Governor proposes $34 million tax increase on low-income renters

In his proposed budget, Governor Pawlenty cuts the renters’ property tax refund by $34 million, raising the portion of property taxes paid by renters by $34 million.

Rental property taxes are extremely regressive, meaning that a disproportionate share of this tax falls on Minnesotans with the lowest incomes and the least ability to pay. Based on the most recent Minnesota Tax Incidence Study, rental property taxes in Minnesota are seven times more regressive than taxes in general.

The regressivity of rental taxes would be even worse if not for the renters’ property tax refund, which directs property tax relief to renters based on their ability to pay. According to the Minnesota Budget Project, 29 percent of refund recipients in Minnesota are seniors and people with disabilities. Click here for a map showing the percentage of renters’ refund recipients in each county that are seniors or disabled.

The Governor’s proposal to cut the renters’ refund would make rental property taxes even more regressive than they already are. Based on a measure of regressivity known as the “suits index,” the regressivity of rental property taxes in Minnesota would increase by approximately 16 percent under the Governor’s proposal.

The Pawlenty administration argues that the current renters’ refund program overstates the portion of rent attributable to property taxes, thereby leading to overly generous refund payments. Under current law, the portion of rent recognized as property taxes is 19 percent; based on information from 2003 and 2004, the Governor asserts that this percentage should be lowered to 16 percent, resulting in a statewide reduction to the renters’ credit of $34 million or 20 percent.

Given the large property tax increases in recent years, the wisdom of slashing the renters’ property tax refund in response to four year old data is questionable. With recent changes in the rental housing tax base, there is good reason to believe the information the Governor cites is no longer accurate.

For example, property taxes as a percentage of rent are higher for 1 to 3 unit buildings than for buildings with 4 or more units. Property taxes for 1 to 3 unit buildings have increased from 43 percent of statewide rental property taxes in 2004 to 62 percent in 2008. As the share of rental property taxes shifts to 1 to 3 unit buildings, the overall average of property taxes as a percent of rent will increase.

Because the cut to the renters’ refund will not affect the state’s budget until fiscal year 2010, it will do nothing to address the state’s budget deficit within the current biennium. In the long-term, the proposed cut to the renters’ refund will be used to offset the impact of the Governor’s sales tax reduction. Thus, the Governor is partially paying for a cut in regressive sales taxes through an increase in even more regressive rental property taxes.

Over the last several years, a larger percentage of the total tax burden in Minnesota has been shifted on to low-income households. The Governor’s attempt to balance the state’s budget deficit by increasing the property tax burden borne by renters will shift even more of the state’s tax burden on to households with the least ability to pay.

The Governor and legislature should seek solutions to the state’s budget problems that do not involve inflicting further pain on Minnesota’s most financially vulnerable residents.