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3 reasons why Dayton’s property tax plan is wrong-headed

Gov. Mark Dayton
MinnPost photo by James Nord
Gov. Mark Dayton proposes to provide the rebate annually and says it would reduce residential property taxes in the first year by 22 percent.

When it comes to property taxes, DFL Gov. Mark Dayton’s tax reform plan contains surprisingly little in the way of reform.

Instead, Dayton layers his $500 tax rebate plan for homeowners onto an incredibly complex property tax system that already includes multiple mechanisms for tax relief. He introduces new inequities into the system. And he provides incentives for local tax increases that could rapidly erode the relief he seeks to provide.

“There are so many reasons this is bad public policy,” says Mark Haveman, executive director of the Minnesota Center for Fiscal Excellence (formerly known as the Minnesota Taxpayers Association). The business-oriented group long has provided tax analysis and comparisons.

Haveman says Dayton’s plan also would cause “collateral damage” by draining a hefty $1.4 billion from state coffers that could be used more effectively for other purposes.

In Dayton’s defense, property tax reform is an ambitious goal that most often has eluded state lawmakers, many of whom don’t pretend to understand the system. It’s a Rube Goldberg contraption with a multitude of gears and mechanisms designed to benefit homes and other favored classes of property.

But Dayton’s revenue commissioner, Myron Frans, raised expectations as he conducted forums in more than 50 cities to solicit public input.

For homeowners, the end result is a proposal to provide a property tax rebate of up to $500 a year on state income tax returns, beginning in 2014 for property taxes paid this year.  There would be no adjustments based on your income or the size of your tax bill. If you paid at least $500 in property taxes, you receive $500 back.

Dayton proposes to provide the rebate annually and says it would reduce residential property taxes in the first year by 22 percent.

So what’s wrong with that?

No. 1: It would make an already complicated system even more complex.

The system already includes multiple mechanisms designed to reduce residential property taxes. First, owner-occupied homes valued at less than $500,000 are taxed at a lower rate than high-value homes, apartments, businesses and other types of property.

Then, homes valued at $413,800 or less receive something called the “homestead exclusion,” which effectively shifts a portion of their tax burden onto other types of property within the same taxing jurisdiction. This provision, approved in 2011, replaced a state-paid homestead credit that had been provided previously.

In addition, the state offers a Property Tax Refund (PTR) to homeowners and renters based on their income and the size of their property tax bill (or, in the case of renters, the amount of their rent that is deemed to go for property taxes). This program already provides refunds of up to $2,530 for homeowners and $1,600 for renters.

In presentations before legislative committees, Frans said homeowners and renters would be eligible for both the PTR and the new $500 rebate – raising the possibility that some homeowners in low-tax areas could receive refunds equaling or even exceeding the taxes they paid for local services.

Property Tax Collections
Minnesota Taxpayers Association

Asked about this issue, Lisa Erickson, a spokesperson for the Revenue Department, said it is possible that up to 3 percent of homeowners could receive refunds and rebates totaling more than their actual property tax bill.

No. 2: It would create new tax inequities.

Thanks to long and effective lobbying by groups such as the Coalition of Greater Minnesota Cities, the state’s property tax system already is heavily tilted in favor of outstate homeowners at the expense of those in the metro area.

According to 2012 estimates by nonpartisan researchers for the Minnesota House, the net property tax on an average-valued home in greater Minnesota cities is $1,643, compared with $3,221 for the average-valued home in the metro area.

The net tax on an average-valued home is as low as $754 in taconite areas cities, $1,226 in southwest Minnesota cities and $1,264 in cities in the north central part of the state.

Existing state-aid mechanisms more than make up for lower incomes in greater Minnesota. According to the latest state studies, the median homestead property tax as a percentage of a taxpayer’s income is 38.7 percent higher in the metro area than it is in greater Minnesota.

The flat $500 property tax rebate proposed by Dayton would only exacerbate the tax inequities that already exist, reducing the net taxes for many outstate homeowners to less than they pay for cable TV or Internet service.

Meanwhile, the governor also would hand an unneeded tax rebate to affluent owners of expensive homes, the very folks he would like to pay higher income taxes.

No. 3: It could spur future tax increases.

In proposing $500 a year in tax rebates to every homeowner in Minnesota, Dayton provides fresh incentives for local officials to raise property taxes, knowing that the impact of their increased levies would be blunted by the state.

Asked about this danger at legislative hearings, Commissioner Frans indicated that he is counting on local officials to exercise good fiscal judgment and taxpayers to “hold them accountable.”

Rep. Greg Davids, R-Preston, responded that it would be naïve to think local officials would not utilize the state-paid relief as a chance to “backfill” their budgets. “I was a mayor,” he said, “and we did it all the time.”

More than four decades of state history demonstrate that state buy-downs of local property taxes are temporary, at best. In 1967, the Legislature enacted Minnesota’s first sales tax and used much of the revenue to provide property tax relief for homeowners. However, this relief quickly evaporated as local property taxes shot up by 17 percent annually between 1969 and 1971.

In 1971, the Legislature enacted massive state tax increases to fund the so-called Minnesota Miracle, which boosted state aid to schools to equalize educational funding and reduce local property taxes. However, the Miracle proved to be costly and difficult to sustain – particularly when the economy tanked in the early 1980s.

In 2001, Gov. Jesse Ventura secured passage of his so-called “Big Plan” to reform taxes, which called for the state to assume responsibility for local school operating costs and reduce the local property tax burden. The first year after the law took effect, cities “jacked up their property tax levies by 16 percent,” according to Haveman.

“We’ve seen this movie before, and we know how it turns out,” Haveman says.

One promising element of Dayton’s tax plan is his proposal to revamp the state formula for Local Government Aid (LGA), which is intended to help local governments to provide a basic level of services and reduce their dependence on property taxes.

Like much of the property tax system, the LGA formula is skewed in favor of greater Minnesota. Many outstate cities receive enough state aid to pay 50 percent, 60 percent or more of their annual operating budgets. Meanwhile, 90 of the 140 cities in the metro area receive zero LGA.

Patricia Nauman, executive director of Metro Cities, an organization of 86 cities in the seven-county area, says metro cities once received about half of all LGA, but that the split is now closer to 70-30 in favor of greater Minnesota.

Nauman says she has not seen all of the details about the formula proposed by Dayton, but that it appears to “better serve the older, fully developed suburbs that we don’t feel have received a fair shake.”

The fact is, while Minnesota’s property tax system could be simplified and made more transparent, there is no urgent need for tax relief. In the latest national comparisons, Minnesota ranked 26th in property taxes per $1,000 of personal income, compared with sixth in income taxes and 20th in sales taxes.

Moreover, the Revenue Department projects that state property taxes will rise by no more than 2.3 percent in 2013, based on the maximum levies  proposed by local governments in advance of last December’s Truth-in-Taxation hearings.

If lawmakers are interested in true reform, a better starting point might be the final report of the Property Tax Working Group, a bipartisan commission established by the 2010 Legislature and chaired by Kathleen Gaylord, a Dakota County commissioner.

The 55-page report – issued in November – recommends simplifying the property tax system, reducing the number of property tax classifications from 55 to four, utilizing the income-adjusted PTR program as the primary vehicle for homeowner tax relief, and avoiding limits, caps, freezes and exclusions.

“Whether the Legislature can tackle a major redesign, or simply engage in some meaningful pruning, changes are necessary to improve the health of the overall system,” the report says.

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Comments (12)

Agreed. This article echoes precisely the concerns I am voicing.

I support the article in it's entirety with one particular area of focus: Renters. You can see my comments on other budget and tax reform related threads.

Young people, people under thirty, people who are nowhere near home-ownership: "You need a dog in this tax fight." Don't brush me off: you got 99 problems and this plan and the futures of Minnesota's tax systems are about 36 of them.

Governor Dayton's plan has been shown to be unresponsive to your needs and this article is exacting. The Commissioner of Revenue, on the other hand, did everything correct by touring the state and seeking YOUR input; I commend his efforts and I congratulate him on his recent confirmation.

You (young people) did not show up. Epic Failure. I was there; I raised my hand; I asked a question: "Are young people participating?" The answer was simply 'no'. That's when I decided it was my responsibility to be the voice of young people in Minnesota in tax reform.

So, who will it be? Look around you. Who is raising their hand to "scrap with big dogs" and represent your interest in this all-important conversation? Look careful. Look at the signature line of this comment. Find the person you want to represent you on Facebook and show that person your support if you are unwilling to wade into this turbulent waters on your own.

~Bob Helland
onemantaxplan @ gmail.com
"The One Man Tax Plan MN" on Facebook

Here, in particular, is the comment to which I was referring.

I had made a large summary comment to compare and contrast my thoughts with the Governor's proposals for tax reform on this Minnpost article, The Budget 101 infographic which I have found to be such a valuable tool for increasing awareness and understanding, thank you.

http://www.minnpost.com/data/2013/01/budget-101-graphic-primer-daytons-b...

Comment (02/01/13):
"........I do not support the homeowners property tax rebate. I do not support it because it does not affect me, it does not affect my peers (under thirty) and I see it as a way of buying votes from rural Minnesota and the elderly at the expense of the young and MN business community [reason #2 above]. Perhaps, if the increase in the homeowners' rebate had a corresponding proportional increase in the renter's rebate I may find it more amenable, but I think there would be a better way to spend $1.5B from expanded sales tax. The $500 will, in my economic understandings, incentivize cities [read: local government] to raise property taxes $499 [reason #3 above]. Everyone's still a winner... except my young peers who rent and pay higher prices to pay for business property taxes, but they don't understand what's going on.

..[omitted]...

In sum, I am disheartened that the debate is being dominated by a discussion of rates and rebates rather than, "What can people comply with and what is efficient to administer?". To me, that is the tax reform Minnesota is asking for and needing.

Simplified classification of properties for taxing purposes [reason #1]....."

~Bob Helland

Well-founded

Both Steve Dornfeld’s article and Robert Helland’s commentary seem relevant.

I’ve been both homeowner and renter over the years, and believe the property tax system – not just in Minnesota, but everywhere I’ve lived – is significantly biased against renters, who generally get no tax relief at all on their rent, while homeowners not only get to deduct some or all of their property tax bill, but also get to deduct their mortgage interest, as well. I've not researched it, but suspect that demographically, renters likely tend toward either/both ends of the age and family spectrum, with home owners tending toward the middle. But that's only a guess that might be worth exploring further.

If “reform” is the goal, then a $500 rebate isn’t necessarily the way to go about it. I’ll certainly take the $500 if it’s offered, but would prefer what Steve’s piece presents from the Property Tax Working Group. I don’t object to property taxes – there ain’t no free lunch, and municipal services, including public schools, roads, trash pickup, blah, blah, blah, have to be paid for – but the system is unnecessarily complex, with too many little loopholes and “gotcha” provisions, and it has far too many of what are now being fashionably labeled as “tax expenditures” (i.e., artificial limits on how much tax is owed or paid).

My barometer in these matters, for better or worse, is my former home: Colorado. While my property taxes here are somewhat higher than they were in the Centennial State, housing prices here are significantly lower, and my living space is somewhat larger, so the difference doesn’t seem especially burdensome. The shocker in Minnesota is state income tax, but that’s another topic for another day.

Keeping People In Their Homes

seems to me to be the primary purpose of this property tax rebate.

For that reason it is geared toward those in danger of losing their homes because of rising property taxes,...

(which were amped up to pay for necessary local government because the Republicans wanted to give their wealthiest friends a break from having to help support the community services upon which they themselves depend,...

and protect them from having to contribute to and help stabilize the communities which surround them).

That this property tax rebate is a stopgap measure to help those in most immediate peril of losing their homes seems to go right over the head of Mr. Dornfield, who seems to be so focused on numbers and policies as pure abstractions that he is unable to recognize how REAL, ACTUAL people are being affected by rising property taxes.

It's entirely likely that more substantial property tax reform will be coming, but such reform will take considerable time and effort. In the meantime, we should not and MUST not fall into the trap of allowing the perfect to be the enemy of the good and necessary and expedient being pursued in the meantime.

Perhaps those salivating at picking up tax-forfeited properties for a song, then flipping them at MASSIVE profit, might need to find another line of work.

The 3 reasons

It would make an already complicated system even more complex

Possibly, but I don't care. If I receive a tax rebate, I don't really mind if it came through a complicated process. The simplest thing is not to have one.

It would create new tax inequities.

Any change in tax policy creates new tax inequities. Dornfeld argues here that poorer outstate residents, would see their already low tax bills lowered. And he complains that the rich would a benefit they don't need. So both poor and rich benefit. Where's the problem?

No. 3: It could spur future tax increases.

That's something to be sorted out the local level. There never is a shortage of reasons to spend money or raise taxes at any level of government.

Ginny

I find many if not most conservatives focus on numbers rather than the people of Minnesota. Citing the Minnesota Taxpayers Association is kind of a giveaway: it is a very conservative organization that seems to represent business interests and the wealthy, I am immediately skeptical. The only problem with that $500 rebate--which I can certainly use as a retired person--is that it is across the board and some people do not need it.
The property taxes went as high as they did because the legislature cut local government aid, forcing local communities to raise property taxes. Pawlenty reduced the renters' credit .
There seems to be a lot of hysteria by conservatives, businesspeople, and wealthy people (who, it is claimed, will leave the state), that the Dayton budget will cost businesses too much in the extension of the sales tax (although overall the sales tax is being lowered) and other changes.
I wish someone (MINNPOST, MAYBE?) would delve into this and see what the likely costs will be for various business according to size and type, and the cost to a range of human beings and corporations (oh, wait, they're one and the same now). How and where will it hit us? Until then, I cannot see if there are problems and where they are.

So it isn't perfect

The whole system does need reform.

Homes subsidizing farmland when farm land is under assessed and very productive makes no sense.

I suggest passing the entire Dayton budget as is and dealing with tax reform as a single issue at a non-budget year time! Property tax unfairness and confusion is only one aspect of many problems. If the DFL controlled three branchs can't reform the system then they are all either incompetent of compromised. It could be done and should be done!

This is an excellent article,

This is an excellent article, providing strong reasons for the Governor and the legislature to just dump the unnecessary and unfair $500 property tax rebate or refund. it is incredibly regressive. And actually, property taxes in most parts of the state, reflecting the effects of the housing bust in 2008-2009, are down because property valuations are finally down.

When I first read that Dayton had proposed a universal $500, I couldn't believe my eyes.

Further, the governor seems to be playing against other features of his own tax plan. If one is to have more progressive taxes, raise the income taxes on the upper end, put back the income-related property tax refund, and focus on the complicated and controversial proposal to lower [hah! that'll last a long time] the state-wide sales tax and extend it.

We need revenues, not populist sops like the $500 rebate that only make our budget situation worse.

Other Considerations

I think it's prudent to highlight, or at least include as reference, other tax "breaks" that do not apply to all people, and sort of unfairly burden those not enjoying that one in particular, when we dissect one tax rule that benefits some and leaves out others.

In the case of property tax, yes, it's going to financially tip in favor of homeowners, and by default against renters, who are most represented by the younger demographic.

However, in the grand scheme of the cost of living in Minnesota, the child care credit and dependent deductions gives a whole bunch of young people (many of them renters) with kids a break that empty-nesters and childless folks (many of them older, and maybe homeowners) do not get. BTW, empty nesters who did not get to enjoy the child care credit when their kids were in daycare, before that tax credit existed.

Many of my friends and I do not attend football games, and yet through taxation we will be forced to subsidize a large portion of that benefit for a whole bunch of people, many if not most of them young, who will enjoy that stadium.

So you see, certain subsets of young people, if we were to single out that age demographic alone, are getting the lion's share of other benefits, more of which is paid for by older people, on average.

I don't disagree we have inequities, but we should be careful cherry-picking one tax advantage, without disclosing the rest for balance.

If you want to feel sorry for a group that gets the least for what they put in, think of the healthy, childless, single, female renter without disabilities, and no interest in public amenities -- having to subsidize everybody else's issues.

Correction: Not the Taxpayers League

Ginny Martin's comment confuses Mark Haveman's former Minnesota Taxpayers Association, quoted in the story, with the Minnesota Taxpayers League.

It was about time the organization changed its name to eliminate the confusion, since it is a respected, centrist, nonpartisan group that has done comparative research for years that is very valuable to those of us who follow tax and investment issues at the state level.

Life's not fair, highness

It always makes me cringe when liberals use "it's not fair" as their war cry. It's lame. And a waste of time. Because the point isn't about fairness in the sense that everyone is treated exactly the same, but that, under proper circumstances, opportunities are not gated. The extent to which the playing field is leveled depends on the specifics of the circumstances.

Sure, it's unfair that people who can afford to pay more taxes would be getting a break from this rebate. However, consider this: the size of that break gets smaller as their ability to pay taxes goes up, based on the value of the property they own. A $500 rebate for someone with a lower income, and likely a lower property value, will be a windfall. A $500 rebate for someone with a higher income, and likely a higher property value, will be a fart in the wind. Further, discriminating based on income when the basis for taxation is property value would be arbitrary.

Second, to claim that such a rebate shouldn't be enacted because it's "regressive" (I think that term is used pretty loosely in the context of a flat rebate) is to cut of your nose to spite your face. That is, a rebate and stronger local government aid would be the fastest way to get the most relief to the most people. People, who Mr. Kapphahn notes, could probably really use it. In my neighborhood (I rent a house, by the way), we are surrounded by foreclosures of many mid-priced houses. Could some of those foreclosures have been avoided by reducing property taxes? Probably at least some, even if not a large portion of them. One of the biggest obstacles to our recovering economy is the ability of consumers to consume. Even if those who get $500 aren't in danger of losing their homes due to rising property taxes, that money could go a long way toward a car payment, a few weeks' groceries, or even a bit of entertainment that families have been putting off because things are just too tight to be spending or saving more. So what if Richie McRich is getting $500, too, and likely will just put it toward their estate for inheritance purposes. It's not that much, and there are far more people that would spend it than would accumulate it.

Finally, to claim that such a rebate would only increase taxes in the future is speculation, at best. I do agree that we need revenues. But, properly paired with revenue streams that are more broadly progressive and comprehensive, a rebate isn't necessarily a bad thing.

A problem with this article, and many other articles and opinions, is that they take each element of the overall picture and review it out of context. Dayton's budget plan isn't simply a property tax rebate. It's a property tax rebate, a sales tax expansion coupled with an overall reduction in the sales tax rate, a repayment of schools, a service tax, etc. An even bigger problem is when the politicians responsible for passing the budget view it the same way Mr. Dornfeld has. But then, such a view serves a particular purpose for them...

Just so we are all clear...

First, one of the major differences between homeowners and renters is...drumroll, please... equity.

Homeowner's have a "store of value", whereas renters have a "money pit". Step 4 of "The One Man Tax Plan" as you'll see on the Budget 101 comment I made, in its entirety, is for young people to be able to "acquire and improve property". This is what young people need and it's also what older, more secure homeowners need because it is precisely this capability, which is going to improve the housing market (i.e. stabilize and augment property values) and it's what local governments need to sustainably expand and reinforce their local tax base.

Because dollars are fungible and paying property taxes, which the rebate program would do, is like paying a mortgage, the question that needs to be asked is this:

Who should be paying for the equity in individuals' homes? The individual purchasers or the State of Minnesota? As a young person who is nowhere near home-ownership, like most of my peers, and who struggles to stay in my rented apartment - I prefer the former.

Second, let's look at some numbers that echo what Mark Haveman and the others are saying in the article. These are not numbers that are borrowed from any conservative organization for commenters who would make that insinuation of me. These are numbers I obtained using the state's public data and developed for research purposes of my own volition.

Here are statewide numbers: http://www.futureslog.com/uploads/007A_Statewide_Aids__Rates_and_Burdens...
Here are numbers broken down by the League of Minnesota Cities' "clusters" which show stark contrast between Metro MN and Greater MN exactly as described in the article: http://www.futureslog.com/uploads/007C_Clusters_Aids__Rates_and_Burdens_...

(Two notes, (1) contact me by e-mail or comment if you need an explanation of the data if you do not understand why the NTC (Net Tax Capacity) rate for most cities is above 100% and sometimes above 200% see my, third topic and compare and contrast with the #1 reason provide in the article)

For those of you who wish to label me a "conservative think-tank", (first, thanks for the thought then...) look at the response I've elicited on the Budget 101 comments and you will see I am also being compared to a "tax-and-spend liberal". Luckily, I reserve politics for other people's amusement because the politics are what have screwed up our income, sales and property tax systems in Minnesota, but I understand that in certain regards, it is a necessary evil, which is why I am throwing my name in the hat for Governor 2014 where I will be a twenty-nine year-old wunderkind who will be able to hack both a mainstream Democratic and mainstream Republicans tax plans to pieces on a public debate stage.

Third, here are some numbers that need to be included with this conversation:

Residential homestead
The $500,000 is classified at a 1.00% property class rate for tax purposes.
The amount greater than $500,000 is classified at a 1.25% rate.

Business property
The first $150,000 is classified at a 1.50% rate.
The amount over $150,000 is classified at a 2.00% rate.

Apartments
There is no threshold, they are classified at a 1.25% rate.

[These figures are from 2007 from the Revenue Deputy Commissioner Dan Salamone and I am reasonably certain they have not changed.]

So, assume that what I've suggested and what reason #3 states is true, even if you don't buy it, and that the $500 rebate creates a cushion for local government to increase total tax levy: who will be hit hardest? Businesses and renters classified at a higher rate that ARE NOT receiving rebates. That's a double whammy.

This is the foundation of reason #1 (overcomplex classification, btw that's a simplified version, wait til agricultural land is thrown in there); reason #2 inequities between demographics, regions and classes; reason #3 incentive to tax the disadvantaged classes even greater!

Can I get a "Hell, yeah!", anybody?

~Bob Helland
onemantaxplan @ gmail.com
"Bob Helland for Governor 2014"

P.S. On that note, for those that say that local government will have reasons to increase property taxes anyways and nothing will stop them, I'd say you are wrong. Active, participatory citizen residents and local leaders will stop them and inter-city and inter-county competition will stop them from doing so, but not a statewide distribution up to $500 (effectively a payment shift out of income/sales taxes.)