Dispute over Idaho property tax law heads to court

A dispute between Latah County and the Idaho State Tax Commission that could affect millions of dollars in statewide property valuations is on its way to court.

The issue involves the residential homestead exemption, which is the primary form of property tax relief available to Idaho homeowners.

According to the Tax Commission, Latah County has been administering the exemption incorrectly over the past year. It has been prorating the exemption in certain circumstances, meaning it only grants a portion of the available tax relief, based on the date of application.

Following a two-hour hearing May 11, the commission ordered the county to stop prorating and grant the full tax relief. The order also covered Lincoln County, which has been doing something similar.

Latah County officials, however, say the commission’s decision was “arbitrary, capricious … (and) based on a flawed statutory interpretation of Idaho Code.”

It filed a motion in district court Friday, asking for the tax commission order to be stayed and requesting judicial review of the matter. It wants the court to decide whose interpretation of state law is correct.

“We are firm in our belief that, according to the plain language of the law, the Legislature’s intent was to allow proration ‘from the date of application,’ ” said Latah County Commissioner Tom Lamar. “To me it’s crystal clear.”

County officials all across Idaho are keeping an eye on the dispute. If Latah County’s interpretation is correct, it would reduce the amount of homestead exemptions counties need to provide — allowing tens of millions of dollars in residential property values to be added back onto local government property tax rolls.

In its current form, the homestead exemption reduces the taxable value of an owner-occupied home by $125,000 or 50%, whichever is less.

Historically, people had to apply for the exemption by April 15. If they bought a home that previously qualified for the exemption, the deadline wasn’t an issue; it was already in place, so the taxable value of the home was reduced for the entire year.

However, if someone bought a home after April 15 that didn’t previously qualify — because it was used as a rental unit or a vacation home, for example — they were out of luck. They had to wait until the next year to qualify for the exemption.

In 2020, the Idaho Legislature approved House Bill 562, which removed the April 15 deadline, allowing people to apply for the exemption at any point during the year.

But the bill also added language saying the exemption “shall be effective upon the date of application.”

Latah County interprets that to mean the exemption should be prorated: Someone who applies for it halfway through the year would only qualifies for half of it. Instead of knocking 50% off the taxable assessed value of the home, the county would only reduce it by 25%. The new homeowner would pay slightly more in property taxes that first year, before receiving the full exemption the next year.

The new law took effect Jan. 1, 2021. According to the Tax Commission, Latah and Lincoln counties are the only two counties in the state that chose to prorate the exemption; the other 42 counties are following the commission’s guidance to not prorate.

Rep. Brandon Mitchell, R-Moscow, was contacted by a constituent about this issue after he was elected in 2020. After meeting with multiple Latah County and state officials to try and understand the dispute, he asked the Attorney General’s Office for a legal opinion on HB 562.

The office concluded that the Tax Commission was correct in its interpretation, and that the homestead exemption should not be prorated.

Latah officials, though, point to comments made during the House and Senate discussions of the bill that indicate lawmakers themselves believed the exemption would be prorated.

During the May 11 Tax Commission hearing, Lincoln County Prosecutor Richard Roats also noted that there’s no reason to add language saying “the exemption shall be effective upon the date of application” unless the intent was to prorate.

“In order to get to the commission’s position that the exemption shouldn’t be prorated, you have to strike that language,” he said.

George Brown, administrator of the Tax Commission’s Property Tax Division, said this dispute comes down to whether the homestead exemption is one amount for everyone, or a different amount based on the date of application.

“That’s the crux of the argument,” he said during the May 11 hearing. “We believe you get the full exemption, because that’s what (the law) says. The statute doesn’t talk about getting anything less than the full exemption. When do you qualify for it? When you apply.”

If the commission’s interpretation stands up in court, it’s unclear if Latah County would have to provide refunds to homeowners who were denied the full exemption in 2021.

The Lincoln County treasurer asked that question at the end of the May 11 hearing. The commissioners said they would provide “guidance” on that later.

The Tax Commission did not respond to a question about that Tuesday.

Latah County Assessor Rod Wakefield estimated if the exemption isn’t prorated, the various taxing jurisdictions in the county would collectively lose about $100,000 in property tax revenue.

In Nez Perce County, where a number of rental units have been converted to owner-occupied homes, Chief Deputy Assessor Brad Bovey said nearly $11.9 million in taxable assessed value was removed from the tax rolls last year because applications for the homestead exemption weren’t prorated. That translated into less revenue for the county, for Lewiston and for other local taxing districts.

“This isn’t just an argument over language,” said Lamar. “It’s an argument over language that has an impact on local governments’ ability to function.”

Spence may be contacted at bspence@lmtribune.com or (208) 791-9168.