Can Tennessee phase in the property tax increase that follows when a business owner makes capital improvements?

Subject

Opinion No. 13-11, Constitutionality of Proposed Property Tax Relief for Businesses' Capital Improvements, February 13, 2013

Plain-English summary

A Tennessee representative asked whether the General Assembly could pass a statute that gave business owners a four-year phase-in for the increased assessment value that comes when they make substantial capital improvements to their property. The AG said no.

Article II, Section 28 of the Tennessee Constitution subjects "[a]ll property, real, personal or mixed" to taxation and requires that "[t]he ratio of assessment to value of property in each class or subclass shall be equal and uniform throughout the State." The only categorical exceptions in the constitution are property owned by state and local governments, property held for purely religious, charitable, scientific, literary, or educational purposes, and residential property owned by elderly or disabled taxpayers. As the Tennessee Supreme Court put it in City of Nashville v. State Board of Equalization, "all property shall be taxed and bear its just share of the cost of government, and no property shall escape this common burden, unless it has been duly exempted by organic or statute law" (the statute law having to track the constitution's narrow list of permissible exemptions).

A four-year phase-in is, in substance, a partial exemption. The improved property gets assessed at a lower value than it otherwise would for four years. The AG read that as the kind of "abatement" the constitution does not permit for ordinary commercial property, however worthwhile the underlying goal. The opinion pointed to a 1998 AG opinion (Op. 98-031) that had rejected a similar proposal for tax relief in a Jackson redevelopment area, and to the 1898 Tennessee Supreme Court decision Jones v. City of Memphis, which had struck down a Memphis annexation statute that exempted the newly annexed territory from city property taxes for a fixed period. The same uniform-taxation concern that defeated those programs would defeat the proposed capital-improvements phase-in.

The opinion took care to acknowledge the General Assembly's broad discretion to design business incentives generally. The point was that, in property taxation specifically, the constitutional uniform-taxation rule limits what tools are on the table.

Currency note

This opinion was issued in 2013. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The constitutional rule in Article II, Section 28, has not changed in the intervening years, and the AG's office has continued to apply the same uniform-taxation analysis. PILOT agreements through IDBs (industrial development boards) are a separate, narrowly authorized mechanism that has its own statutory framework. Anyone evaluating a current incentive proposal should pull the current case law and any amendments to the relevant statutes and IDB authorizing legislation.

Background and statutory framework

Tennessee's uniform-taxation rule does two things in tandem. First, it makes "[a]ll property, real, personal or mixed" subject to taxation. Second, it requires that the "ratio of assessment to value of property in each class or subclass" be equal and uniform statewide. The General Assembly chooses the method of valuation, but it cannot pick winners within a class by assessing similarly situated property at different ratios.

The exemptions the constitution allows are listed in the same section. Government-owned property is exempt. Property "held and used for purely religious, charitable, scientific, literary, or educational purposes" can be exempted by statute. Residential property of certain elderly and disabled taxpayers can receive limited relief. Beyond those categories, the General Assembly cannot create new property-tax exemptions or abatements, even temporary ones, and even for purposes the legislature considers important.

A four-year phase-in of the assessed value of capital improvements doesn't fit any of the categories. It's an abatement for ordinary commercial property, intended to soften the tax consequence of improvements. That's a real-world appealing policy, but the AG read the constitutional rule as foreclosing it. The 1898 Jones v. City of Memphis decision had reached the same result on similar facts: a temporary exemption for newly annexed territory failed because all property within Memphis's boundaries had to bear the city's taxes uniformly.

Common questions

Couldn't the legislature accomplish this through a state-level credit or grant instead?

Possibly, depending on the design. The constitutional rule applies to property-tax assessments specifically. The General Assembly could potentially use other taxation tools (income tax credits, franchise/excise tax credits, grants from the state's general fund) to achieve a similar economic effect, as long as those tools don't violate other constitutional limits. The opinion didn't reach that question; it was answering only the specific phase-in proposal.

What about PILOT (payment in lieu of taxes) agreements through IDBs?

PILOTs are a distinct mechanism. They typically involve title to the improved property passing to a local industrial development board, which is exempt from property tax, with the operating business making negotiated payments to local government in lieu of taxes. That structure has been blessed under Tennessee law and is different in form from a phase-in. The opinion didn't address PILOTs.

Did the AG say economic development incentives are always unconstitutional?

No. The opinion expressly recognized that "the General Assembly has significant discretion in creating tax incentives for businesses in Tennessee." The constraint is specific to property taxes, because the uniform-taxation rule speaks specifically to "[t]he ratio of assessment to value of property." Other taxes don't operate under the same constitutional constraint.

Could a county or city impose its own phase-in?

No, for the same constitutional reason. Local governments operate under state law and are subject to the same uniform-taxation requirement. The AG's earlier Op. 98-031 had explicitly rejected a similar local-level proposal in Jackson.

What about reducing the assessment ratio for all commercial property statewide?

That's different. The constitution lets the legislature set assessment ratios by class or subclass, but the ratios within a class must be uniform. Reducing the ratio for all commercial property would lower commercial taxes generally but wouldn't violate uniformity. It also wouldn't be a phase-in: it would be a permanent across-the-board change.

Citations

• Tenn. Const. art. II, § 28 (uniform taxation and listed exemptions)
• City of Nashville v. State Bd. of Equalization, 360 S.W.2d 458 (Tenn. 1962) (all property bears its just share)
• Jones v. City of Memphis, 47 S.W. 138 (Tenn. 1898) (annexation/temporary exemption struck down as nonuniform)
• Tenn. Att'y Gen. Op. 98-031 (Feb. 9, 1998) (Jackson area exemption struck down on same theory)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2013/op13-011.pdf

Original opinion text

S T A T E O F T E N N E S S E E
OFFICE OF THE
ATTORNEY GENERAL
PO BOX 20207
NASHVILLE, TENNESSEE 37202

February 13, 2013

Opinion No. 13-11

Constitutionality of Proposed Property Tax Relief for Businesses' Capital Improvements

QUESTION

Would a statute violate Article II, Section 28, of the Tennessee Constitution if it allowed for a four-year period in which to phase in the increase in assessment value on commercial property resulting from capital improvements undertaken by a business owner that substantially increase the property's value?

OPINION

Yes, such a statute would violate Article II, Section 28, of the Tennessee Constitution because it would constitute an impermissible tax exemption or abatement.

ANALYSIS

The Tennessee Constitution subjects "[a]ll property, real, personal or mixed" to taxation and provides that "[t]he ratio of assessment to value of property in each class or subclass shall be equal and uniform throughout the State, the value and definition of property in each class or subclass to be ascertained in such manner as the Legislature shall direct." Tenn. Const. art. II, § 28. The only exceptions to this constitutional requirement of uniform taxation are contained in Article II, Section 28, and are limited to property owned by state and local governments, property held and used for purely religious, charitable, scientific, literary, or educational purposes, and residential property owned by elderly and disabled taxpayers. As the Tennessee Supreme Court has explained, "[i]t is a fundamental rule that all property shall be taxed and bear its just share of the cost of government, and no property shall escape this common burden, unless it has been duly exempted by organic or statute law." City of Nashville v. State Bd. of Equalization, 360 S.W.2d 458, 461 (Tenn. 1962).

While the General Assembly has significant discretion in creating tax incentives for businesses in Tennessee, the General Assembly's ability to do so in the area of property taxes is greatly circumscribed by the limiting language of Article II, Section 28. Citing Article II, Section 28, this Office previously opined that proposed legislation that provided for an exemption from or abatement of taxes for property owners within a certain geographical area of the City of Jackson would violate the Tennessee Constitution. See Tenn. Att'y Gen. Op. 98-031 (Feb. 9, 1998). The purpose of that proposal was to promote economic development in the downtown area of Jackson. The opinion explained that

[s]uch an exemption would be in effect a per se exemption for property lying in areas which are simply deemed to be in need of economic development and renovation. As such, the proposed exemption . . . would exceed the areas of exemption reserved to the Legislature in Article II, § 28. The Constitution will not permit this.

Id. See also Jones v. City of Memphis, 101 Tenn. 188, 193-94, 47 S.W. 138, 139 (Tenn. 1898) (holding that legislation that annexed additional territory but exempted it from property taxation for a specified period of time violated the uniform taxation provision of the Tennessee Constitution).

The proposed statute in question, like the proposal pertaining to the City of Jackson, appears designed to stimulate economic development. Such a goal, however, constitutionally cannot be achieved by enacting legislation that effectively grants business owners a partial property tax exemption for a specified period of time to reward them for undertaking capital improvements to their property. Instead, the Tennessee Constitution requires that such property be assessed in the same manner as other business properties across the state.

ROBERT E. COOPER, JR.
Attorney General and Reporter

WILLIAM E. YOUNG
Solicitor General

MARY ELLEN KNACK
Senior Counsel

Requested by:

The Honorable Darren Jernigan
State Representative
24 Legislative Plaza
Nashville, Tennessee 37243