It is no secret that homestead property taxes in the east metro area have increased rapidly. For example, from 2002 to 2008 the average homestead property tax increased by 52 percent in Cottage Grove, 90 percent in Maplewood and 74 percent in Oakdale. What remains a mystery to many taxpayers is the reason for this.
Of course, inflation accounts for much of the increase. However, even after adjusting for inflation in the cost of government purchases, the average homestead tax in Cottage Grove, Maplewood and Oakdale increased by 14 percent, 42 percent and 30 percent respectively. What explains the growth in homestead property taxes above and beyond the rate of inflation?
One major cause is cuts in state aid to local governments. Modest cuts in state aid to local governments can be matched with budget cuts and do not necessarily cause property tax increases. However, aid cuts of the magnitude experienced over the past six years in Minnesota make property tax increases inevitable. From 2002 to 2008, total real per capita state aid to Minnesota local governments has declined by 23 percent.
The east metro area certainly has not been immune from state aid cuts. For example, undedicated state aid to Ramsey and Washington counties has been cut by more than a third since 2002 after adjusting for inflation. Dedicated aid to counties for state mandated programs has also been reduced at the same time that the state has shifted additional costs onto county taxpayers. Property taxes in Ramsey and Washington have increased not to pay for new county spending, but to replace state aid cuts.
Aid cuts have not been restricted to counties. Since 2002, the cities of Cottage Grove, Maplewood and Oakdale have lost all of their Local Government Aid – a total of $2.3 million in property tax relief permanently eliminated. Real per pupil operating state aid to School District 622 (which includes most of Maplewood and Oakdale) and 833 (which includes Cottage Grove) have each fallen by approximately 12 percent since 2002.
Another major cause of homestead property taxes increases around the state and in the east metro is changes to the property tax system enacted in 2001. These changes gave a windfall of homestead property tax relief in 2002. However, the same legislation made structural changes to the property tax system that would cause homestead property taxes to increase in subsequent years even if local spending did not increase by a single cent.
For example, in 2002 the state put in place a new “market value homestead credit.” Since its inception, the amount of this credit received by homeowners in Cottage Grove, Maplewood and Oakdale has fallen by nearly one-third even without adjusting for inflation. As the homestead credit falls, homestead property taxes increase.
Other explanations given for homestead property tax increases do not hold up. For example, growth in homestead property taxes has frequently been blamed on growth in home values. While homestead values have grown in recent years, this does not explain the growth in homestead taxes in Cottage Grove, Maplewood and Oakdale because the values of other classes of property grew equally or even more rapidly.
Growth in homestead taxes in these cities also cannot be attributed to growth in local government budgets. In real (i.e., inflation-adjusted) dollars per capita, the revenue base in Cottage Grove, Maplewood and Oakdale, and in Ramsey and Washington counties remained flat or declined. Real per pupil school revenue declined in Cottage Grove, but increased by approximately 6 percent in Maplewood and Oakdale. However, this 6 percent growth in school revenue is certainly not sufficient to explain average real homestead property tax increases of 42 percent in Maplewood and 30 percent in Oakdale.
The primary cause of homestead property tax increases in Cottage Grove, Maplewood, and Oakdale is not market forces or growth in local government spending, but rather decisions made at the State Capitol. It is time for our legislators and governor – who are continually talking about the need for accountability – to acknowledge this fact.