Why your next New Castle County tax bill is on hold
This year’s official property tax bills in New Castle County will have to wait for the resolution of a lawsuit challenging different rates for commercial property.
The recent ruling by a Delaware Chancery Court judge upholding lawmakers’ effort to cut New Castle County homeowners a property tax break is likely to be the most widely impactful local court ruling since the court mandated a statewide reassessment of property taxing values five years ago.
It’s impactful because it will, to at least some extent, affect every property tax bill in the state’s most populous county for this taxing year.
The ruling, issued Oct. 30, upheld state lawmakers’ emergency legislation allowing school boards to charge separate tax rates for nonresidential versus residential property, capping an extraordinarily chaotic taxing season in Delaware.
The legislation allowing such split rates was passed in an emergency, out-of-season gathering of Delaware lawmakers responding to outcry from residential property owners about increases they saw in property tax bills that went out this summer. They were the first bills following the reassessment of property values that are married with local taxing rates to calculate a taxpayer’s annual bill.
That reassessment of those property values was years in the making and hadn’t been done in Delaware for decades. It was mandated by a Chancery Court ruling in 2020 that found the lack of reassessment had led to some property owners being given an artificial tax break that under Delaware’s constitution had to be rectified.
But it had a consequence beyond that in New Castle County, shifting the overall share of the tax burden that funds local government and schools further onto residential properties. Before reassessment, the residential properties made up 66% of the tax base while nonresidential property made up about 34%.
Reassessment shifted that overall burden for residential property to 76%, meaning residential property owners were set to shoulder larger-than-predicted increases.
Lawmakers’ solution was a bill − House Bill 242 − that passed in August and allows school boards, which collect the bulk of property tax, to charge different tax rates: increasing the rate for nonresidential properties and decreasing for residential properties in order to bring the overall burden to closer to its reassessment levels and give residential tax payers a break.
After the bill passed, school districts then set about applying the new split rates. Nonresidential rates were raised 35% to 80% while cutting the residential tax rates and the county was beginning the process of issuing the new tax bills.
This tax-bill redo occurring months before an extended deadline for taxes to be paid is extraordinary in typically predictable year-to-year taxing processes. And then came a last-minute lawsuit from business interest representing landlords and other lodging businesses asking a court to put a stop to the new split rate bills less than a month before they were to hit the mail.
The lawsuit was filed in the Court of Chancery, Delaware’s renowned business court, and generally claimed that the law allowing split rates violated the U.S. and Delaware constitutions, as well as various state laws. This alleged violation would hurt the plaintiffs’ businesses’ and cause them to shift greater costs on their rent-paying tenants, the plaintiffs argued.
Recent: New school tax bills are coming soon as judge upholds ‘split rates’ for property taxes
It named officials from the county to local school boards up to Gov. Matt Meyer as defendants. And, as happens in Chancery, the lawsuit was fast-tracked, given that the county needed to send out school tax bills to residents sometime before the already-extended Nov. 30 deadline to pay.
A one day trial was held in mid-October and about a week later, Vice Chancellor Lori Will, the presiding judge, issued her opinion batting down all counts raised by the plaintiffs, upholding the split-rate relief measure and setting the county on track to issue the new school bills with residential tax breaks later this month.
Here’s a breakdown of the judge’s ruling, which can be read in full at the end of this article.
Uniformity in taxation
The banner claim made by the plaintiffs was that charging separate rates for commercial versus residential property violated a tenant of Delaware’s constitution that requires: “all taxes shall be uniform upon the same class of subjects within the territorial limits of the authority levying the tax.”
This was a central aspect of the 2020 ruling that required reassessment. In that case, presiding Vice Chancellor Travis Laster found that the lack of reassessment caused a “profound lack of uniformity” in valuations so that taxpayers were paying different effective tax rates despite being charged the same nominal rate.
The plaintiffs used the uniformity clause to generally argue that charging different rates for residential versus non residential violated the uniformity tenant.
However, Will wrote that logic incorrectly assumes the only class of property is all property in a taxing district, but the language actually presumes classifications will occur within the tax base. The rule is meant to bar discrimination within a given class, she wrote.
With this in mind, she evaluated whether the classification enabled by HB 242 was reasonable under the law and not whether, in her opinion, it was the best policy.
She noted that state law gives deference to lawmakers’ intent and that they were responding to a shift in the overall tax burden and reasoned that businesses would be better suited to absorb that increase, calling that thinking “rational.”
2020 ruling: Judge rules Delaware property tax system unconstitutional; major changes to residents’ bills could follow
She also distinguished the constitutional infirmity in the 2020 reassessment ruling from the HB 242 controversy by noting that the 2020 ruling found that flawed and non-uniform assessment methodology was the problem then. The question presented by HB 242 is different: whether lawmakers can legislate different classes within the tax base, which she ruled they can.
Referendums, income tax increases and changed values
Multiple plaintiff claims against HB 242 also hinged on Delaware law outside the state constitution.
It’s a well-known − and for many school administrator, a cursed − aspect of Delaware law that schools must generally win a vote of the people through referendum to raise revenue through higher tax rates.
The plaintiffs argued that increasing the tax rates upon nonresidential properties without a popular vote violates this law.
Will disagreed. She noted that the split rates simply reapportion the tax burden and don’t provide the type of increase that is implicated by the referendum law. She also again noted deference to lawmakers’ intent in crafting the split-rate legislation, writing the law allows the split rates without mention of a referendum and on a timeline that doesn’t comport with the referendum process.
Plaintiffs also argued that because income-potential is included as a valuation metric for nonresidential properties, the change in law violates laws against retroactive income tax increases. Will rejected this also, writing that a property tax is distinct from an income tax covered by that law. She added that income is a simply standard metric in appraising commercial property value and doesn’t create an income tax.
Plaintiffs argued that an increase in rate also would change the assessed value of the property and make the recent reassessments invalid. Plaintiffs reasoned that pending increases in tax rates on nonresidential property will reduce that income potential and thus change its value.
Will also rejected the change-in-value argument, stating that for legal purposes the valuation is a snapshot in time and events that occur afterward, like the increased rates, are “legally irrelevant” to the validity of the assessment.
Due process violations?
The plaintiffs additionally took aim at the implementation of the split rates.
After the lawsuit was filed, the county shared information with the attorneys representing the plaintiffs that made clear that some properties in the county had been misclassified as residential.
Recent: New filing in tax lawsuit calls New Castle County property classifications ‘arbitrary’
Plaintiffs’ attorneys called this a “bombshell,” noting apartment complexes with similar characteristics located close together that were classified differently.
They said this showed that the classifications were unconstitutionally arbitrary.
Will wrote that the tax system does not demand perfection and to be unconstitutional, its flaws must be systemic. Of the 213,000 properties in New Castle County, approximately 1,409 were misclassified in a way that would affect their tax rate. Will wrote that this demonstrates “administrative difficulties,” not that the system is arbitrary. Additionally, she noted the county was taking steps to fix this.
And the plaintiffs also argued that the ongoing reclassifications of properties into the nonresidential bucket with tax rates will result in more revenue for school districts in violation of limits in increased revenue that districts can see from reassessment.
However, Will stated the law requires districts to look at “projected” revenue in setting their rates to avoid a windfall, and because the classification errors were not known to them in that rate-setting process, the valuations they projected are valid.
The plaintiffs also argued this ongoing reclassification violates due process provisions within the U.S. Constitution as the window for challenging one’s assessment value had closed by the time these errors became prominent.
However, the defendants argued that valuation challenge window is different than a challenge to the classification of a property. Will agreed. She also wrote that the deprivation cited by the plaintiffs is not a legitimate legal entitlement, but the loss of an effective tax windfall resulting from an administrative error.
Her ruling did require the county to make clear on tax notices the process for challenging whether a property is residential versus nonresidential.
What now?
With Will siding with the defendants on all counts, those new bills reflecting the split rates are set to go out soon and the taxes are due Nov. 30.
The legislation that allowed for split rates only did so for this taxing season. So, presumably, the high residential bills that prompted the upset that caused the legislation could be back on the table next summer.
The committee: Next special property reassessment committee hearing postponed to await court ruling
It’s likely this will be a significant aspect of lawmakers’ 2026 legislative session that begins in January.
Meanwhile, a special committee of lawmakers reviewing the reassessment process has been meeting and will continue to do so through the winter.
Will’s ruling could also be appealed, but that process will take place after bills go out for this taxing season.
Contact Xerxes Wilson at (302) 324-2787 or xwilson@delawareonline.com.
