bills designed to clarify the situation circulate through the Capitol.

The disagreement over how to assess tax value for Section 42, or what are commonly called affordable rental housing, developments began when tax assessors in some of the 40 counties that have them did not include revenue developers get from selling the federal tax credits they receive.

Currently, under Department of Revenue rules, tax assessors can only count tenant rent as income. Because the federal government caps the rent on Section 42 housing, the tax liability for developers, many of whom are from out of state, is limited.

The Mississippi Association of Supervisors, the Mississippi Municipal League and dozens of towns and cities have sued the Department of Revenue, in an attempt to force that agency to allow tax assessors to include the tax credit revenue.

That litigation has made its way to the Mississippi Supreme Court, which has yet to rule one way or another.

Two bills dealing with the assessment rules have been filed. Each sit in the House Ways and Means Committee, and each take a different approach. One would clarify the rules to include the tax credit sale revenue. One, authored by Ways and Means chairman Jeff Smith, R-Columbus, would preclude tax credit sale revenue, and exempt 65 percent of what tax assessors were allowed to calculate from tax liability.

Smith, though, isn’t married to that number.

“We just kind of threw 65 percent out there,” he said in an interview last week. “That’s actually an attempt to get the ball rolling. I can’t say that it will end up being 65 percent.”

Smith said the bill was “good to go” as far as making it out of his committee before the Feb. 5 deadline for committees to report bills originating in their chamber.

Smith said removing the tax credit revenue from the tax-calculation equation is the fairest approach. “Their rent is locked in,” he said. “They can never go up on it. Where a comparable apartment would get $1,000 a month, these can only bring maybe $500 a month. If you tax them at the full rate, they’re a thing of the past.”

Bills that would have brought tax credit revenue into the equation died in committee last year.

Derrick Surrette, executive director of the Mississippi Supervisors Association, has told the Mississippi Business Journal in multiple interviews the past year that precluding the tax credit revenue costs counties and municipalities huge sums in ad valorem tax money. Especially vulnerable, he said, are poorer counties, where Section 42 developments are heavily concentrated.

The crux of the lawsuit, though, centers on a bill that passed the Legislature and was signed by then-Gov. Haley Barbour in 2005.

That bill directed tax assessors to use the income capitalization approach when figuring the ad valorem tax bills for Section 42 developments. The income capitalization method takes into account all income derived from a development, including the revenue from tax credits.

Shortly after Barbour signed the bill, the then-State Tax Commission amended its Land Appraisal Manual to preclude tax credit-sale revenue from the assessors’ calculations. The only income they could count was whatever rent tenants paid.

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