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

MinnPost photo by Steve Date
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.

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.”

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.

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.

“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.

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Comments (8)

  1. Submitted by Rich Crose on 10/19/2012 - 11:08 am.

    Way too Complicated

    You’re right. Explain this to me:

    When the value of my home went up 25%, my taxes went up 25%. When the value of my home dropped 30%, my property taxes remained the same. I thought the tax was based on the value of the home.

    Someone’s missing a column in their spreadsheet somewhere.

    • Submitted by David Greene on 10/19/2012 - 12:29 pm.

      Missing Piece

      The tax is based on the value of the home AND on the levy amount passed by the city or county. The local government sets a levy (amount of dollars) which has to be satisfied. The relative values of the properties determines what amount each owner pays.

      So you may have lost value in your property but your taxes went up because other people lost MORE.

      Of course there are different rates for residential vs. commercial. Another legacy of Republican legislation is shifting the property tax burden from commercial to residential properties. That also contributes to homeowners paying more over the last few years.

  2. Submitted by Jeremy Powers on 10/19/2012 - 12:03 pm.

    Several issues with this story

    First, this story looks like it was a premise looking for copy to back it up. Obviously more “analysis” than news. Essentially three quotes, one from a taxpayer organization whose board is mostly big business, and another from the Chamber of Commerce. The third one is from the state, which was a statement of fact, more or less.

    Second, a basic tenet of this story is that Gov. Mark Dayton went along with the idea. The reason he did: compromise. The result, more media types beating him up for compromising. Did you ask the Dayton office if he LIKED this idea? But now, because he went a long with it, it’s his fault, too. And, after MinnPost having numerous stories about the evils of not compromising, is it any wonder no one wants to compromise? No stories in MinnPost about Kurt Zellers being a lout for compromising; BECAUSE HE DIDN’T.

    Third, property taxes are SUPPOSED to be low. They are the most regressive of the bunch, taxing retirees on Social Security the same as a double-income, no-kids couple next door. The ONLY tax breaks on property taxes in the last 14 years have been to lower commercial property taxes. Minnesota has low property taxes because despite efforts to the contrary, it’s doing what it supposed to do – trying to stay progressive.

    Fourth, for the eight years when Tim “No New Taxes” Pawlenty was elected we had been shifting more and more of school and other costs to property tax payers rather than income taxes. Apparently raising a local property tax is perfectly fair game if the media won’t make connection, which pretty much is what happened for eight years.

    It’s a miracle our property taxes aren’t even higher. Instead, we’re laying off teachers left and right and our city budgets are shrinking and the reserves are dropping.

  3. Submitted by James Hamilton on 10/19/2012 - 12:09 pm.

    All most of us know, if that,

    is how much we pay each year and how much we get in refunds, if any. In fact, I’d be willing to bet that most people don’t account for their refunds in complaining about how much they pay in property taxes.

    Property taxes play different roles in different states, so comparing property taxes across states is not as easy as some would sugges. Some don’t have income taxes (Alaska, Florida, Nevada, South Dakota, Texas, Washington); some don’t have sales taxes (Oregon, Montana, Alaska, New Hampshire, Delaware). Property values are all over the map, literally.

    The fairest way to compare taxes is to look at the total tax burden, as a percentage of income at each income level. That’s hard to do for most of us, but there are sites that can get you started. Here’s one:

    http://www.retirementliving.com/taxes-by-state

  4. Submitted by Ray Schoch on 10/19/2012 - 01:29 pm.

    Quick response

    I’ll check out the links in both James Hamilton’s comment and in the article, but off the cuff, my property taxes in Minnesota are 150% of what they were in Colorado, for a property that – at the time I bought it – was worth only 5% more. My inclination therefore, is to think of Minnesota has a high-tax state. Since the disparity in income taxes – an old retired guy, I’ve had the same income for years, but my income taxes in Minnesota are 280% of what they were in Colorado – is even greater, my impression of Minnesota as a high-tax state gets reinforced.

    The value of my Minneapolis property has dropped a bit more than 25% since I bought it in 2009, and I’ll be underwater on the loan for the foreseeable future, yet – in line with Rich Crose – my property taxes have not declined in proportion.

    I share Jeremy Powers’ (and Governor Dayton’s) frustration with the demise of the Homestead Exemption, and am not pleased by the recent trend to put more and more of the tax burden on homeowners.

    That said, however, two things occur to me that I can’t personally just ignore.

    First, for reasons not at all clear to me, despite the considerably higher property and income tax burden in Minnesota than in my former home state, my modest standard of living has not deteriorated to any significant degree. I was retired in Colorado, too, and my income hasn’t changed, so if other things are equal, a significantly higher tax burden should mean that I’m having to scrimp elsewhere to make ends meet. So far, at least, that hasn’t been the case.

    Second, in ethical terms, and painful as it is for me to admit, homeowners SHOULD be paying more in taxes than those who are renting, at least for the foreseeable future. If nothing else, homeowners, most of them, anyway, still enjoy a mortgage interest deduction that is nowhere available to those who can’t afford home ownership. Taxing property values tends to even out that particular instance of skewing the tax rates a bit to make them at least somewhat more equitable. On the other hand, shifting more of the property tax burden to residential property owners from commercial property owners does not strike me as equitable.

    As Steve said, it’s complicated, and David Greene’s comment illustrates that.

  5. Submitted by Connie Sullivan on 10/19/2012 - 01:56 pm.

    What’s worrisome about this article is that it seems to say that a significant change in how our property taxes are levied on the local level was made, but. . . not to worry!

    What happened: the state has removed from possible taxation a bottom portion of all residential property value (maybe commercial, too; I only pay attention to my house’s valuation). That means, no matter how you slice it, that local governments have less valuation on which to base their property taxes. It’s like another cut, a huge cut, to local government aid (LGA) that the state under the GOP aegis has been slicing away for ten years. Cities, school districts, parks and recreation, counties, lose big, because they can no longer tax those many thousands of dollars at the bottom of your home’s valuation. And the state doesn’t have to pay you anything anymore for the homestead credit.

    It’s a hugely regressive tax (in no way based on ability to pay). And local government has to raise property tax rates just to stay even and tread water.

    A trick, so indirect in its effects and so quickly done (with little news analysis at the time) that people still don’t seem to know what it was.

  6. Submitted by Richard Parker on 10/19/2012 - 02:30 pm.

    Minnesota vs. Wisconsin

    The taxes on our 98-year-old Roseville house have climbed steadily, but not precipitously, as its supposed value peaked around 2007 and then dropped by $37,000. I don’t have the figures handy, but I guess the taxes did go down about $400 at that point. Meanwhile, the taxes on our $40,000 cabin on one-third acre of sandy lakeside in central Wisconsin have been about the same as or higher than our Roseville property for years. Property taxes on my daughter’s little house in Milwaukee also were noticeably higher than a comparable house here.

  7. Submitted by Blair Tremere on 10/19/2012 - 03:02 pm.

    Fine article; elusive solutions

    Steve’s article is accurate and it seem, provocative. We need more of that. It is noteworthy that most comments are from within the box from which few (especially elected officials) want to escape: the arcane system of taxation that blatantly signals the need for comprehensive reform. The real problem: total lack of political will (courage) to do what needs to be done. How about a system that taxed property at a rate that was not tied to value of the property, per se? How about a system that had few if any subclassifications?

    For all the complaining, the voters have yet to raise the volume to a level where the legislature will hunker down and do what is right. Why? The old adage (attributed to more than one, often to Huey Long: don’t tax me, don’t tax thee, tax that (other) fellow behind the tree.

    More information from Steve and from Mark Haveman is needed. There are binders full of credible solutions! Now, who is willing to open a binder or two?

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