Businesses, apartments will probably be hit harder in some areas
As local elected officials prepare their 2012 budgets, they’re feeling the aftermath of a property tax law change by state lawmakers.
In order to save about $500 million toward solving a $5 billion state budget deficit, lawmakers killed off the market value homestead credit (MVHC), which had been a product of 2001 property tax reform legislation passed during Gov. Jesse Ventura’s administration. The program cost the state money in the form of a reimbursement to local units of government.
MVHC had given homeowners a property tax credit based on a sliding scale down from homes worth $413,800. The cutoff point was for homes valued at $76,000, which were eligible for the largest amount of credit at $304.
According to the League of Minnesota Cities, between 5 and 15 percent of a city’s levy was paid by the MVHC reimbursement.
At least that’s how it was supposed to work.
But given the perennial budget deficits of recent years, state lawmakers got into the habit of cutting payments, leaving local units of government scrambling to cover the cost of giving qualifying homeowners their tax credit. Therefore few in St. Paul protested the elimination of MVHC in the omnibus tax bill that Gov. Mark Dayton signed in July to end the government shutdown.
“It’s a program that promised a lot but hadn’t delivered much for eight of the last nine years,” said House Property and Local Tax Division Chairwoman Linda Runbeck, R-Circle Pines. “That’s really why it was targeted.”
In seven of the last eight years, the state failed to fully reimburse local governments for the MVHC in order to balance the state budget, according to a recent report by the nonpartisan House Research Office.
Local government groups like the Association of Minnesota Counties and League of Minnesota Cities did not mind the change because of the reality that local governments had a slim chance of receiving payments from the state. Gary Carlson, director of intergovernmental relations for the league, said the program was starting to resemble a “shell game.”
“We did support fully funding the program,” Carlson said, “which means paying for the credit. Or if the state wasn’t willing to do that, then eliminate it.”
Going forward, homeowners will now get tax relief through an exclusion, which amounts to lowering the taxable value of their homes. The troublesome part for county and city officials is they will have to shift the tax burden to other properties in the absence of state assistance.
The likely targets will be business properties and apartments.
Kaye Rakow, director of public policy for the Minnesota Chapter of the National Association of Industrial and Office Properties, said that the tax hit to commercial properties will depend on the particular tax bases in each county. But it’s likely some business properties will have their taxes increase.
“I would assume where you have the lowest valued homes, you’ll have the greatest exclusion,” Rakow said. “Properties in that jurisdiction will have to make it up, and businesses will be one of them [along with] higher valued homes and apartments.”
The unfunded exclusion creates the possibility for property taxes to increase even if the city isn’t raising its levy.
In Washington County, commissioners are proposing to decrease operating expenditures and hold the levy flat. But Deputy County Administrator Molly O’Rourke figures that property taxes will rise an average of $30 per home because of the MVHC change. Many homesteads that receive the exclusion on their property tax value will still see their property tax bills increase.
“The reality is, because the value of tax base in total is going down, the tax rate goes up,” O’Rourke said. “They will pay more tax. … It’s like when you put water in a bathtub and you put someone in the bathtub, the water doesn’t go away. It just goes someplace else.”
On the other side of the state, the Fargo Forum reported Tuesday that Moorhead expects to see its property tax base drop more than $2 million because of the new exclusion. The city will have to either raise taxes or cut services or personnel to make up the difference.
A recent analysis by a House tax researcher, Steve Hinze, showed that a $200,000 house in a county where the levy is held flat would have its property taxes increase because of the new market value exclusion by about 4 percent, from $1,924 to $2,005.
MVHC was one component of the 2001 reforms, of which the biggest was removing the general education property tax levy from local taxpayers and establishing a statewide tax on business properties.
Mark Haveman, executive director of the Minnesota Taxpayers Association, who has been critical of both the old credit and has doubts about the new exclusion, said the MVHC was an attempt to alleviate the tax bite felt in places with comparatively low property values. He noted that MVHC was particularly popular in greater Minnesota, where fewer properties benefit from the so-called circuit-breaker law that provides refunds to people whose property values are high compared to their income.
“There’s always been an interest in property tax policy to strike an acceptable balance of distribution of state aids among various regions of the state,” Haveman said. “[MVHC] has been sort of the hallmark to make sure that those areas of the state that may not be able to take advantage of the circuit-breaker program have access to property tax relief of some sort.”
The new exclusion will likely be a subject of debate among property tax policy advocates. Haveman and Rakow, among others, are critical of the approach because there isn’t a proven connection between home values and household income.
“People who own low-valued homes may be needy,” Haveman said. “But they may not be needy. We’ve always felt that if they are, they could be helped by income-sensitive circuit-breaker programs without imposing a heavier burden on property owners. One of the concerns we have with this exclusion now is that we still provide some of the relief, but in a contorted, un-transparent, distorting sort of way.”