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Monday, May 27, 2024 | Back issues
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Court Takes Issue With City’s Demolition Tax

CHICAGO (CN) - Two residents of Evanston, Ill., have standing to challenge a tax aimed at preventing the destruction of affordable housing in the city, the 7th Circuit ruled.

Evanston charges demolition permit applicants a fee of $10,000 per building or $3,000 per residential unit, whichever is greater. Proceeds from the tax go toward the city's Affordable Housing Fund, which helps low-income families find homes in Evanston.

In 2007, Michael and Victoria Kathrein agreed to sell their single-family house to a real estate developer named Eitan Ouzan for $225,000. When Ouzan learned about the demolition tax, he demanded that Kathreins reduce the sale price to offset the cost. Without the reduction, Ouzan refused to buy the property.

The Kathreins then sued the city, claiming its Affordable Housing Demolition Tax violated the Fourth and Fifth Amendments, the Illinois Constitution and other state laws.

Evanston argued that the couple's claims were pre-empted by the Tax Injunction Act, which prohibits federal courts' jurisdiction in tax law where a "plain, speedy, and efficient remedy may be had in the [state] courts."

The Kathreins amended their complaint, adding a constitutional challenge to the TIA, but the District Court ruled that they lacked standing and dismissed the case.

The 7th Circuit reversed, finding that the demolition tax was not a "tax" as defined by the TIA.

"Courts have identified four types of payments to government that are not taxes ... 'user fees,' 'regulatory devices,' 'compensation charges,' and 'market exchanges,'" Judge Michael Kanne wrote for the appellate court's three-judge panel.

The court noted three factors that led it to classify the fee as a regulatory device, rather than a tax. First, the so-called tax generates paltry revenue; second, that revenue is appropriated to a special fund, as opposed to the city's coffers; and third, the "tax" creates a disincentive for demolition.

In 2006, the tax only raised $90,000. The city of Evanston's total annual budget was $92 million.

In a footnote, Kanne noted: "We would put Evanston's revenue stream at greater risk by reviewing the city's library fines and fees, which accounted for $182,477 in 2006-7."

The three-judge panel also found that the Kathreins had been injured by their property's loss in value, giving them standing to sue, regardless of whether they had immediate plans to sell the property.

Finally, the court clarified that any injunction must take into account market forces that have affected the property value, remedying only the damage caused by the demolition tax.

The case was remanded to the District Court.

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