Pitfalls of Tax Lien Sales for Taxation Authorities and Local Governments

Try as it might to effectively maintain a community, the local government while sensitive and responsive to the needs of its citizens, often has to address the consequences of treating tax debts as an asset in themselves. The sale of tax liens can generate much needed revenue, but at its least effective will retrieve for the government a fraction of the debt, which apart from having ramifications far removed from the lien itself, is liable to precipitate the financial and social destruction of the community.

Fundamentally, local governments in particular, rely heavily on the revenue derived from property tax, a tax which has routinely been described as the most regressive tax ever devised, as those on fixed incomes and low income earners are increasingly found unable to pay it.

Strict Procedure Must Be Followed
However, often is the case when, in the attempt to enforce their statutory right of foreclosure on a property where the taxes yet remain outstanding, some tax authorities may encounter judicial resistance, as the Court seeks to uphold the due process of the law by requiring that the taxation authority comply precisely with measures structured inherently to favor the delinquent tax payer.

Related to the issue of complying with procedures, the system of administration of tax and the filing of liens needs to be efficient. In the past the methods used by tax authorities have been outdated and inappropriate for the efficient administration of tax.Obviously this places a burden of prohibitory cost on tax authorities as they attempt to coordinate the logistical nightmare that is the US tax lien market.

A further source of frustration for taxation authorities is the growing public resentment at the administrative procedures relating to tax liens, which preset an interest rate penalty. The government or tax authority are seen as ambivalent as to the high rate of return, simply due to the fact that they do not have to pay it, it is the delinquent taxpayer that does. Where the application of taxes is seen to be arbitrary, public resentment can easily turn of no confidence in the system.
 
The Devil You Know…
Local governments recoup taxes that are unpaid by resorting to offering tax liens for sale to third parties, and these authorities often see many investors buying tax liens.

Unfortunately, this strategy sometimes results in the property eventually in the ownership of speculators not willing to maintain or develop the property, or even to perform the tax obligations imposed upon them as owners, and so the value of the property remains negligible, while influencing the values of neighboring properties and the extended community as a whole.At times the new owners of these foreclosed properties have demanded exorbitant prices from local governments for the repurchase of the property that is by that stage much needed for redevelopment.A strategy of this variety can only result in eventual demise of the financial integrity of a local municipality.

When the infrastructure of the local community is found wanting due to lack of revenue to fund public expenditure, the population of the local community may diminish as property values decline and investment and employment also shrink, leaving the citizens of the locality to be wooed to the promise of another location.In this case, the very predicament of a local municipality needing to recoup funding for public expenditure is exacerbated due to the reducing population and the subsequent decline in revenue.

 

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