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Litigation timeline key for Section 42 valuation fight

A key hearing this week in Hinds County Chancery Court could go a long way toward changing how tax assessors calculate the tax liability for Section 42 Housing Developments.

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 revenue from federal tax credit sales in the tax liability for Section 42, or what’s commonly called affordable rental housing, developments.

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. Developers receive federal tax credits for building the housing developments; often, they’re sold, and can bring millions of dollars in revenue.

Chancellor Denise Owens will hear the plaintiffs’ motion for summary judgment Thursday.

Derrick Surrette, executive director of the Mississippi Supervisors Association, has told the Mississippi Business Journal in multiple interviews the past six months that the revenue from tax credit sales 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.

After Thursday’s hearing, Owens could rule on the motion or take it under advisement. It’s more likely she will take the issue under advisement, and issue a ruling within several weeks.

That could make for an interesting timeline, because it’s possible the entire legal ordeal could be rendered moot by then.

Sen. Terry Burton, R-Newton, has filed a bill that would essentially force the Department of Revenue into allowing tax assessors to include tax credit sale revenue for the housing developments’ tax liability. Burton has filed the bill in previous sessions, but it has died each time.

If the bill clears the Capitol and is signed into law by Gov. Phil Bryant, the lawsuit brought by the MAS and others would most likely be dropped, if Owens had not yet ruled on the matter.

Surrette said in an interview last week that Burton’s bill would do what the litigation is attempting to do.

“I filed it because supervisors and aldermen in my district came to me and asked me to,” Burton said. “They said it’s costing them money.”

Sen. Joey Fillingane, R-Sumrall, chairs the Finance Committee where the bill currently sits. He did not respond to a message left on his cell phone last week.

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 credit sales.

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.

The two committee chairs who sent the bill on its way have since told the MBJ the bill’s intent was for tax credit sale revenue to be counted.

“It was not our intent that the legislation be interpreted the way the tax commission interpreted the bill,” former House Ways and Means Chairman Rep. Percy Watson, D-Hattiesburg, said last year. “It was a matter of them implementing it in a way different than the way we had drafted the bill.”

In the 2010 legislative session, Watson’s Ways and Means Committee sent a bill to the House floor, where it passed, that would have exempted 35 percent of the revenue generated from Section 42 housing from ad valorem taxes. That bill died in the Senate Finance Committee.

Former Sen. Tommy Robertson, who chaired the Finance Committee in 2005 and is now in private legal practice in Moss Point, echoed Watson.

“The intent of the bill was, in those types of housing developments, the income approach would be used. The income approach basically meant (accounting for) all the revenue generated off of it. (Tax credit sale revenue) would be included in that. It’s the whole package. A private housing development, you take in their revenue, land value, everything else. The same should be true for these Section 42s. That was the intent, that all sources of revenue would come into play.”

Former chairman of the old State Tax Commission Joe Blount said in an interview last year that he remembered meeting with MAS representatives about the changes, though he could not recall details from those meetings. Blount left the Commission in 2008. Ed Morgan took his place.

“We made several changes (to the appraisal manual) while I was there,” Blount said. “I don’t remember ever having any kind of comments on any of the changes we made.”

The hearing was scheduled for late last week in the Hinds County Chancery Courthouse.

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