At the same that he is proposing tax cuts for Minnesota corporations, Governor Pawlenty is proposing a tax increase for Minnesota renters. Specifically, the Governor wants to cut the renters’ property tax refund, thereby increasing the portion of property taxes shouldered by renters.
This proposal is a rehash of a similar proposal made last year. During the 2008 legislative session, the Governor proposed reducing the renters’ property tax refund and increasing the net tax burden of Minnesota renters by $34 million. This year, the Governor would like to reach even deeper into the pockets of renters, to the tune of $51 million. This translates to a 27 percent reduction in the renters’ refund.
Even before the cuts to the renters’ property tax refund proposed by the Governor, the statewide growth in the refund was failing to keep pace with growth in rental property taxes. From pay 2004 to pay 2009, statewide rental property taxes have increased at a pace three times greater than that of the renters’ refund.
Rental property taxes are regressive, meaning that a disproportionate share of this tax falls on taxpayers with the lowest incomes and the least ability to pay. An unfortunate byproduct of the decline in the renters’ refund relative to total rental property taxes is that rental property taxes have grown even more regressive over the last five years.
The progressivity or regressivity of a tax can be measured using the “suits index.” A suits index with a negative value denotes tax regressivity; the further below zero, the greater the degree of regressivity. Based on data from the 2007 Minnesota Tax Incidence Study, rental property taxes after the property tax refund had a suits index of -0.120, which denotes significant regressivity. By 2009, the regressivity of rental property taxes as measured by the suits index is projected to nearly double to -0.239.
The primary cause of the dramatic growth in rental property tax regressivity from 2004 to 2009 is the failure of growth in the renters’ refund to keep pace with growth in rental property taxes. The Governor’s proposed cut to the renters’ refund would accelerate the slide of rental property taxes toward even greater regressivity. The rental property tax suits index would drop to approximately -0.295 if the state chops $51 million from the renters’ refund, as the Governor is proposing.
The rationale that the Governor gives for cutting the renters’ refund is that the portion of rent attributed to property taxes is overstated, 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 15 percent.
However, due to changes in the composition of the rental housing tax base in recent years, there is good reason to believe that the information that the Governor is citing as a basis for reducing renters’ refunds and increasing the share of property taxes paid by renters is no longer current.
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 from 1 to 3 unit buildings have increased from 43 percent of statewide rental property taxes in 2004 to 63 percent in 2009. As the share of property taxes paid shifts more toward 1 to 3 unit buildings, the overall average of property taxes as a percent of rent will increase. Thus, the information used by the Governor to argue for reducing the percentage of rent recognized as property taxes may no longer be accurate.
Furthermore, the total statewide renters’ refund payment is shaped in large part by arbitrary percentages that are written into state law. The income threshold, the amount of the refund as a percentage of the property tax, and the maximum allowable refund are not based on hard social science, but on legislative preferences. The reduction in the refund resulting from reducing the percentage of rent recognized as property taxes could be offset by increasing other arbitrary parameters of the refund so that the total amount of property tax relief received by low-income Minnesotans would not be reduced.
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 proposal to cut the renters’ refund would accelerate this drift toward greater regressivity. As it did in 2008, the legislature should reject the Governor’s proposal to shift a larger percentage of the tax burden on to Minnesota’s most financially vulnerable families.