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Minnesota Property Tax Update: Homeowners Bearing More Costs

December 01, 2009 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis
From 2002 to 2009, property taxes in Minnesota have skyrocketed, particularly for homeowners.  Statewide, the cause is not local government spending, but state policies that have shifted a larger share of public costs on to the property tax and shifted a larger share of the total property tax on to homeowners.

Last April, Minnesota 2020 released Minnesota Property Taxes by the Numbers: 2009 Edition, which documented trends in statewide property taxes from 2002 to 2009.  We now have final property tax information for 2009 that was released after publication of the original report.

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.  As in the original report, changes in tax and revenue amounts over time are adjusted for inflation* unless otherwise noted.

Of the 854 cities in Minnesota, 680 (79.6 percent) experienced an increase in per capita property taxes from 2002 to 2009, while 564 (66.4 percent) experienced an increase of ten percent or more.  The graph below summarizes the statewide distribution of cities by the increase in per capita property taxes from 2002 to 2009.  Click here [PDF] for a table showing annual per capita property tax amounts for all Minnesota cities with a population over 5,000 for each year from 2002 to 2009.


Homeowner property taxes increased even more rapidly than per capita property taxes since 2002.  Of Minnesota's 854 cities, 747 (87.5 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.  The graph below summarizes the statewide distribution of cities by the average increase in homeowner property taxes from 2002 to 2009.  Click here [PDF] for a table showing the average homeowner property tax for all Minnesota cities with a population over 5,000 from 2002 to 2009.

Statewide, 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 30 percent from 2002 to 2009, per capita county, city, and township revenue has fallen.  Real per pupil school revenue in 2009 (FY 2010) is higher than in 2002 (FY 2003), but this is because of a one-time infusion of federal dollars associated with the American Recovery and Reinvestment act in 2009 (FY 2010); in 2010 (FY 2011), real per pupil school district revenue is projected to once again fall below the 2002 (FY 2003) level.

State policies have been the primary cause of increasing property taxes in Minnesota since 2002.  Cuts in the dollars that the state shares with local governments are foremost among the state policies that have driven up property taxes.  From 2002 to 2009, state aid to local governments declined by $2.4 billion in constant 2009 dollars.  In response to these aid reductions, local governments increased property taxes by $1.6 billion, as illustrated below.

On a statewide basis, local governments recovered slightly less than two-thirds of the $2.4 billion state aid reduction through property tax increases.  The remainder of the aid cut was dealt with primarily through cuts in funding for schools, roads, parks, public safety, and other public services and infrastructure.  In general, the real property tax growth was driven not by local spending increases, but by cuts in the revenue that the state shares with local governments.

The preceding graph counts as "state aid" $500 million in federal recovery dollars that was used to replace a one-time $500 million cut in state general education aid in 2009 (FY 2010).  The actual cut in state aid to all Minnesota local governments from 2002 to 2009 was actually $2.9 billion.

During the same period that state aid to local governments fell precipitously, the population that local governments must provide service to increased by approximately 5.5 percent, although statewide school enrollment declined by one percent.  In addition, over this seven year span new testing requirements and higher standards were foisted on school districts and additional state costs were shifted to counties.

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 above $76,000.  As homestead taxable value increased, the amount of the credit fell and net homestead property taxes grew.
  • In exchange for a sizable 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 thereafter.
Further compounding the growth in homestead property taxes are cuts in state funding for education, which has 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.

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.

* All inflation adjustments in this analysis are based on the implicit price deflator for state and local government purchases, which is the appropriate measure of inflation for state and local governments.

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