The "why" behind homestead property tax increases

Last February, Minnesota 2020 compared the rapid growth in Minnesota homestead property taxes to the change in local government revenue from 2002 to 2008. That report, entitled “Sticker Shock: Why Property Taxes are Going Through the Roof in Minnesota”, found that the inflation-adjusted homestead property taxes in Minnesota increased from 2002 to 2008, while real per capita and per pupil local government revenue declined.

The information in that report was based on preliminary data for 2008. Today, an update based on final data.

The new information reveals the same basic trends that were observed last February. From 2002 to 2008, the average homestead property tax in Minnesota increased by 27.8 percent after adjusting for inflation in government purchases. (The average homestead tax increase is 69.6 percent if inflation is ignored.) Over the same period, real per capita county and city/town revenue declined by 12.7 percent and 10.0 percent respectively, while real per pupil school revenue declined by 3.4 percent.

Homestead property tax calculated using Minnesota Department of Revenue data. Local government revenue information from May 2008 end-of-session Price of Government report (Minnesota Department of Finance and Employee Relations). Population estimates and projections for per capita calculations derived from State Demographer’s data. Pupil count (average daily membership) for per pupil calculations from Minnesota Department of Education. Inflation adjustment based on implicit price deflator for state and local government purchases. County revenues adjusted for state takeover of court administration costs. Tax payable years 2002 to 2008 correspond to school district fiscal years 2003 to 2009.

Clearly, the growth in homestead property taxes cannot be attributed to statewide growth in local government revenue. Real per capita county and city/town revenue has undergone a double digit percent decline since 2002. In fact, data from the Minnesota Department of Finance and Employee Relations demonstrate that local governments have been far more frugal than state government over the last six years.

The table also shows the percentage change in the average homestead property tax from 2002 to 2008 with and without adjusting for inflation. It is worth noting that for three out of every four cities, the percentage change in county, city, and school district revenues are all less than the percentage growth in homestead property taxes. This is yet another indication that the statewide growth in homestead property taxes is driven by forces beyond increases in local budgets.

The statewide growth in homestead property taxes can’t be attributed to increasing homestead values. While estimated market value of homestead property certainly jumped since 2002, statewide homestead estimated market value grew less rapidly than other property categories. If the property tax burden was driven solely by estimated market value, the homestead share of statewide property tax burden should have decreased. Rather, the homestead share of the statewide property taxes increased from 41 percent in 2002 to 47 percent in 2008. Clearly, on a statewide basis homestead value growth does not explain the growth in homestead property taxes.

If growth in government revenue and growth in homestead values have not caused the statewide growth in homestead property taxes, what has? As originally noted in “Sticker Shock,” state aid cuts are the most significant contributor to property tax increases. Adjusted for inflation in government purchases, per pupil state aid to Minnesota school districts has declined by 13.4% from 2002 to 2008 (corresponding to school fiscal years 2003 to 2009), while state aid to counties and cities/towns have declined by 31.2 percent and 29.1 percent respectively.

Local government aid information from May 2008 end-of-session Price of Government report (Minnesota Department of Finance and Employee Relations). Population estimates and projections for per capita calculations derived from State Demographer’s data. Pupil count (average daily membership) for per pupil calculations from Minnesota Department of Education. Inflation adjustment based on implicit price deflator for state and local government purchases. County aid adjusted for state takeover of court administration costs. Tax payable years 2002 to 2008 correspond to school district fiscal years 2003 to 2009.

In constant current year dollars, total state aid to all Minnesota local governments has fallen by $2.3 billion from 2002 to 2008. The total local government property tax increase over the same period is $1.3 billion-one billion dollars less than the decline in state aid. Thus, the large reduction in state aid since 2002 is capable of explaining both (1) the large statewide decline in local government revenue since 2002 and (2) the large statewide increase in property taxes.

However, the decline in state aid does not explain why homestead property taxes have increased much more rapidly than that of most other classes of property. From 2002 to 2008, the rate of growth in homestead property taxes is nearly double that of all other classes of property combined.

The more rapid rate of growth in homestead property taxes is primarily the results of policies enacted at the state level. The tax act passed by the legislature during the 2001 session led to a large reduction in homestead property taxes in 2002; however, the same tax act also contributed to homestead property tax increases in subsequent years. The provisions of the 2001 tax act that contributed to homestead property tax increases beginning in 2003 include:

* Changes to the class rates assigned to various classes of property, which led to a shift of tax burden on to homesteads over time. * The phase-out of “limited market value,” a state program which restricted the rate of growth in taxable homestead value. As the program was phased-out, the rate of growth in taxable value exceeded the rate of growth in the actual sale price of the home. * The structure of the new homestead market value credit, which declined as homestead taxable value grew, thereby causing an accelerated rate of growth in the net tax paid by homeowners.

Each of these factors was more thoroughly described in “Sticker Shock.”

Finally, the more rapid rate of growth in homestead property taxes can be attributed to increases in “referendum market value” levies since 2002. With the large reduction in state aid since 2002, more and more school districts were compelled to go to voters with referenda for additional levy authority; many of the levies were referendum market value levies. Unlike ordinary levies, referendum market value levies provide no preferential treatment to homesteads; thus an increase in referendum market value levies leads to a more rapid rate of growth in homestead property taxes than do ordinary levies. From 2002 to 2008, over half of the increase in school levies has been in the form of referendum market value levies.

While increases in city Local Government Aid and County Program Aid in 2009 will provide some property tax relief in the upcoming year, the aggregate level of state aid to local governments, including categorical aids and school aids, is not expected to keep pace with inflation. Thus, despite declining home values, the statewide homestead property tax burden is nonetheless is expected to increase again in 2009.

The fact that homestead property taxes have increased well above the rate of inflation is clearly the result of state policies. The trend toward rising homestead property taxes is likely to continue until state leaders change these policies in favor of a fairer and more accountable tax system.