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 representative asked whether the General Assembly could allow a four-year phase-in of the increased assessment value when a business owner makes substantial capital improvements to commercial property. The Attorney General answered no: the proposed statute would be an impermissible property tax exemption or abatement under Article II, Section 28, of the Tennessee Constitution.

The opinion says Article II, Section 28 requires the assessment-to-value ratio for property in each class or subclass to be equal and uniform statewide. It identifies limited categories of property that may be exempted. A temporary phase-in for improved commercial property would effectively give those owners a partial exemption. The opinion concludes that the property must instead be assessed in the same manner as other business property across Tennessee.

The Attorney General compared the proposal with proposed state legislation discussed in Op. 98-031. That earlier proposal would have exempted or abated taxes for property owners in a defined area of Jackson to promote economic development. The opinion also cites Jones v. City of Memphis, which invalidated a statute temporarily exempting newly annexed territory from property taxes.

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.

What this means for you

If you are drafting a capital-improvement incentive, this opinion addresses a particular method: phasing in the increased assessment value of improved commercial property for four years. It concludes that this method would grant a partial property tax exemption outside the permitted constitutional categories. The opinion does not assess other incentive designs.

Common questions

Would a four-year phase-in be valid if its goal is economic development?

The Attorney General said no. The opinion acknowledges the goal but concludes that the proposed phase-in would effectively exempt part of the property's value for a specified period, contrary to Article II, Section 28.

Was the earlier Jackson proposal a city ordinance?

The opinion describes Op. 98-031 as addressing proposed legislation for property owners in a geographic area of Jackson. It does not describe that proposal as a city ordinance.

Did the opinion decide whether a county or city could create a phase-in?

No. The question and answer concern a proposed statute of the General Assembly. The opinion does not separately analyze county or municipal action.

Could the legislature lower the assessment ratio for every commercial property statewide?

This opinion does not address that proposal. It quotes Article II, Section 28's requirement that the assessment-to-value ratio within each class or subclass be equal and uniform statewide, then decides the proposed four-year phase-in for capital improvements.

Citations

• Tenn. Const. art. II, § 28 (uniform taxation and exceptions discussed in the opinion)
• City of Nashville v. State Bd. of Equalization, 360 S.W.2d 458 (Tenn. 1962)
• Jones v. City of Memphis, 101 Tenn. 188, 47 S.W. 138 (Tenn. 1898)
• Tenn. Att'y Gen. Op. 98-031 (Feb. 9, 1998) (earlier proposed legislation for a Jackson area)

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