Let’s Say it Again, Property Taxes Going Down
Jeff Van Wychen, Minnesota 2020, August 19, 2013 – Mayors of Minnesota’s two largest cities sung the praises of new property tax relief recently enacted by progressive lawmakers. The proposed 2014 Minneapolis budget cuts property taxes, while St. Paul’s budget holds the property tax levy flat, according to announcements last week. In both communities, city taxes on existing property will decline. The new tax laws and local government funding take a tremendous amount of pressure off city, county, and school leaders who’ve seen shared revenue from the state slashed significantly over the past decade, forcing them to cut budgets deeply and increase property taxes to maintain local services.
Thanks to a new fiscal direction from the state, overall taxes on existing property in Minnesota are projected to decrease by $63 million or 0.7 percent from 2013 to 2014—the first decline in twelve years. For existing residential homestead property taxes, the state is anticipating a significant 3.1 percent decline. And there’s more good news for Minnesota homeowners: these property tax reductions do not even factor in the single largest property tax relief enhancement in the 2013 tax act: the new homestead credit refund.
Part 1 of this series based property tax projections on new simulations from the non-partisan Minnesota House Research Department. These simulations do not include the impact of the expanded homeowners’ property tax refund (PTR)—renamed the homestead credit refund—or the increased funding for the renters’ PTR, both part of the new tax act passed by the Legislature in May. Fortunately,new information from the Minnesota Department of Revenue (DOR) tracks the total statewide property tax amounts after factoring in the property tax refunds. In fact, the DOR information shows total statewide property taxes after PTRs for every year from 2001 through projected 2014.
After factoring in the effects of the PTR increases, total statewide property taxes in Minnesota are projected to decline by $121 million or 1.5 percent from 2013 to 2014. The information from DOR includes the property tax growth due to new construction. The projected property tax decrease for existing property (i.e., excluding new construction) is approximately $190 million or two percent.*
The graph below shows the change relative to the previous year in total statewide property taxes after subtracting PTR payments for each year from 2002 to projected 2014, based on the new DOR information. The property tax change shown in this table includes the tax growth due to new construction; excluding new construction would reduce the magnitude of tax growth or increase the magnitude of tax reductions in each year.
The largest reduction in statewide property taxes in recent history (since at least the 1970s) occurred in 2002, when the state eliminated the general education property tax. However, the state was unable to maintain its commitment to fully fund general education over the course of the next decade. Gradually, inflation-adjusted state aid to school districts and other levels of local government was slashed, thereby compelling local governments to increase property taxes at the same time that they were trimming their budgets. As a result, total statewide property taxes after PTR payments increased every year from 2003 to 2013 at an annual average rate of 5.6 percent.
This trend in net property tax growth is finally projected to end in 2014, thanks to the new 2013 tax act passed by the Legislature last May. The centerpiece of the property tax relief provisions in the 2013 tax act is the new homestead credit refund, which is an expanded version of the homeowner PTR program. Other important property tax relief measures include an increase in the renters’ PTR and enhanced funding for County Program Aid and city Local Government Aid (including a new and improved city LGA formula), which will partially replace funding cuts to these programs over the preceding decade.
As a result of the new homestead credit refund, homestead property taxes are projected to take a particularly dramatic dip in 2014.† Statewide homestead property taxes after the refund are expected to fall by $209 million or 6.4 percent from 2013 to 2014, based on a Minnesota 2020 estimate derived using data from the recent DOR and House Research simulations. Excluding new construction, taxes on existing homesteads are projected to fall by approximately $230 million or about seven percent.
All this goes to show that elections really do have consequences. Without progressive majorities in the Minnesota House and Senate and without a progressive governor, it is a pretty safe bet that a progressive income tax increase would not have become law. That progressive income tax increase is what made the property tax relief in the 2013 tax act and the projected 2014 property tax reductions possible. In 2013, progressive state policymakers asked the wealthiest two percent of Minnesotans to pay something closer to their fair share‡ so that the rest of the state could get a reprieve from perennial property tax increases.
*A focus on existing property provides a better indication of the change in total taxes on property that existed in both 2013 and 2014. Unfortunately, the DOR information cited here does not distinguish between existing property and new construction. The estimated $190 (two percent) reduction cited here was calculated by combining the new DOR information with information from the House Research simulations discussed in part 1 of this series.
†These calculations include both residential homestead and the house, garage, and one acre of agricultural homestead property. It is necessary to combine both classes when doing calculations that involve the homestead credit refund.
‡Technically speaking, high income Minnesota households are still not paying their full “fair share” as measured by effective tax rates (i.e., total state and local taxes as a percentage of personal income), even after passage of the 2013 tax act. As noted in a recent Hindsight post, the top one percent and the top five percent of all Minnesota households by income will continue to have a state and local effective tax rate that is less than that paid by other income groups, even after enactment of the 2013 tax act.