As cities work to prepare budgets in anticipation of the Sept. 15 deadline for certifying preliminary levies, several current issues can lead to more questions from homeowners and others about how property taxes are determined. The foreclosure crisis and bursting of the housing-market bubble have created concerns over how changing home values will affect property taxes. New levy limits on large cities are confusing for city officials and the public. In addition, other factors can dramatically influence the property-tax statements of property owners.
In Minnesota, the market value of property is determined by Jan. 2 of the year prior to the year in which taxes on that property are due. In other words, market values for taxes payable in 2008 were set in January 2007.
Property owners receive notice of the market value from the assessor in March of each year. This lag in the system can create confusion for many homeowners who perceive that their home values have fallen. This can create an expectation among homeowners that their tax bill will be immediately lowered. Assessments are just starting to reflect the decline in home values, which means that any impact on property taxes is still a year away.
Property-tax bills also depend on local levy decisions, not just property values. They also depend on how the values of all other property within the city may have changed. Even if a home’s value is lower than it was for taxes payable in the previous year, the homeowner may pay more property taxes if the city needs to increase its levy to cover increased costs or if other properties saw larger declines in value.
It can be helpful to think of the property tax levy as a pie. Each taxable parcel of property in the city gets a piece of the pie — or, in other words, pays part of the levy. When values change, the size of the pieces may change a little — with some getting bigger and others getting smaller — but the whole pie must still be paid.
Another complicating factor this year is the decision by the Legislature and governor to impose levy limits on cities with populations over 2,500. In those cities, levy decisions will be affected by levy limits for taxes payable in 2009, 2010, and 2011.
Many media reports stated that the levy limit would cap city levy increases at 3.9 percent. In reality, levy growth for those cities is limited to an amount equal to 3.9 percent of the city’s previous year levy plus local government aid (LGA) with additional small percentage adjustments for household growth and commercial and industrial new construction increases.
As with most property tax issues, however, it is not as simple as that. The allowable levy increase is offset by any increase a city will receive in LGA. (Note: Some cities will see a decrease in LGA for 2009; in those cities, levy authority will actually increase as a result.) In addition, there are more than 20 special levies that are outside the city’s levy limit.
The heavy media attention to the 3.9-percent figure may create confusion among property owners if a city levy increases more than that due to special levies. The levy limits may also create confusion if property owners are expecting to see a maximum increase of 3.9 percent in their individual property tax bills.
In addition to changes in a city’s property tax base and property tax levy, similar factors in the county, school district, and any overlapping special taxing authorities can influence the property taxes paid by a homeowner. Taxpayers may not always be aware that their property tax bill also includes the influence of these other taxing authorities.
To summarize, increases or decreases in an individual’s property tax bill depend on changes in the individual’s property value; the value of other properties in the city, county, and school district; and in the size of the levy of the city, county, and school district.
Resources for cities and citizens
Two years ago, the League of Minnesota Cities worked with the Association of Minnesota Counties (AMC) and the Minnesota School Boards Association to produce materials to help local government officials address questions from the public. The outcome of that joint effort was a DVD titled, “14 Reasons Why Property Taxes Vary From Year to Year.” Copies of the DVD, as well as accompanying handouts, were sent to all League member cities. You can find a copy of the handouts here.
In addition, the league’s website includes several resources related to the property tax system: Property Tax 101, Property Tax Statement 101, and Homeowner Property Tax Relief 101.
Rachel Walker is a policy analysis manager for the League of Minnesota Cities. Reprinted with permission from Cities Bulletin, a publication of the League of Minnesota Cities, copyright 2008.
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