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Private Tax Collection

posted by Bob Lawless

The New York Times has a story today that Credit Slips readers will want to check out. It catalogs the growing trend of local governments to sell their real estate tax debts to private investors. The reporter, Jack Healy, succinctly states the opposing policy points:

Investors say the arrangement actually benefits everyone. School districts, fire departments and public parks get an infusion of cash. The investors take on a risky but potentially high-yielding investment. And taxpayers do not have to pick up the slack from scofflaw landlords or tax evaders.

Governments, of course, can charge interest and penalties too, and they foreclose on properties for back taxes. But governments charge interest rates that are half what private investors charge — often offering no-interest payment plans — and are also more likely to be concerned about the long-term prospects of neighborhoods.

All good points, but there is nothing that the ivory tower can't make more confusing.

First, private investors buying tax liens is not a new business, but the article suggests it is a rapidly growing business. Tax liens are given priorities over other types of debt for several reasons. One is that the tax debt creates an involuntary creditor. By "involuntary," we mean the taxing entity was not intending to create a creditor-debtor relationship. (Of course, one might ask why other involuntary creditors, such as tort creditors, do not also get priority, but that is a problem for another time.) The investor has bought the tax lien voluntarily, creating a different type of debtor-creditor relationship. Yes, the price the investor pays for the debt reflects the collection advantages it carries. If, however, investor purchase of tax debt becomes routine, then the involuntary nature of the debt no longer is a justification for its collection advantages. We would have to justify the priority for tax debt on other grounds. Perhaps that justification is just that we like tax debts to be collected for the public fisc more than we like other debts to be collected?

The more troubling part of this trend is that collection practices by governmental entities are subject to the same democratic processes that surround all governmental decisions. Tax collectors have powerful collection tools, but these tools have to be exercised with the political ramifications in mind. These political checks are another reason we entrust tax collectors with powerful collection tools. Local officials with overly aggressive tax policies have to answer to the electorate. Private investors do not.


Real estate tax purchasers are a huge pain when trying to save a house - they just want to foreclose and get their money, plus sky-high interest and expenses.

They are aggressive with a capital A.

Communities are getting their real estate tax money from these private debt buyers on the front end, but they are getting foreclosed, abandoned homes on the back end. Often not nearly as good a deal, particularly for the long term, as the counties thought it was.

I so agree. Supper aggressive and sometimes its like having another Mortgage. The ones we have problems with are the ones the debtors solicit. I do like objecting to their claims though as some of the ones down here hate BK. Their claims when added to Mortgage arrears complicate Plan calcs. That non-escrowed Home equity ARM really comes back to bite debtors, those jokers make things so much worse than just dealing with the County and City in BK.

Ah, the return of tax farming. Did we learn nothing from the ancien regime?

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