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2014 Homeowner Property Tax Reduction is Wide & Deep

July 21, 2014 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

The fact that Minnesota property taxes will decline in 2014 for the first time in twelve years is well established. However, a new simulation from non-partisan staff at the Minnesota House Research Department reveals the breadth and depth of those tax reductions. From 2013 to 2014, taxes on existing residential homestead property will decline statewide by $171 million or 5.2 percent; total homeowner property taxes in 80 of the 87 Minnesota counties—containing 93 percent of residential homesteads in the state—will drop.

Credit for the 2014 homestead property tax reductions largely goes to progressive legislation passed during the 2013 and 2014 legislative sessions—especially the new homestead credit refund. The homestead credit refund—part of the 2013 omnibus tax act—is a souped-up version of the old homeowner property tax refund (PTR) that targets property tax relief to homeowners who have high property taxes relative to their income. The credit was further enhanced during the second tax act of the 2014 session on a one-time basis. Among policy wonks, the PTR has long been a popular mechanism for delivering property tax relief because it is targeted based on the ability to pay.

A comparison data from the new House Research simulation and previous simulations reveals that the new homestead credit refund enacted in 2013 and enhanced in 2014 is responsible for 70 percent of the reduction in taxes on existing homestead property in 2014. Other factors—including state aid increases enacted in 2013 and a decline in homestead values relative to other types of property—explain the remaining decline from 2013 to 2014.

Among the twenty largest counties in the state, two will see 2013 to 2014 tax reductions on existing residential homesteads in excess of 10 percent, while nine see will reductions in excess of 5 percent. Only one, Saint Louis County, will see a tax increase—and even that increase (0.7 percent) is well below the rate of inflation. The fact that Saint Louis alone among the twenty largest counties will experience a tax increase from 2013 to 2014 is not surprising, given that it had the lowest 2013 average residential homestead tax and the lowest homestead tax as a percent of income among these counties.* This is a clear indication that the 2013 and 2014 tax acts successfully directed the bulk of tax relief to areas in which average homestead taxes and homeowner taxes as a percent of income are greatest.

An analysis of all 87 counties reveals that average residential homestead taxes and taxes as a percent of income are significantly higher among the 80 counties that will see a 2014 reduction in existing residential homestead taxes than among the seven counties that will see an increase. For example, the 2013 average residential tax among the 80 counties with a 2014 tax reduction was $2,554—$1,100 (75 percent) greater than among the seven counties that experienced a 2014 tax increase. Rather than distributing property tax relief randomly across the state, the 2013 and 2014 tax acts successfully targeted tax relief to homeowners with the highest property taxes through the homestead credit refund.

A recent Minnesota 2020 analysis of Minnesota Revenue Department data demonstrated that the 2013 and 2014 tax acts resulted in a net tax reduction for most Minnesota taxpayers, with the largest tax reductions occurring among middle-income households. The homestead credit refund, along with federal conformity provisions related to the marriage penalty, the student loan interest deduction, and the mortgage insurance premium deduction, were the primary mechanisms for achieving this middle-class tax relief.

After a decade in which “no new state tax” policies contributed to a 6 percent annual average increase in residential homestead property taxes, homeowner taxes are finally falling for the vast majority of Minnesota homeowners in the vast majority of Minnesota counties. At the same time, public investments in education, infrastructure, and other areas have been enhanced, the state budget has been balanced responsibly, and Minnesota’s tax system has become more fair. Credit smart progressive leadership at the State Capitol for these accomplishments.

 

*Homestead taxes as a percentage of homeowner income for Minnesota counties were calculated by combining residential homestead tax information from the House Research simulation with owner-occupied household income data from the American Community Survey, published by the U.S. Census Bureau.

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5 Comments:

  • Tim Gieseke says:

    July 28, 2014 at 8:48 am

    Since this property tax refund is tied to the ability to pay, does this not act as another income-related tax?
    I understand political strategies that are designed to make bad policy, not as bad.  Do you see this policy as falling into that category; that is to say our property tax system is not properly designed, so this is the corrective action.

    • Dan Conner says:

      July 28, 2014 at 10:54 am

      Considering the one small element of regression in the property tax, adding the element of income would help reduce even that regressive effect.  A chief concern of conservatives has been about the affect rising property taxes have on people of limited income.  Linking the property tax to income, in this way, will help mitigate that.

  • Mike Downing says:

    July 28, 2014 at 1:12 pm

    Jeff does a good job of describing the state wide property tax situation. The VOSS report from the MN Department of Revenue clearly shows property taxes are VERY regressive with high income people paying 1-2% of their income on property taxes and low income people paying 5+% of their income on property taxes. It is even more egregious for retired seniors on fixed incomes where many pay 10-25% of their income on property taxes.

    • Dan Conner says:

      August 25, 2014 at 9:19 am

      Well, there’s several fixes for that.  While property taxes could definitely be reduced for the poor, they should greatly be increased on the rich.  A move toward equity.  The rich too often “skate” in our country/state.

      • Mike Downing says:

        August 25, 2014 at 1:53 pm

        It’s a miracle! I agree with Dan.

        Having an income based property tax system would increase the current average of 1% tax rate for the rich on property and decrease the 5, 10 & 20% tax rates for the poor and retired seniors on property tax. (See DOR’s VOSS report for confirmation).