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Non-partisan Research Projects Property Tax Decline

August 12, 2013 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

Statewide property taxes payable in 2014 are expected to decline by $181 million or 2.1 percent relative to what they would have been in the absence of changes made in the 2013 tax act passed by the Legislature last May. This reduction comes before factoring in the increase the homeowners’ and renters’ property tax refunds, according to a new simulation from the non-partisan Minnesota House Research Department.

Based on standard assumptions developed by non-partisan legislative and Revenue Department staff, approximately half of increase in city Local Government Aid, County Program Aid, and other state aids and half of the reduced costs resulting from the new local government sales tax exemption will translate into property tax relief, while the remainder will go toward funding increased local government services and infrastructure.* Property taxes are still expected to go down by $181 million, even after factoring in the increase in local government spending. Final 2014 property tax information will not be available until early in 2014, after certified levies for all local governments in the state are set and reported to the Department of Revenue.

The graph below shows the percent change in projected 2014 property taxes under the new tax act relative to what they would have been under previous law for seven major classes of property based on the House Research simulation.

On a statewide basis, all major classes of property in Minnesota are projected to see a property tax reduction under the new law relative to what taxes would have been under the old law, ranging from a 1.3 percent reduction for seasonal recreational properties to a 2.5 percent reduction for residential homestead, 1 to 3 unit rental, apartment, and agricultural properties.

The House Research simulation also shows the change in taxes for particular regions of the state. In each of the regions examined, total property taxes are projected to decline as a result of the tax act passed last May. The graph below shows the percent change in projected 2014 residential homestead and total property taxes under the new tax act relative to what they would have been under previous law for various regions based on data from the House Research simulation. For more information on the regions referenced in this graph, click here.

Among the 18 regions displayed in this graph, the projected decline in total property taxes ranges from a low of 0.8 percent in East Central Minnesota to high of 4.6 percent in South Central Minnesota. East Central Minnesota will see no decline in residential homestead property taxes, while residential homesteads in South Central Minnesota are expected to see a decline of 7.1 percent.

Up to this point, our analysis has focused on a comparison of 2014 property taxes under the old law relative to taxes under the new tax act enacted last May. A separate House Research simulation compares actual 2013 property taxes to projected 2014 property taxes under the new tax act. The following analysis will include only “existing properties” and exclude taxes on “new construction” (i.e., “property that will appear on the tax rolls for the first time in 2014”). A focus on existing property will provide a better indication of the average tax change for Minnesotans who owned property in both 2013 and 2014.

From 2013 to 2014, total statewide taxes on existing property are projected to decline by $63 million or 0.7 percent—the first year to year decline since 2001 to 2002; residential homestead property taxes alone are projected to drop by 3.1 percent. Similar reductions are expected to occur within most of the regions examined in the House Research simulation.  The graph below shows the projected percent change in residential homestead and total property taxes from 2013 to 2014 for various regions.

Total taxes on existing property are projected to increase in only three of the regions displayed in the above graph: the Taconite Area, East Central Minnesota, and Hennepin County. Even within these regions, the projected growth in taxes will be less than the projected rate of inflation, so that real (i.e., inflation-adjusted) property taxes decline. Among the remaining regions, total taxes are projected to decline from 0.3 percent (Northwest Minnesota) to 5.9 percent (Anoka County).

Taxes on existing residential homestead property are projected to drop from 2013 to 2014 in every region displayed in the above graph except one—the Taconite Area. In the remaining regions of the state, residential homestead property taxes are projected to decline from 0.6 percent (East Central Minnesota) to 9.7 percent (South Central Minnesota).

In 2013, progressive state policymakers decided to enact a progressive income tax increase rather than continuing to shift the state’s budget problems on to local taxpayers through regressive property taxes. As a result, taxes on existing property in Minnesota are projected to decline for the first time in over a decade. And this does not even factor in the property tax relief resulting from the new homestead credit refund and the increase in the renters’ property tax refund! More on this when this two part series concludes next week.

 

*As noted in the House Research simulation, the temporary levy limits in the 2013 tax act will also contribute to property tax reductions in some communities.

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2 Comments:

  • Mike Downing says:

    August 19, 2013 at 8:46 am

    Jeff,

    This article is like saying “on average” you’re OK with one foot in boiling water and one foot in freezing water.

    The background assumption in this article is that a community receives LGA. My Township receives no LGA so this article is meaningless to me and others in my community. We should at least get a “Thank You” for paying MN income tax to support the communities that get LGA and who received an increase in LGA.

    • Jeff Van Wychen says:

      August 19, 2013 at 11:52 am

      Residents of your township do benefit from the increase in County Program Aid and from a new township aid program.  Furthermore, you don’t have to live in a city to benefit from city LGA; anyone who works, recreates, or visits a city for any reason benefits from the police protection, transportation, and other public services and infrastructure that LGA helps to pay for.  Finally, your income taxes did not increase as a result of the 2013 tax act unless you’re among the wealthiest two percent; if you are among the top two percent, your state and local effective tax rate is probably still less than the statewide average.