Progressive property tax reform

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Minnesota’s property tax is regressive, meaning that a disproportionate share of the property tax burden falls upon those with the least ability to pay. In recent years, both the amount of statewide property taxes and the degree of property tax regressivity have increased, contributing to the overall growth in tax regressivity in Minnesota.

Credit the Minnesota House with coming up with a resourceful way of tackling tax fairness.

The simplest way of dealing with the property tax’s regressivity is to reduce the state’s reliance on property taxes and increase the reliance on fair, progressive taxes such as the income tax. However, this option has been precluded by Governor Pawlenty and his “no new tax” allies, who refuse to consider an increase in progressive income taxes to cut regressive property taxes.

Rather than resigning themselves to a deeper slide into the pit of tax regressivity, the House has come up with a novel approach. If a substantial decrease in reliance on the property tax is impossible due to the Governor’s obstructions, at least measures can be taken to make the property tax less regressive.

Three major programs for providing homestead property tax relief are:

1. The homeowners’ property tax refund.

2. The homestead market value credit.

3. The state income tax deduction for property taxes.

Of these three programs, only the first targets property tax relief based on the ability to pay. The property tax refund, also referred to as the circuit breaker, is income-tested so that property tax relief is directed to low and moderate income households.

The other two programs-the homestead market value credit and the income tax deduction for property taxes-do nothing to direct property tax relief based on ability to pay. The House approach is to eliminate or phase-out the untargeted property tax relief programs so that state resources can be concentrated on the targeted property tax refund, thereby making the property tax a little fairer.

The enhanced property tax refund program-referred to as the “homestead credit state refund”-refunds a significant portion of homeowner property taxes in excess of two percent of household income. All homeowners with a household income under $200,000 potentially qualify for this refund; in this way, all but the wealthiest homeowners qualify for property tax relief.

The following charts show the net tax increase or decrease for four different homeowners under the House plan for taxes payable in 2009, taking into account the new homestead credit state refund, the repeal of the existing property tax refund program, and the elimination of the income tax deduction for property taxes. The table below the graph outlines the assumptions used to calculate the net tax change.


The amounts in this graph were calculated using a property tax relief calculator created by the Research Department of the Minnesota House of Representatives. Using this calculator, it is possible to compute the net change in tax relief for homeowners with varying levels of income, home value, and property tax. To use this calculator, click here. (Excel Required)

Based on the examples in the graph, all homeowners see tax relief under the House plan except the “very high income” homeowner. However, the net loss of tax relief under the plan for the “very high income” homeowner comes to less than two-tenths of one percent of household income. Even with this loss of tax relief, the total state and local tax burden as a percent of income will probably still be considerably less for the “very high income” homeowner than for the other three homeowners based on the 2007 Tax Incidence Study from the Minnesota Department of Revenue.

Ideally, property tax relief should be provided to all Minnesotans. However, given the Governor’s refusal to consider an increase in progressive income taxes to provide property tax relief for all, the House was faced with two choices: (1) do nothing or (2) rearrange the tax system so that the available property tax relief dollars would go to those who need the relief most. They chose the latter.

The House proposal to target property tax relief based on ability to pay is an important step toward tax fairness. The Governor and the public should give it serious consideration.