Earlier this year, the hedge fund Alden Global Capital cut a check for $1.75 million to Cook County, Illinois, for the right to prey on some of its poorest and most disadvantaged residents. The hedge fund—notorious for acquiring and gutting local newspapers across the country, and more recently gobbling up mobile-home parks while summarily raising rents, cutting maintenance, and laying off staff—purchased tax liens on over 600 tax-delinquent properties in the nation’s second-largest county. In exchange for paying these properties’ outstanding taxes, Alden Global Capital can charge an escalating rate of interest and attach fees to those debts. If the delinquent taxpayer fails to pay it all back within two years, they can claim ownership of the property.
Tax lien investing is a multibillion-dollar industry in America today, increasingly dominated by hedge funds and private equity firms. It is also a fundamentally predatory enterprise. It utilizes the machinery of local tax enforcement to exploit the hardships and misfortunes of struggling homeowners, and extract their wealth and property. Its chief victims, both the homeowners whose tax liens are purchased and those in the surrounding neighborhoods who suffer collateral damage, are poor, elderly, and disproportionately Black and Latino. Any attempts to promote greater access, affordability, and equity in U.S. housing markets—and undo the damage from racist and exploitative practices in the past—must first attack the financial forces that profit from and exacerbate those inequities today, and the laws that let them do it.
The tax lien industry has aggressively promoted tax lien sales as a magic elixir for local governments’ budgetary woes.
Illinois is one of 27 states that permit or even require local governments to sell tax lien certificates (equivalent to the amount of taxes a property owes) at public auctions once property taxes are past due. Through these tax sales, local governments get the taxes they are owed. The bidders get much more: a high-yield, virtually guaranteed return on their investment, either from interest (in many states, 18 percent or higher) and fees (in some states, virtually unlimited) that a homeowner must pay to remove the lien, or from taking ownership of the property when they cannot.
Local governments’ sale of tax liens at public auctions dates back to the 19th century. From their inception, these auctions were venues for investors to profit through exploitation. In early 20th-century cities, notorious “tax sharks” like Chicago’s Jacob Glos and New York’s Charles Wiltsie amassed fortunes by buying up scores of tax liens on residential properties, charging their owners exorbitant amounts to remove the lien, or waiting until the deadline for settlement passed and claiming the deed. Afterward, they would often try to sell the property back to the former owner.
Critics denounced these schemes as unconscionable. More than a few went into the trade and saw the riches to be made, but begged off, finding it to be “too merciless.” Announcing his company’s decision to divest in tax liens in 1911, one New Jersey real estate executive likened the practice to “picking pennies off a dead man’s eyes.” Others questioned whether siccing private debt collectors, motivated solely by personal gain, on delinquent taxpayers served the public’s interest. As tax delinquency rates soared to record levels during the Great Depression, The Milwaukee Journal asked, “Is there anything constructive about handing delinquencies over to private individuals who hope to collect heavy interest charges or seize the properties of home owners or business men?” Instead, they argued, government agencies should be in charge of collecting delinquent taxes, and should establish programs to assist persons struggling to pay.
Calls to abolish tax lien sales and overhaul tax delinquency laws have periodically erupted. Often, they have come in response to cases of poor, often elderly homeowners who lost their homes to unscrupulous tax buyers over small tax debts. But with a few exceptions, state legislatures have resisted structural reforms. This has been due in no small measure to lobbying by the tax lien industry, which has aggressively promoted tax lien sales as a magic elixir for local governments’ budgetary woes. As state and federal governments slashed funding for cities while placing restrictions on their ability to raise tax rates or impose new taxes in recent decades, this industry’s political influence has only grown stronger.
The reasons why Black and Latino neighborhoods suffer from higher rates of tax delinquency are tied to other features of housing markets and tax administration that have historically created racial disadvantages. As numerous studies have found, properties in Black and brown neighborhoods tend to be overassessed, forcing residents to pay higher taxes than persons living in predominantly white neighborhoods. Because these same neighborhoods are devalued on the open market, municipalities with larger Black and Latino populations tend to have smaller tax bases relative to their populations, resulting in those homeowners paying higher property tax rates than white homeowners in predominantly white cities and towns (while, it should be noted, receiving less in return).
Along with shouldering heavier tax burdens, low-income and minority homeowners are less likely to have financed their home purchase with a conventional mortgage, which often comes with a property tax escrow account, and instead must save for and pay their property taxes themselves. Those who have paid off their mortgages (mostly elderly persons or persons who had inherited a family home) must also find the money to pay property taxes. This explains why 70 percent of the homes sold at tax lien sales are owned outright.
It is well past time for states to adopt a more humane—and more effective—system for property tax enforcement.
Tax lien investors target poor neighborhoods and vulnerable homeowners because, quite logically, they are poor and vulnerable. The conditions that generate higher rates of tax delinquency in poor, predominantly minority neighborhoods are precisely what makes tax liens in these areas so attractive. For, one, tax lien certificates generate greater returns the longer they go unredeemed. Not only does interest accumulate, but in some states the interest rate increases the longer it goes unredeemed, as do the amount and type of fees an investor can attach to the debt. The harder it is for a homeowner to settle their debts, the more money a tax lien holder can extract from them.
Tax liens in poor neighborhoods are also attractive for their speculative value. For minimal cost, tax lien investors can claim liens on properties in areas where the market has bottomed out in the hope that it will eventually become targeted by developers and gentrifiers. In the meantime, their speculative investments often lie vacant and in disrepair, further eroding neighborhood conditions and blocking any community-led attempts at revitalization. In areas already exhibiting signs of gentrification, investors can take advantage of low- and fixed-income homeowners’ struggles to pay rising property tax bills. If the owner is unable to settle their mounting debts—as is often the case—tax lien purchasers can claim ownership of valuable property. As a 2013 investigation by The Washington Post and more recent studies have found, this is precisely the strategy individual and institutional tax lien investors are deploying in gentrifying markets in these states, with the main victims elderly, low-income, and Black.
This is what happens when we rely on private interests, motivated solely by the opportunity for profit, to address public concerns like tax collection and enforcement. Instead of mitigating the underlying causes of tax delinquency among poor and minority homeowners and distressed neighborhoods, tax lien sales and the predatory marketplace they have spawned exacerbate them. It is well past time for these states to adopt a more humane—and more effective—system for property tax enforcement.
But simply ending tax lien sales is not enough. We must also address the reasons why governments are drawn to them in the first place. We must, as a nation, reinvest in our cities and towns and the vital public goods and services they provide. And we must do so by taxing the immense and extremely concentrated wealth of those at the top, instead of preying on those at the bottom.
