Property taxes in Minnesota are likely to increase in 2012. To understand why, we have to look back to 2011’s heated legislative budget debates which led to a three-week shutdown of almost all state government functions. Many of us that were eagerly awaiting an end to the shut-down (or at least for people to stop talking about it) may have missed an important detail in the agreement that finally ended it concerning property tax relief. The Homestead Market Value Credit, a pool of state funding set aside for local property tax relief (estimated at $260 million for 2012), was eliminated. In its place, Governor Dayton and state legislatures agreed to replace it with the Homestead Market Value Exclusion, which excludes a certain percentage of a home’s value, up to $414,000, from property taxes.
There are a few factors that explain why this change from credit to exclusion will lead to higher property taxes for Minnesotans. The simplest explanation is that the state is no longer providing this funding, so meeting the same property tax levies will require taxpayers to pony up more dough to fill the gap. Less intuitive, however, is the understanding that the reduction in the taxable value caused by the exclusion will increase tax rates. Because the overall tax base has decreased, local governments must raise tax rates to meet the same levies. This is further complicated by the reduction of home values caused by current conditions in the housing market. To understand more about this change in property tax relief, read this document provided by the Minnesota Department of Revenue, and watch this video by Minnesota Public Radio.
Shifting the need to raise revenues for property tax relief from states to local governments makes sense from an efficiency standpoint. Because demand for housing is somewhat more inelastic than income and goods charged a sales tax, increasing property taxes will generally result in less efficiency loss than increasing income or sales taxes. However, property tax relief was established on the value of equity—particularly ability-to-pay—so it is important to assess this new tax structure in terms of equity and who is paying the highest burden.
The Homestead Market Value Exclusion is set up on a sliding scale which excludes a higher percentage from homes with lower valuations. In this regard, the Homestead Exclusion is an appropriately progressive form of tax relief. Underneath the surface, however, is a more intriguing shift in the property tax incidence. Because the tax base from homesteads is reduced by the exclusion, properties with higher values and other property types, such as businesses and rental properties, will have to pay a larger share of the tax. Thus, the exclusion places a larger burden on certain taxpayers, depending on what type of community they live in. Cities with higher concentrations of businesses, factories, and apartment buildings have properties that can absorb some of that tax burden, while more rural or strictly suburban communities will have homeowners taking a larger share of the burden. Therefore, the new Homestead Exclusion is arguably less equitable to many middle-class families living in Minnesota.