Should the Government be Allowed to Foreclose your Home for Back Property Taxes?

There has been a major push to eliminate property taxes as taxes keep going up. Many argue that you can’t truly own something if you have to make annual payments to the government to keep it.

But what if you do stop making property tax payments?

In most jurisdictions, the county will put your home in foreclosure and sell it at a cash auction. The cash auction price is historically much lower than what the home would sell for on the open market.

The government then takes the proceeds that they are owed and give the former owner the difference. This happened to the Pung family in Isabella County, Michigan.

In 2010, the Pung family applied for a tax exemption in which they were denied. They challenged this decision at the Michigan Tax Tribunal where they won. Still, Isabella County denied the tax exemption in subsequent years in which the Pung family fought and prevailed in court.

Eventually, the Pung family refused to pay their property taxes when the county denied their tax exemption once again. Isabella County decided to foreclose the home over $2,241.93 in delinquent taxes.

The home was then sold at a public cash auction for “$76,008, even though its assessed value for tax purposes was $194,400.” The county did not give Pung the difference in what he owed and the auction price until he sued in federal court.

Even then, Pung argued he should receive the difference from the assessed value, not the cash auction price.

The first question the court needed to answer is whether the Fifth Amendment sees a cash auction price as just compensation. The Fifth Amendment says, “…nor shall private property be taken for public use, without just compensation.”

Pung argued that just compensation would be the fair market value. Even the county assessor valued his home at $194,400, but the county claimed $76,008 was just from a cash auction.

Ultimately the court decided that. “the auction price is the proper baseline, at least when the procedure is fair in light of our country’s history of tax sales.” In oral arguments and in the written opinion, the court noted that Pung could of sold his home on the open market before foreclosure proceedings took place to get the highest price.

The Eighth Amendment is short and simple:

“Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.”

Pung argued that taking his home instead of taking alternative routes, like garnishing wages or taking less valuable property, constituted “excessive fines” by the government. During oral arguments, Pung’s legal team argued that even a Peloton bike that was in the house could have been taken to pay the debt owed, instead the government took the most extreme approach by taking his family home.

Once again, the court disagreed.

“We have already explained that Pung’s fair-market-value theory lacks support in either history or precedent. He does not offer any additional historical evidence suggesting that a tax sale which is fairly conducted in light of our Nation’s history would violate the Eighth Amendment. Nor has he cited a single decision holding that the government violates the Eighth Amendment by returning only the surplus proceeds from a tax sale.”

In reading the court opinion and listening to oral arguments, it’s clear the Supreme Court was worried about placing a burden on the government. The following passage from the opinion illustrates this well:

“Pung’s fair-market-value theory would impose unprecedented burdens on jurisdictions that wish to collect unpaid taxes and might well make tax sales impractical. Under Pung’s rule, a tax sale would often net the government a loss, paid out to the delinquent taxpayer himself, rendering tax sales infeasible as a debt-collection mechanism. That Pung’s novel interpretation of the Takings Clause would eliminate this longstanding practice is strong evidence that his interpretation is incorrect.”

Frankly, it is disappointing to see the court take this approach. The Constitution was written to protect the people from the government, not the government from the people. Yet throughout the opinion, the justices repeatedly focused on the practical difficulties a ruling for Pung could create for local governments. In doing so, the Court appears to have viewed the Fifth and Eighth Amendments through the lens of protecting government interests rather than protecting individual rights.

However, the ruling leaves several interesting questions open for debate.

The Court specifically held that an auction price constitutes fair market value “at least when the sale is fairly conducted in light of the country’s history of tax sales.” But what exactly does “fairly conducted” mean? Is a typical cash auction, where prospective buyers often cannot inspect the property beforehand and must have cash immediately available, really a fair measure of market value? That question remains unanswered and leaves a glimmer of hope for future challenges to how modern tax auctions are conducted.

The justices also described the county’s assessed value as a “hypothetical fair market value.” Yet these are the same values government relies upon to calculate property taxes. If assessed values are merely hypothetical when a property owner is seeking compensation, can property owners now argue that their homes should be taxed based on what they would actually sell for at a tax auction—often far below the assessed value?

We will have to see in the coming years if these questions make it through the courts.

Read the court opinion here.