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Targeted, Powerful Property Tax Relief

July 01, 2013 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

The state's newest tax laws will bring serious property tax relief to middle-class Minnesota homeowners hard hit by conservative austerity. This continues our series on the new homestead property tax law.

The new homestead credit refund significantly expands the existing homeowner property tax refund (PTR), also known as the circuit breaker. There are four major changes to the homeowner PTR program incorporated into the new homestead credit refund.

First, the homestead credit refund legislation includes a $120 million increase in homeowner refunds of property taxes paid in 2014 relative to what would have been paid under the previous homeowner PTR program, with slightly larger increases in subsequent years. As noted in a previous Minnesota 2020 article, the $120 million increase represents a 35 percent expansion in circuit breaker funding—the largest single year increase in nearly four decades.

Second, in an effort to reach eligible homeowners who have not been filing for a refund, the Department of Revenue (DOR) is instructed to undertake a one-time effort to notify homeowners who may qualify for a refund of at least $1,000. DOR will use data from the most recent income tax returns and homestead credit refund claims combined with current year homestead property tax information provided by Minnesota counties to identify potential refund recipients. The increase in refunds resulting from this outreach effort is expected to comprise about one-quarter of the $120 million increase in homeowner refunds. DOR is also instructed to report to the Legislature on the success of this outreach effort.

Third, the new homestead credit refund will exclude contributions to all voluntary retirement plans up to a maximum of $5,500 from the definition of household income used to determine the refund amount; this change will increase the number of qualifying refund recipients and increase refunds for recipients whose household income was reduced due to this change. On the other hand, the definition of income used in the new refund will include distributions from Roth plans, thereby increasing household income; this change will lead to a reduction in the number of qualifying recipients and the size of the refunds received by affected applicants.*

Fourth, and perhaps most importantly, the new refund program reduces the “income threshold” for all homeowners with household incomes between $19,530 and $105,500 based on refund calculations for property taxes paid in 2014.† The income threshold refers to the percentage of income that a homeowner must pay in property taxes before qualifying for a refund. For example, the new refund program reduces the income threshold for a homeowner with household income of $60,000 from 3 percent to 2 percent. Before this change, the property tax bill of this homeowner would have to exceed $1,800 (3% x $60,000) before the homeowner would qualify for a refund; after this change, the tax bill would only need to exceed $1,200 (2% x $60,000).

By reducing this threshold, the new homestead credit property tax refund will allow more homeowners with household income between $19,530 and $105,500 to qualify for a refund and will increase the size of the refund for homeowners within this income range who already qualified under the previous PTR program. The following graph illustrates the homeowner refund under the old homeowner PTR program and the new homestead credit refund for homeowners with varying levels of household income, assuming a gross property tax (i.e., prior to refund) of $3,100. (This is the approximate average property tax prior to refunds for homesteads in the seven-county metropolitan area.) This analysis assumes no change in household income resulting from the household income definition changes described above.

The refund increases under the new homestead credit refund will accrue primarily to middle-income homeowners; homeowners with household income below $19,530 will not receive any refund increase, while homeowners with household income above $105,500 remain ineligible for a refund. For homeowners with incomes above $19,530, the size of the refund increase will climb gradually as income rises, peaking at approximately $81,000; refunds for homeowners with $81,000 income will increase from $159 under the old PTR to $791 under the new homestead credit refund—an increase of $632 dollars. The amount of the refund increase will taper as household income increases beyond $81,000, before hitting zero at $105,500.

As noted above, this analysis assumes a gross property tax of $3,100. At higher tax levels, the largest refund increase will occur at somewhat higher income levels, but never above approximately $94,000. At lower tax levels, the largest refund increase will occur at lower income levels, but at no point will any refund increase accrue to homeowners with household income below $19,530 (although the largest total refunds will still go to low income households, all other things being equal). It should be noted that all of the above analysis assumes no change in household income resulting from changes to the treatment of retirement income described above.

The $120 million in increased homestead property tax relief distributed through the expanded refund program is somewhat greater than the estimated $112 million in homestead property tax relief that was lost when the homestead credit was eliminated in 2011.‡

In addition to replacing the homeowner property tax relief that was lost when the market value homestead credit was eliminated, the new homestead credit refund will avoid some of the pitfalls of the old market value credit. More on this when this series concludes next week.

 

*The same changes to the household income definition will also apply to the renters’ PTR program.

†A similar threshold reduction will occur in subsequent years, although the affected income brackets will be adjusted upward each year to reflect the impact of inflation.

‡The $112 million estimate is from House Research simulation #11F1. The total decline in property tax relief resulting from the elimination of the old homestead credit was actually $272 million based on estimates from simulation #11F1. However, due to the decline in taxable homestead value resulting homestead market value exclusion (enacted in 2011 along with the elimination of the old homestead credit in order to cushion homeowners from the full impact of the credit elimination), most of this loss of property tax relief was shifted on to non-homestead properties, leaving only the estimated $112 million impact on homesteads.  It should be noted that here we are comparing a 2011 estimate of the homestead property tax relief lost due to the elimination of the old homestead credit to a 2014 estimate of the increased property tax relief from the new homestead credit refund.  If the estimate of the foregone homestead property tax relief resulting from the elimination of the homestead credit were to be recalculated using 2014 data, the resulting amount would likely be greater than the $112 million estimate based on 2011 data.

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