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No more homestead credit: Has that meant higher property taxes?

The precise impact of the change is difficult to gauge because the property tax system has so many moving parts.

The impact could vary considerably from one community to the next depending on changes in local government tax levies, the mix of property and changes in the market values of each type property.
MinnPost photo by Steve Date

For most of the last four decades, Minnesota political candidates — mostly DFLers — have argued that the state’s property taxes are out of control and have pledged to rein them in if elected.

Property taxes are an easy target. They come to taxpayers every year in one large bill. They’re levied by multiple units of government — the city, county, school district and other jurisdictions. And they’re applied to the county assessor’s valuation of your home, which may nor may not resemble what you think it’s worth.

Moreover, the system is so incredibly complex that most legislators don’t understand it.

“I don’t think there is any question that citizen frustration with this tax is incredibly high and patience with it is practically zero,” says Mark Haveman, executive director of the Minnesota Taxpayers Association (MTA). “It is a very fertile field for tax resentment.”

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This year, DFL legislative candidates, their party and DFL-aligned groups are criticizing the decision in 2011 by the Republican-controlled Legislature to eliminate the homestead credit, which provided a tax break to all owner-occupied homes valued below $413,800.

In TV commercials and mailings, DFLers are saying variously that the Republicans “passed a law making 95 percent of Minnesota homeowners pay higher property taxes” or that this legislation is the reason “seven out of 10 Minnesota property owners (are) being hit with bigger tax bills.”

However, DFLers are telling only part of the legislative story – and the impact of the new law is not yet clear.

In 2011, the Republican Legislature approved elimination of the homestead credit as part of the effort to erase a projected $5 billion state budget shortfall. DFL Gov. Mark Dayton went along with the idea, which saved the state about $260 million a year.

Market-value ‘exclusion’

They replaced the state-paid tax break with a homestead market-value “exclusion” for all homes valued at under $413,800.  The change effectively shifted a portion of the residential tax burden onto other classes of property within the same taxing jurisdiction.

The market value exclusion gave homes “approximately the same amount of tax relief” as the homestead credit, according to the nonpartisan research staff of the Minnesota House.

However, the precise impact of the change – which took effect this year – is difficult to gauge because the property tax system has so many moving parts. In reducing the tax base, it required a higher tax rate to raise the same total levy as the previous year.

However, the impact could vary considerably from one community to the next depending on changes in local government tax levies, the mix of property (homes, apartments, businesses, etc.) in each community and changes in the market values of each type property. In some jurisdictions, residential property values have been declining while commercial-industrial values have been rising, amplifying the shift resulting from the new law.

Haveman and Steve Hinze, property tax expert for the Minnesota House Research Department, say they are unaware of any analysis showing the impact of the change in the homestead credit law.

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Lisa Erickson, a spokesperson for the Minnesota Department of Revenue, says the department estimates that 68.7 percent of homeowners experienced a property tax increase this year. But she says the department did not analyze the impact of the change in the homestead credit law “in isolation from other factors.”

Policy reasons

There were valid policy reasons for changing the homestead credit.

First, it granted relief to owners of all homes with values under $413,800 regardless of their incomes or their ability to pay. Most tax experts believe the state’s income-adjusted Property Tax Refund (PTR) program is a more equitable and efficient way to provide relief to Minnesotans who need it most –homeowners and renters with lower incomes and disproportionately high property tax burdens.

Second, by effectively discounting the cost of local government services, the homestead credit encouraged local officials to spend more, knowing that the state would pick up part of the tab.

Despite all of the political rhetoric to the contrary, one thing is clear: Minnesota’s residential property taxes are not out of line in comparison with other states.

The MTA’s latest comparison of state taxes, published just last month, shows that Minnesota ranks 21st among all states in property taxes per capita and 26th in property taxes per $1,000 of personal income. The comparison is based on taxes paid in 2010, using data collected by the U.S. Census Bureau.

In other words, Minnesota is about in the middle of the pack when it comes to property taxes. In comparison, Minnesota ranks sixth in state income taxes per capita and 16th in state sales-taxes per capita.

The MTA does a separate study of residential property taxes. In its latest study for 2011,  it found that Minnesota property taxes on urban homes ranked 20th in the nation.

Bill Blazar, senior vice president of the Minnesota Chamber of Commerce, tells the story of being at a meeting recently with a businesswoman who happens to live in Wisconsin.

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“Someone was complaining about his property taxes and she said, ‘Come over to Wisconsin. Mine are double what you are paying in Minnesota.’”

According to the MTA study, Wisconsin ranks 13th in property taxes per capita and ninth in property taxes per $1,000 of personal income.