Toxic Tax Assessments: The Ad Valorem Taxation of Contaminated Property

By Carver, Robert P. | Real Estate Issues, Fall 1999 | Go to article overview

Toxic Tax Assessments: The Ad Valorem Taxation of Contaminated Property


Carver, Robert P., Real Estate Issues


In tax assessment review proceedings involving contaminated property, taxpayers typically contend that property value is substantially impaired or erased by the presence of environmental contamination. Some taxpayers contend contaminated property has no value even when it is fully usable and the taxpayer is liable for the cleanup. These cases present courts with difficult and competing questions of law, equity, and public policy concerning the interplay of ad valorem taxation and sound environmental policy. Consequently, the legal premise of ad valorem taxation, which is to assess taxes against property at a certain rate upon its value, and the public policy concerning environmental cleanup, namely that the polluter pays, are often seemingly at odds.

Here, the authors review and analyze the reasoning of the courts when addressing these issues in the leading tax assessment review cases involving contaminated property nationwide. The manuscript first addresses issues affecting the marketability of contaminated property in the face of environmental liability statutes. Next, it reviews the methodologies adopted by the courts in adjudicating claims of assessment overvaluation. Finally, it considers the effect of the usability of contaminated property; the cleanup obligation of owners and purchasers of contaminated property; and the public policy concerns of taxing authorities on the outcome in tax assessment review litigation.

ENVIRONMENTAL LIABILITY AND THE REAL ESTATE MARKET

The impact of environmental liability statutes on the marketability and profitability of contaminated property is central to taxpayer arguments for assessment reductions. It is generally accepted in the legal and appraisal communities that environmental contamination may affect property value. The threat of liability for cleanup imposed on contaminated property owners by the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA)1 and its state counterparts, clean up costs, issues of indemnification, and the stigma associated with the actual or perceived risks involved with owning or using contaminated property all yield this conclusion.

CERCLA, commonly known as the Superfund law, is the principal federal statute designed to protect the public and environment from the release of hazardous substances, and to ensure that hazardous substances are cleaned up. Congressional intent behind CERCLA is rooted in the "polluter pays" principle which dictates that: 1). contaminated property which threatens public health and safety be restored to an environmentally acceptable condition; and 2). any parties benefitting from or even involved with the use of hazardous substances that ultimately contaminate property should bear the cost of cleanup, starting though not necessarily ending with the owner or operator of the contaminated property.

CERCLA's liability scheme is strict, joint, several, and retroactive. This means that the entire chain of property owners, including both current and former owners, and other potentially responsible parties, such as lending institutions, other investors, and even transporters who carried hazardous substances to property that is contaminated, may be liable for costs associated with restoring that property to an environmentally acceptable state. CERCLA imposes liability on the current owner of contaminated property regardless of whether the owner caused the contamination. And potential liability remains with former owners who sell contaminated property, even in cases where a purchaser agrees to assume the risk of cleanup liability. Thus, acceptance of liability by one party cannot absolve others of potential liability especially in cases where cleanup costs exceed the financial capabilities of the party assuming the risk.

Two decades of experience under CERCLA have proved that it has a stigmatizing effect on property both before and after cleanup of contamination. …

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