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2013 Tax Act: Best Deal for Homeowners in 30 Years

September 08, 2014 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

Over the last three decades, years in which statewide homeowner property taxes fell were rare. The largest reduction occurred from 2001 to 2002 and was the result of the 2001 tax act. The second largest occurred from 2013 to 2014 and was driven primarily by the 2013 and 2014 tax acts.* While the 2013 and 2014 acts provided far less immediate relief than the 2001 act, over the long haul they should turn out to be a much better deal for Minnesota homeowners.

The aggregate homeowner property tax reduction from 2001 to 2002 was approximately 16 percent—over three times greater than the aggregate 5.2 percent reduction from 2013 to 2014. However, tucked away within the pages of the tax act that delivered the 2002 property tax reductions were provisions that—as noted in part 1 of this series—caused homeowner property taxes to escalate in subsequent years. Over the long haul, the 2001 tax act turned out to be a bad deal for homeowners. The tax relief provided to homeowners in the 2013 tax act—while not initially as grand as that delivered in the 2001 tax act—should turn out to be more reliable over the long term, provided that future legislatures don’t screw it up.

A major reason the 2013 tax act should provide more stable long-term property tax relief for homeowners has to do with the primary mechanism for delivering that relief: the expanded homestead credit refund. This refund program—in essence an expansion of the pre-existing homeowner property tax refund—is paid directly to homeowners. The direct and transparent nature of the homestead credit refund will make it politically difficult for state policymakers to cut it in response to state budget problems, since any cut to the refund will take tax relief dollars directly out of the pockets of homeowners, leading to political repercussions that legislators would just as soon avoid.

Contrast this to the principal mechanism for targeting tax relief to homeowners created in the 2001 tax act: the homestead market value credit. This credit was an appealing target for budget cutters because it was paid to local governments, rather than directly to homeowners. It is easier for state policymakers to cut payments to local governments than to homeowners because local governments don’t vote, while homeowners do. While at least some portion of payment cuts to local governments ultimately translate into higher property taxes, it is easy for state officials to blame the resulting tax hikes on local elected officials. No such obfuscation is possible when the tax relief is paid directly to homeowners, as is the case with the homestead credit refund.

The vulnerability of the homestead market value credit to budget cuts was repeatedly demonstrated over its ten year history (2002-2011). In eight of these ten years, the credit was reduced below its statutorily prescribed level. Contrast this with the precursor of the homestead credit refund—the homeowner property tax refund—which was not cut a single time over this period.

In addition to being more resistant to budget cuts, the homestead credit refund is superior to the old homestead market value credit in other ways as well. For example:

  • The homestead credit refund effectively targets tax relief to homeowners who have high property taxes relative to their ability to pay; the market value credit did not.
  • On a dollar for dollar basis, the homestead credit refund is much more efficient in reducing tax regressivity than the old market value credit.
  • Homestead credit refund payments tend to increase as property taxes increase, thereby keeping pace with the demand for property tax relief; the exact opposite tended to happen under the market value credit, for reasons noted in part 1.

In short, the 2013 tax act should provide more stable long-term property tax relief to homeowners because—unlike the 2001 act—it targets tax relief to homeowners through a more reliable mechanism and does not contain any ticking time bombs that will explode in the face of homeowners down the road.

Of course, policymakers cannot guarantee that property taxes will never rise again, short of imposing property tax freezes or caps—a cure to the problem of rising property taxes that is worse than the disease. Future property tax growth will always be a possibility—if only to keep pace with growth in government costs resulting from inflation and population growth. In addition, shifts in property values can contribute to homeowner property tax increases or decreases; such shifts are unavoidable in an ad valorem property tax system.

The best thing that state policymakers can do to protect homeowners from unreasonable property tax increases over the long haul is to establish reliable and adequately funded programs that direct tax relief to those who need it most. In 2013 and 2014, the state legislature did precisely this not only by reforming and increasing state aid to local governments, but more importantly by expanding the property tax refund program in the form of the homestead credit refund. This type of refund has historically enjoyed broad bi-partisan support because it is transparent, efficient, and well targeted. While the 2013 and 2014 tax acts did not provide the largest homeowner property tax relief in recent history, they did provide the best.

*Most of the “heavy lifting” in terms of property tax reform occurred in the 2013 tax act and included permanent increases in homeowners and renters property tax refunds, reform of the city Local Government Aid formula, and increases in various state aids to local governments. From a property tax perspective, the changes in the 2014 tax acts were comparatively minor; the changes in the 2014 acts that affect property taxes payable in 2014 include one-time increases to the property tax refunds and an increase in the agricultural land market value credit.

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