Exclusions, Credits, Market Value and You

As discussed in Friday’s blog post and in class on Wednesday night, property taxes in Minnesota went through a major policy overhaul at the end of the 2011 session. The Homestead Market Value Credit was eliminated and was replaced by the Homestead Market Value Exclusion. Tonight we discussed some of the different ways that tax rates and tax bills can change, our video specified 14, and Friday’s blog post focused on a specific way that the new property tax policy changes rates. I’d like to focus on a characteristic of the Exclusion that changes rates and bills in a subtle way: $1 of Credit and $1 of Exclusion, though theoretically equal in certain conditions, are usually not equal in practice.

Click Here! for an Excel workbook that I’ve assembled to help you follow along. Many of the values are changeable, crucially the local tax rate. The default setting is for a Homestead property in District Code 0151 (St. Paul - 625 (C))with an Estimated market value of $200,000. On the second sheet of the workbook are rates from all the different taxing districts in Ramsey County. 

So as I was saying, the Exclusion and the Credit, though they appear at first glance to be equal can in reality arrive at very different values of tax relief. Professor Zhao mentioned briefly in class that the benefit of the Credit and Exclusion can vary depending on the level of local tax. This is because Tax Credits are not dependent on tax rates and are applied after tax capacity has been determined. Tax Exclusions are applied before tax capacity has been determined, but more importantly, the value of a tax exclusion depends on the tax rate applied to that excluded property. If you’ve downloaded the workbook you can adjust the local tax rate to see what I mean. Click on the picture below for a larger image.

Here the Credit and the Exclusion are essentially equal. This is because the Excluded property would have been taxed at 100%, ergo the value of a $100 Exclusion would be $100. A $100 Credit is worth $100 no matter what the tax rate is. In the next picture the local tax rate is 155%, and you’ll notice that the tax bill under the exclusion has shrunk because its value has increased with the tax rate.

In the above example, $100 of Exclusion is worth $155, whereas $100 of Credit is only worth $100.

Finally, consider an example where the local tax rate is very low, in this case 15%. There are many places in Minnesota where the local tax rates are extremely low relative to the Metro area. This is why there was a significant uproar over replacing the credit, especially coming from the Rural areas. As you can see, the Exclusion in this case is worth far less than the Credit, and local tax bills have risen dramatically. In this scenario $100 of Exclusion is only worth $15, where $100 of Credit is still worth $100.

Whether or not the uproar over the Exclusion will be enough to reinstate the Market Value Credit remains to be seen, though there are signs that it could happen.