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Minnesota 2020 Property Tax Report: 2002-2010

August 31, 2010 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis
Property taxes in Minnesota have soared since 2002, the product of state policies that have shifted more public costs on to property tax and more of the property tax on to homeowners.  Minnesota 2020 Property Tax Report: 2002-2010 examines the causes of the growth in property taxes and what can be done about it.

The principle culprit behind statewide property tax increases since 2002 is the reduction in revenue the state shares with local governments.  In constant 2010 dollars, state aid to local governments has fallen by $2.6 billion since 2002.  In response, local governments have increased property taxes by $1.7 billion.  However, property tax increases weren't enough to replace lost state aid; therefore, total revenue of Minnesota local governments fell.  In fact since 2002, local government revenues have fallen much more rapidly than state government revenues.

Real per capita statewide property taxes increased by 26 percent from 2002 to 2010. Specific county, city and school district property tax increases are contained within the report. In addition, an online supplement to the report shows trends in property taxes, state aid, and revenue base for all Minnesota cities with more than 5,000 in population.

For most of the last eight years, homeowner property taxes increased more rapidly than property taxes in general.  Contrary to conventional wisdom, rapid growth in homestead estimated market value was not the primary cause of exceptionally large homeowner property tax increases since 2002; rather, features of the state property tax system, such as the structure of the homestead market value credit, played a bigger role.

However, in 2010, there was a low rate of property tax growth and decline in average homestead property taxes. This is a welcome deviation from the pattern of the previous seven years.  Still, in the absence of reform, this trend is likely temporary. Large state aid cuts in 2010 occurred after 2010 property tax levels were set; 2011 property taxes could increase as local governments attempt to recover a portion of their 2010 aid reduction. In addition, while aid to counties and cities is scheduled to increase in 2011, a massive $7 billion dollar budget deficit jeopardizes these increases. Furthermore, some of the forces that led to rapid homeowner property tax growth in the past could resurface.

Minnesota 2020 Property Tax Report: 2002-2010 describes the measures needed to repair Minnesota's state-local fiscal relationship. First and foremost, an increase in state revenue is needed so that a disproportionate share of the state's budget mess is not perennially dumped into the laps of local governments and property taxpayers through massive cuts in state revenue sharing with counties, cities, and school districts. Minnesota leads the nation in the decline of real per capita own-source revenue since 2002; in light of this fact, there is no reason why state revenue increases cannot be part of a balanced solution to Minnesota's ongoing deficit problem.

In addition, several features of Minnesota's property tax system should be altered so that homeowners don't shoulder a disproportionate share of future property tax increases.  For example, the market value homestead credit could be restructured so that the credit does not automatically shrink as home values grow.  Other measures are outlined in the report.

Minnesota 2020 Property Tax Report: 2002-2010 examines trends in Minnesota property taxes over the last eight years from a progressive perspective, with the goal of ascertaining the true causes of property tax increases and ultimately moving Minnesota's property tax policy discussion forward.

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