Reducing Regressivity Through Renters’ Refund
Dollar for dollar, one program does more than any other to reduce taxes paid by low income Minnesotans: the renters’ property tax refund (PTR). Unfortunately, funding for this powerfully progressive program was temporarily cut in 2010 and permanently cut in 2011; in addition to these cuts, there were unsuccessful attempts to cut the renters' PTR prior to 2010 and again in 2012. During the 2013 legislative session, state lawmakers will have the opportunity restore needed funding for the renters' PTR.
Minnesota’s state and local tax system is regressive, meaning that a disproportionate share of state and local taxes is borne by low and middle-income households. Economists measure the regressivity (or progressivity) of a tax using a statistic referred to as the Suits index. A Suits index of +1.0 indicates a tax that is completely progressive, while an index on -1.0 indicates a tax that is completely regressive. A Suits index can be calculated for individual taxes or for an entire tax system.
While renters do not pay property taxes directly, property taxes are passed on to renters in the form of higher rents. Information on the share of rental property taxes borne by renters cited in this article is based on tax year 2008 data from the 2011 Minnesota Tax Incidence Study Study (MTIS).
Property taxes in general are significantly regressive, but no category of property tax is more regressive than rental property taxes. The Suits index for all Minnesota property taxes is -0.176, while the Suits index of rental property taxes is a whopping -0.315.* Just how regressive is a tax with a Suits index of -0.315? The rental property tax effective tax rate (i.e., gross rental property taxes as a percentage of income) for the poorest 20 percent of Minnesota households (income under $16,300) is approximately 25 times greater than it is for the wealthiest 20 percent. Of the major Minnesota taxes,† only cigarette and tobacco excise taxes are more regressive.
The renters’ PTR is a powerful tool for reducing the regressivity of rental property taxes. The renters’ PTR targets tax relief to renters whose estimated rental property tax payment (paid in the form of higher rents) is high relative to their income. For example, for refunds filed for in 2013 (based on taxes paid in 2012), a renter with an annual income of $12,000 and rental property taxes of $1,000 will receive a refund equal to 85 percent of the tax in excess of 1.3 percent of income—or $717. Meanwhile, a renter with double this income ($24,000) and the same property tax will receive a refund equal to 75 percent of the tax in excess of 1.7 percent of income—or $444.‡ The income-sensitive nature of the renters’ PTR ensures that refunds are targeted to renters with the greatest need of property tax relief.
The renters’ property tax refund is the single most progressive program in Minnesota’s tax system, with a Suits index of +0.893. The powerfully progressive nature of the renters’ PTR is sufficient to reduce the regressivity of Minnesota’s rental property tax as measured by the Suits index from -0.315 to -0.140, which is still significantly regressive but much more in line with other categories of property taxes in Minnesota, as illustrated below.
Like renters, Minnesota homeowners also qualify for an income-sensitive property tax refund. For this reason, the above graph shows the Suits index for these two types of property before and after the refund. By reducing the regressivity of homeowner and renter property taxes, these two refunds also reduce the overall regressivity of total Minnesota property taxes. Thus, the above graph also shows the Suits index for total property taxes before and after the PTR programs. The combined height of the red and blue bars indicate the Suits index before the PTR, while the blue portion alone denotes the Suits after the PTR. The PTR does not apply to commercial/industrial and farm land property taxes; the Suits index for these two types of property are denoted in green.
Through the PTR program, the regressivity of rental property taxes is reduced to the point that it is only slightly more regressive than the tax on other types of property based on 2008 data. Unfortunately, the $26 million permanent annual cut to the renters' PTR made during the 2011 legislative session is not reflected in the 2008 data used in this analysis. (The impact of this cut will be reflected in the 2013 MTIS, to be released in March.) As a result of the cut, the renters’ PTR is not as effective in reducing rental property tax regressivity as it once was. If the $26 million cut had been applied to the 2008 data used in this analysis, the renters’ PTR would have been sufficient to reduce the rental property tax Suits index to only about -0.17 instead of -0.140.
Fortunately, several pieces of legislation have been introduced during the 2013 that will restore at least a portion of the regressive 2011 renters’ PTR funding cut, including House File (HF) 126, HF 173, and HF 2. These bills are expected to be heard before the Minnesota House Property Tax Division in the near future.
Nearly all legislators--progressives and conservatives alike--pay lip service to the notion of reducing taxes on low-income Minnesotans. During the 2013 legislative session, legislators who say they support reducing tax regressivity will have the opportunity to do something about it by restoring funding for the renters’ property tax refund. Dollar for dollar, no other program on the books does more to help those Minnesotans in greatest need of tax relief.
*All Suits indices and tax incidence information cited in this article are based on 2008 tax year data from the 2011 MTIS. Suits indices cited here were calculated using population decile data.
† “Major taxes” are defined here as taxes that generate more than $400 million in tax year 2008 based on the 2011 MTIS.
‡ The Minnesota Department of Revenue website contains a table for refunds filed in 2013 (based on taxes paid in 2012) showing the threshold of income that rental property taxes must exceed before a renter can qualify for a refund, the renter’s co-pay, and the maximum refund amount for all income levels.