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Property taxes will once again be a politically volatile issue at the Capitol. That was readily apparent at a committee hearing Wednesday evening on a proposal to phase out the state’s business property tax over a dozen years.

Property tax fix is politically fraught

House Taxes Chairman Greg Davids wants to phase out the business property tax. “We shouldn’t have counties being the collection agencies for the state,” he said. “If we need more money, we need to go get more money. We don’t need to pile on the property tax.”(Staff photo: Peter Bartz-Gallagher)

GOP majorities want to clean up problems with homestead credit repeal and roll back business property taxes

Property taxes will once again be a politically volatile issue at the Capitol. That was readily apparent at a committee hearing Wednesday evening on a proposal to phase out the state’s business property tax over a dozen years.

Under legislation introduced by Rep. Greg Davids, chairman of the House Taxes Committee, the nearly $700 million tax levy would be reduced 8.3 percent annually until it is eliminated. The bill would also exclude from taxation the initial $150,000 in valuation for commercial properties.

“We shouldn’t have counties being the collection agencies for the state,” Davids said. “If we need more money, we need to go get more money. We don’t need to pile on the property tax.”

But the means of paying for even the initial $66 million tax cut immediately drew howls of protest from DFLers. Davids proposed covering the bulk of the tax cut by reducing the so-called “renters credit.” Under the plan, individuals who qualify for the program would see their payments from the state reduced from 17 percent to 15 percent of gross rent paid. The bill would also slightly lower income guidelines for the program, to $40,000 for elderly and disabled individuals and $25,000 for everyone else.

“This is all about priorities,” said Rep. Paul Marquart, the ranking DFLer on the Property and Local Tax Division, at Wednesday’s hearing. “The fact of the matter is, what you’ve decided to do is put corporations ahead of senior citizens and those with disabilities.”

Davids bristled at the criticism. “To say this is the rich corporation kicking Grandma off the cliff is nonsense,” he said. “This is the number one jobs bill of the year in the state of Minnesota. To demagogue it … is insanity.”

The outcome of the debate over phasing out the corporate property tax is likely irrelevant in practical terms. That’s because Gov. Mark Dayton is almost certain to veto the legislation if it ever arrives on his desk. But the dust-up certainly won’t be the last time that Republicans and Democrats tangle on the issue of property taxes this legislative session. With every seat in the Legislature in play in the November election, the issue is bound to be a political piñata.

Property taxes up 4.6 percent in 2012

On Wednesday the House Research Department released a study showing that local property taxes increased by $370 million, or 4.6 percent, from 2011 to 2012. But the impact was grossly disproportionate on a regional basis: Outstate Minnesota had property tax levies increase 8.1 percent, while the seven-county metro area underwent just a 2.6 percent bump.

Democrats pounced on the data as confirmation that the Legislature had merely shifted the burden to local governments by failing to raise revenues as part of last year’s contentious battle over the state’s $5 billion deficit. In particular they point to the elimination of the Market Value Homestead Credit as a chief culprit in the property tax spike.

“You cannot remove $538 million per biennium permanently, for all time, and not expect property taxes to go up,” said Rep. Ann Lenczewski, the ranking DFLer on the Taxes Committee. “If there had been some honesty — tough times, we need to raise your property taxes — we wouldn’t have a quibble here. But what was said was, elect us and we won’t raise taxes. What happened? They raised taxes.”

The elimination of the Market Value Homestead Credit is causing other lingering headaches at the Capitol. That’s because the Minnesota Department of Revenue has determined that under its cheaper replacement — the Homestead Market Value Exclusion — the taxable value of some properties would be reduced. That’s because the portion of the property value excluded from taxation would not be included in the listed taxable value of the land.

The amount of depreciation is expected to vary widely across the state. In some municipalities — primarily rural areas with modest tax bases — the reduction could be as much as 30 percent. But for other towns, most notably wealthier suburbs, the drop in taxable value is projected to be minuscule. The northwestern town of Hitterdal, for instance, with just 200 residents, is expected to see its taxable value drop 25 percent. By contrast, Orono would likely see the value of its property tax rolls slip less than 1 percent.

“The effect is dramatically different from jurisdiction to jurisdiction when you subtract out the homestead exclusion value,” said Gary Carlson, director of intergovernmental relations for the League of Minnesota Cities.

That change in the valuation of properties has a ripple effect across the tax code. For instance, local governments are prohibited from borrowing more than 3 percent of their property tax base. If that base is significantly reduced, it could potentially prevent cities from borrowing money to pay for street repairs and other capital projects. “It’s somewhat of a theoretical exercise,” Carlson said. “We’re not aware of a city that is in fact in excess of their debt limit, but we can’t be sure there’s not somebody out there.”

The change in property value assessments could also affect the ability of quasi-government agencies, such as housing redevelopment authorities and port authorities, to levy taxes. Various statutes limit their ability to do so based on the taxable value of land in their jurisdiction. For instance, port authorities are currently limited by state law from levying property tax assessments in excess of 0.01813 percent of taxable value. “It basically means they may not be able to levy for everything they needed to levy for,” Carlson said.

Politics could make fixes difficult

The League of Minnesota Cities, the Minnesota Inter-County Association and other groups are now pushing the Legislature to pass a bill fixing the potential problems before they cause issues at the local level. The fix-it bill contains 112 sections and runs 60 pages. Davids is the chief sponsor of the bill in the House; a Senate version has not yet been introduced.

“The legislators we’ve met with all understand that there were unintended effects of the tax reform last year,” Carlson said. “These things are discovered as you start to implement a new law change. I think everybody agrees that at some point we need to fix this. We would certainly like to get this done very soon.”
But that’s where the acrimony over property taxes could come into play. DFLers have little interest in helping their Republican counterparts fix a mess of their own making that could cause headaches back in their home districts. Instead Marquart and Lenczewski have introduced legislation that would fully restore the Market Value Homestead Credit.

“My strong belief is that if we fix any of it, we should fix all of it,” Marquart said. “My first priority would be to totally restore the Market Value Homestead Credit.”

One lobbyist working closely on the issue expects no support from Democrats for the bill. “I’d say it’s 50-50,” the source said of the bill’s prospects. “The Republicans are going to have to put up all the votes.”
Davids acknowledges that DFLers will take every opportunity to try to pin property tax increases on Republicans. “Any bill that we have that says tax on it is going to be a vehicle for all their games,” he said. “But hopefully we can get this passed and do the right thing and get it out and fix these situations up for the cities and counties.”

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