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Property tax: Be careful what you wish for

I believe the ongoing discussion of property taxes and what role the state should have in providing relief will be aided by a bit of a reality check.

We all love to hate property taxes, and political partisans have repeatedly pointed out that they have gone up almost $2 billion during the Pawlenty administration.

These politicians are careful not to mention, however, that property values have gone up more than $139 billion. That’s a very good thing. A house is not a liquid asset, but the growth in home equity has made it a more active asset and a sensible option for financing home improvements, college tuition or other expenses. In fact, the Federal Reserve reports that Americans have borrowed $826 billion in home equity loans.

What I’m afraid we’re really saying when we complain about rising property taxes is not that we want dirtier water or longer response time from police and fire. I’m afraid what we’re really saying is that we still want all of our city services; we just want someone else to pay for them.

Here’s what I want to say to you: Be careful what you wish for.

Before I tell you why, I want you to know some things about the state of property and property taxes in Minnesota.

Most cities receive state aid

First, very few cities in Minnesota pay all their own bills. Most receive local government aid (LGA) from the state general fund. There are cities that receive almost twice as much LGA as they raise in local property taxes. And even though state subsidies to local government have increased 4 percent since 2003, local elected officials — who, remember, determine how much you pay in property taxes — have not seen fit, in most cases, to reduce your local tax burden by a comparable amount.

Second, Minnesota maintains property-tax refund programs for both homeowners and renters. These programs are also referred to as “circuit breakers,” providing targeted relief to taxpayers whose property taxes are high relative to their incomes.

Third, tax rates on all property classes as a group have fallen every year since 1997, from 2.45 percent ($2.45 per $1,000 of valuation) to 1.30 percent in 2008. Homestead tax rates for 2008 are 1.05 percent statewide, well below the pre-2001-reform level.

Fourth, the state has taken over most of the cost of K-12 education from local government. This year its portion of school funding will be 79 percent, the third-highest percentage in the country.

Finally, we all have sympathy for our seniors, who might have to make serious sacrifices to pay their taxes. According to the National Council on Aging, 81 percent of Americans aged 62 and older own their own homes; 74 percent of them own them free and clear, representing $2 trillion worth of home equity. The Legislature is discussing how to help seniors with reverse mortgages.

I will grant that the formula for calculating state aid to local governments needs reform. There are property-poor cities that need more LGA than they get, and there are property-rich cities that should be embarrassed to get anything at all. The important point to remember, however, is that no one is printing money in St. Paul. Whether it is income tax, sales tax, or property tax, it all comes out of our pockets one way or another. All levels of government have to share the load — and justify it to their constituents.

A recipe for accountability
If we ask the state to take on more of the cost of our local services — in other words, ask the taxpayer in a metro suburb to pay for garbage pick-up in a town outstate, we lose an important tool for holding our local elected officials accountable. Let the residents of our cities and towns decide to plow the snow at 2 inches rather than 1, or staff the library with volunteers to balance their budget. I’m comfortable knowing that my city council member or county commissioner is a little uncomfortable knowing he might run into me in the grocery store, where I will tell him exactly what I think about my property taxes. That’s accountability.

Finally, when significant amounts of a city’s services are paid for from the state general fund rather than from local coffers, how realistic are the voters’ assessments of the true cost and value of those services?

The truth is that property taxes are an important part of the total tax mix. They are more stable than individual income, corporate income, and sales taxes, which fluctuate with changes in our economy. They can be adjusted more immediately to manage changing conditions or needs. They reflect local preferences about spending. They offer, and require, local control and accountability in tax matters.

And even if I do say so myself, it’s much easier for one concerned citizen to have an impact on five city council members than he can have on 201 legislators. My advice regarding property tax reform: Be careful.

Bill Belanger served eight terms in the Minnesota Senate, representing parts of Bloomington, Burnsville, and Savag, and was long-time lead Republican on the Senate Tax Committee. He served previously on the Bloomington City Council for 12 years and as vice mayor. 

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Comments (4)

  1. Submitted by Craig Westover on 03/03/2008 - 02:08 pm.

    One reason there is so much resistance to property taxes is that is one of the few taxes people actually have to sit down and write out a check to pay. Income and payroll taxes are hidden from us through withholding. Unless we make a major purchase, the total amount of sales tax we pay is for the most part extracted in nickels and dimes. Ditto the gas tax. But property tax – we have to write a whopper of check for that one.

    Personally, I think that’s healthy. It’s one of the few times the real cost of government hits home. If people had to actually write a check to pay their income taxes — like self-employed people have to do — “no new taxes” wouldn’t be a slogan, it would be sacred text.

  2. Submitted by John Olson on 03/03/2008 - 05:42 pm.

    Thanks for your commentary Senator! I’m not going to argue with you on impact, that’s for sure! But I would ask you to consider some other real possibilities:

    * The property tax is based on the “value” of the property. I put “value” in parentheses because I built my house many years ago for a price, and the assessor says that this same house is now worth a higher value. But I do not know for sure, because I have not sold it.

    Unlike a stock transaction where you have a clear purchase price and a clear selling price and a tax based on the net profit, the increase in property values is subjective, yet its effects are painful as Mr. Westover has pointed out. The assessor increases my home’s value, my taxes go up. I have no EASY way to argue whether the “value” that is assigned by the assessor is accurate, underinflated or overinflated. Sure, I can contest my property’s valuation if I think it is too far out of whack or I can go get a root canal done without Novacaine.

    Bring on the drill!

    (PS: I did the property tax hearing meeting once. Not worth the gasoline.)

    * Part of the reason we are in such a fine mess is that the perceived value of the equity in these properties increased and many chose to borrow against that equity. Many consumers assumed that the increases in the value of their property would go on and on and were all-too-happy to sign the dotted line with the lender. Lenders were all too happy to accommodate and collect the fees.

    That party’s over. Where’s the ibuprofen?

    * In Minnesota, a typical homestead pays a property tax somewhere in the neighborhood of 1.1 percent of the market value of their property. Businesses pay (I believe) somewhere around 4 percent of market value in property taxes each year and they are every bit as much subject to the whims of the assessor as well. (If I am wrong on these percentages, I will stand corrected.)

    More importantly, brick and mortar do not vote. But they can get TIF deals and other incentives if they move in or expand. The business owner who has been loyal to their community for generations is left to pay the full tax bill too.

  3. Submitted by Steve Elkins on 03/03/2008 - 06:05 pm.

    Nice article, Bill!

  4. Submitted by Bill Siegel on 03/03/2008 - 08:16 pm.

    Despite the difference on tax policy between the GOP and the DFL you can’t argue with the common sense of this article.

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