Minnesota Property Taxes by the Numbers: 2009 Edition

April 20, 2009 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

Since 2002, Minnesota property taxes, in general, and homeowner property taxes, in particular, have increased rapidly.  The cause of the statewide growth in property taxes is not growth in local government budgets. These property tax hikes are the result of state policies that require more public costs to be borne by property taxpayers and a larger share of total property taxes to be borne by homeowners.

Of the 854 cities in Minnesota, 677 (79.3 percent) experienced an increase in per capita property taxes from 2002 to 2009, while 560 (65.6 percent) experienced an increase of ten percent or more.

The average homestead* property tax among Minnesota cities has increased even more rapidly than per capita taxes.  Of Minnesota's 854 cities, 746 (87.4 percent) saw an increase in the average homestead property tax from 2002 to 2009, while 530 (62.1 percent) experienced an increase of 20 percent or more.

It is important to adjust for the impact of inflation when assessing changes in state and local government revenue over time so as to distinguish between real spending growth versus growth caused by erosion in the purchasing power of the dollar. In this report, all changes in tax and revenue amounts over time are adjusted for inflation in the cost of state and local government purchases, unless otherwise noted.

Appendices A and B show growth from 2002 to 2009 in per capita property taxes and average homestead property taxes for all Minnesota cities with a population over 5,000.

On a statewide basis, the rapid growth in property taxes in Minnesota since 2002 cannot be attributed to growth in local government budgets.  While the average Minnesota homestead property tax has increased by over 25 percent from 2002 to 2008, per capita county, city and township and per pupil school district revenue have all fallen.

State Aid Cuts Force Property Taxes Up
If growth in local government budgets does not explain the growth in property taxes, what does?  State policies have caused property taxes, generally, and homestead property taxes, specifically, to increase rapidly since 2002.

The primary cause of statewide property tax growth is reductions in state aid to local governments.  From 2002 to 2008, state aid to local governments declined by $2.4 billion in 2008 dollars.  In response to these aid reductions, local governments increased property taxes and cut spending, as illustrated below.

On a statewide basis, local governments recovered slightly less than half of the $2.4 billion state aid reduction through property tax increases.  The rest of the aid cut was made up for through cuts in funding for schools, roads, parks, public safety, and other public services.  One thing is certain: the claim that statewide property tax growth in Minnesota since 2002 is the result of increased local government spending is demonstrably false.  Growth in local spending could not have caused property tax increases during a period when local government budgets were shrinking. In fact, local governments have been tightening their belts much more than state government.

During the same period that state aid to local governments fell by $2.4 billion, the population that local governments must provide service to increased by approximately five percent (although statewide school enrollment declined by one percent).  In addition, over this six year span, new testing requirements and higher standards were foisted on to school districts and additional state costs were shifted on to counties.

The basic pattern observed for all local governments is also apparent when we examine the three major levels of local government-counties, cities, and school districts-individually.  For all three levels of government, cuts in state aid have caused both reduced funding for local services and higher property taxes.

Homeowners Shoulder Higher Tax Burden
However, state aid cuts do not explain why homestead property taxes have risen more rapidly than the average for all other types of property.  The more rapid rate of growth in homestead property taxes since 2002 is largely attributable to repercussions of the state's 2001 tax act.  Specifically:

  • Changes in the rate at which various classes of property were assessed contributed to a shift of local taxes on to homesteads.  While an initial increase in homestead property taxes in 2002 was prevented through the elimination of the general education property taxes, subsequent shifts in 2003 and 2004 were allowed to occur.
  • The new "market value homestead credit" was structured in such a way that the amount of the credit would shrink as the taxable value of homesteads increased.  As homestead taxable value increased, the amount of the credit fell and net homestead property taxes grew.
  • In exchange for a sizeable reduction in local property taxes, the 2001 tax act imposed a new state property tax on businesses (and seasonal recreational properties).  This state property tax was insulated from the state aid cuts that were pushing local property taxes upward. The fact that a portion of business property taxes were protected from the impact of state aid cuts is among the reasons that business property taxes have grown less rapidly than homestead property taxes since 2002.
  • The phase-out of the limited market value program (i.e., a program that limits the rate of taxable value growth for homesteads and some other classes of property) contributed to homestead property tax increases in 2003 and for at least the next two years.

Further compounding the growth in homestead property taxes are cuts in state funding for education, which have stimulated growth in "referendum market value levies" as school districts seek to replace declining state aid dollars.  Referendum market value levies fall more heavily on homestead properties than do ordinary levies, thereby accelerating the rate of growth in homestead property taxes.

Fair, Progressive Tax Policy Needed
State policymakers need to come clean about the true cause of rising property taxes in Minnesota.  Since 2002, the rapid growth in property taxes, in general, and homestead property taxes, in particular, is primarily the result of state policies, not local spending decisions.  True reform to the property tax and state aid systems will not come about until policymakers acknowledge-or citizens compel them to acknowledge-the real causes of property tax increases.

Minnesota 2020 is calling on state leaders to stop large state aid cuts that result in additional increases to local property taxes and to fix state policies that shift a greater share of property taxes on to homeowners over time.

At the same time, state leaders must ensure that Minnesota's tax system is fair and progressive by ensuring that a disproportionate share of the cost of public services and infrastructure is not borne by families with the least ability to pay. A fair tax system is needed in Minnesota to ensure a balanced budget, healthy communities, and a thriving statewide economy.

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