Legislators divided on what to do about impact of MVHC repeal
To some, the changes made to the state’s property tax system during this summer’s special session looked like a step in the right direction. The repeal of the state’s market value homestead credit, after all, contributed more than $500 million to solving the deficit. It also sought to shield taxpayers from local levy hikes and ended a state program that never seemed to work as advertised anyway.
But as soon as proposed local levy hikes began to sprout up in response around the state, a welter of voices began to call for adjustments to the MVHC repeal. And old political fault lines — local versus state, GOP versus DFL and rural versus suburban — soon came to the fore at the Capitol, putting property taxes back on the presumptive agenda for the 2012 session.
The latest round of local tax hikes came about in part thanks to the abolition of the MVHC and its replacement by a mechanism known as the homestead market value exclusion (HMVE). The MVHC, created more than a decade ago, was designed as property tax relief for individuals in proportion to their property’s value. The revenue lost to local governments as a result was then to be backfilled with state dollars.
Eventually, though, the MVHC became a ripe target for budget cutting. Not since 2003 had full payments been made to local governments, a reality that led many local officials to reluctantly back the switch to HMVE. The changes eliminated about $500 million in payments to local governments for the biennium.
The HMVE, in turn, offers a tax exclusion that allows property owners to pay taxes on a reduced-valuation basis. The exclusion was intended to directly offset the loss of the credit. But for local governments, it has had the effect of depressing overall property values — a scenario that points to further local tax hikes as a means of making up the lost revenue.
Proposed remedies vary
Some critics of the changes would revert back to previous law, while others would tinker on the edges and offer new forms of relief. Others insist that tax hikes are either the fault of profligate local governments or the side effect of an overdue adjustment to a local government aid system that had grown too large.
But no matter what the property tax Rorschach test says to one person or another, the problem isn’t likely to go away.
“Neither side has really come out in favor of property tax increases,” one nonpartisan fiscal staffer said drily. “Then there’s the budget issue sort of over the top of all of it. If there weren’t these budget issues, you wouldn’t see these kinds of things.”
Homeowners and some lawmakers have been riled by the proposed local levy hikes, which in some cases have offset the HMVE exclusion. To be sure, some localities are holding levies flat, decreasing them or seeking modest increases. But others are forecasting increases of 10 percent or more. The full picture for each property taxpayer will become clear over the next few weeks as truth-in-taxation statements are sent out.
The situation has left both parties at the Capitol looking for a response, particularly as local governments and editorial boards around the state have blamed St. Paul for the increases in local levies.
The DFL response thus far has been to pre-file a bill for the coming session that would reinstate the old credit, an effort that has dozens of backers in the House and Senate minority caucuses, Rep. Paul Marquart said.
“The main reason we wanted to get something pre-filed was to tell residents back home that we’re going to fight,” he said. “Now the discussion is really going.”
But that effort has gained little Republican support. One drawback of the proposal is that Marquart and his co-author, Rep. Ann Lenczewski, have not specified how they would offset the lost savings. The more than $500 million in budget savings contributed a significant portion of the fiscal year 2013-14 deficit fix and is one of the few permanent fixes included among a set of budget measures that included an extended K-12 shift and state borrowing through tobacco bonds.
It’s that cash-strapped reality — not to mention the prospect of a fresh shortfall in the state’s November revenue forecast — that has led observers and many Republicans to cast a skeptical eye at the DFL efforts thus far. “That’s a total lack of reality,” as one lobbyist put it.
“It’s a total nonstarter,” said House Property and Local Tax Division Chairwoman Linda Runbeck. “Absolutely not.”
Republicans divided on solution
But that doesn’t mean the GOP is ignoring the issue. For now, how Republicans will react as they try to assuage local fervor over rising taxes is an open question — one that interested parties on both sides of the aisle are watching closely.
Runbeck and Republican leaders could have a sizable contingent of their own party looking to make changes to property tax exclusions as well. Rep. Larry Howes made no secret of his feelings, telling Forum Communications, “We are going to do some fixes on that.”
In a interview later with Capitol Report, Howes explained that he wants to address anomalies that have left some rural districts, including his own, facing exceptionally steep tax hikes (for example, $280 from $28, Howes said) because of the way taxing districts are drawn. Some of these hikes, he added, are occurring even where levies are held flat.
“We’ve been told that it’s an anomaly,” Howes said. “It’s not like we’re whining.”
A fix Howes intends to offer next session — one he says GOP leaders have assured him will be funded — is a boost to property tax refund programs for homeowners facing exceptionally large tax increases.
Similar, yet broader, relief was included in this past budget deal — at the insistence of Senate Taxes Chairwoman Julianne Ortman, one analyst said — and cost nearly $62 million. Howes declined to say how many homeowners would be eligible for this new relief and how much state money GOP leaders have promised.
But with the state likely facing another budget deficit this coming session — a prospect that will become clearer in early December — solutions with any kind of price tag figure to face an uphill climb at the Legislature.
“There’s no money to undo this,” one lobbyist said. “The only real choice is to take the money from somewhere else.”
That calculus, perhaps, is what led Runbeck to prepare her own fix for rising property tax bills: During the 2012 session, she will pitch a freeze on levy hikes for some local governments. Runbeck also said she would be willing to support means-tested, targeted relief as Howes described.
But even amid the pre-session jockeying, the political perils are clear and will likely only grow as the legislative session, and the 2012 election, draw nearer.
For Howes, a seven-term moderate Republican, the parochial interests of his constituent taxpayers are enough to spur somewhat thinly veiled threats if his proposed relief doesn’t gain the leadership’s support.
And, he added, he is not alone in his caucus.
“I’ve been assured by leadership that they’re going to help,” he said. “There are enough of us that, if that assurance doesn’t follow through, we may have to join Marquart and Lenczewski. I don’t want to, but maybe we’ll have to. We have to do something.”