The latest edition of the routinely overlooked but indispensible Department of Revenue “Voss Report” shows that the average homeowners’ property tax effort over the last decade is feebler than whatever the state is (or is not) doing.
Totaling $3.34 billion in current biennium, property tax aids and credits is the 3rd largest spending area in the state general fund, trailing only the two behemoths – E-12 education and health and human services. Spending to keep property taxes down exceeds state higher education spending by 8%. It exceeds the combined general fund spending on public safety, judiciary, environment, agriculture, jobs, economic development, housing, and commerce. In short, in the grand scheme of state government budgeting, Minnesota policymakers have made helping to pay for the costs of citizens’ own local governments a very high priority.
It’s not working. Or at least that’s the message being communicated as the 2017 legislative session began. In the most recently released city finances report from the State Auditor, property taxes were 39.4% of total city revenues in 2015, up from 30.8% in 2006. The same report also finds that total property tax collections grew 49.4% over this 10-year period, compared to an increase of only 6.0% for intergovernmental revenues (mostly state and federal aid payments). Local government stakeholders have echoed this message in their commentary on the state of local finances. City officials have highlighted a decade of unfilled positions, program cuts, and delayed capital spending – presumably because local property taxation reached unacceptable levels. Editorial pages and advocacy groups have renewed appeals for more state aid to cities and counties. Governor Dayton’s budget proposes $30 million of additional general purpose aids to “relieve the burden on Minnesota property owners”.
Has $3.34 billion of spending ever had less to show for it? That’s a reasonable question to contemplate in light of the current portrayal of local finance conditions. Fortunately, there is a routinely overlooked, but absolutely indispensible research report published by the Department of Revenue which helps make sense of what is going on while cutting through the rhetoric to reveal important truths about the state of local property taxation. It’s the Residential Homestead Property Tax Burden Report (a.k.a “Voss Report”).
The Voss Report matches each homeowner’s property tax burden with their household income across all parts of Minnesota to determine how big a claim on income homeowner property taxes really are. To protect taxpayers’ privacy, the report summarizes results at the regional level. What makes the Voss Report so unique and important is the power of its simplicity. It drills down from aggregate collections, which can mask a multitude of issues and relationships, to capture what an individual taxpayer’s world actually looks like.
The just-released report for taxes payable 2015 is interesting in and of itself, but the real attention-grabbing findings come from comparing it to the first-ever Voss Report for taxes payable 2007. Conveniently, this 9-year period matches up closely with the 10-year analysis in the State Auditor’s city finance report. Table 2 compares the median net property taxes (taxes minus any property tax refund, to give a sense of the true homeowner cost) and the median incomes, by region, from the 2007 and 2015 Voss Reports.
The data shows something quite remarkable: median net homeowner burdens have changed very little over the last 9 years in the vast majority of the state. In six regions, it actually declined. In Greater Minnesota, the 6.1% median change translates to an annual growth rate of 0.66%. But the median net homeowner property tax price for all local government services – K-12 education delivery, city services, county functions, and anything else – is still a bargain by any definition at about $3.50 a day (essentially a McDonald’s Happy Meal or a Starbucks cappuccino – take your pick).
Over this same period, Local Government Aid grew from $484.5 million to $516.9 million – an increase of 6.7% that outpaces growth in median net homestead taxes in 14 of the 20 individual regions and in both the metro area and Greater Minnesota as a whole. If some might use the term “anemic” to describe how state support for local governments has grown over the past decade, growth in median homeowner property taxes could be described as “comatose” by comparison.
All this is on a nominal basis. We could show changes in homeowner effort between 2007 and 2015 on a “real” or inflation-adjusted basis as the State Auditor’s report does with state aid support. Such an adjustment would clearly show a decided decline in the median net homeowner property tax effort in nearly every, if not each, state region.
The curiosities don’t stop there. Affordability needs to be judged relative to income, and even small property tax increases could be an undue burden if household incomes are stagnant or declining. But they are not. Median homestead incomes grew consistently across each region of the state, ranging from 19.6% in Anoka County to 34.5% in Minneapolis. Contrary to the conventional thinking informing “One Minnesota” debates, median homeowner incomes in Greater Minnesota grew slightly faster than in the metro area (24.7% vs. 23.7%).
Looking at the change in the net median homeowner property tax over this period gives a good idea of how the affordability of homeowner property taxes has changed over this time. As Table 3 illustrates, taxes relative to income have fallen in every region except one (the Arrowhead), and generally property taxes are eating up about 15%-20% less of the median homeowners’ income. Frankly, it’s tough to see where homeowners should be experiencing large-scale property tax annoyance and frustration.
While these findings may be surprising to many at first glance, they actually make a lot of sense when considering the nature of Minnesota’s property tax policy decisions over the past decade. We made the nation’s most accessible and generous homeowner property tax refund program even more accessible and even more generous. On top of that, we also have the homestead exclusion exempting significant chunks of home value from the tax. And our classification system continues to effectively subsidize homeowners, especially in times of rising commercial real estate values.
The bigger mystery and concern is why, in light of these findings, local governments are so reluctant to simply pass higher levies to address all the unfilled positions, program cuts, and capital needs their officials highlight. Is Minnesota’s classification system and homestead exclusion shifting so much tax burden onto higher value homesteads and business property that these property owners have become much more vocal and active in their local levy setting discussions? Does the state’s own huge footprint in business property taxation make the prospect of raising local levies further a non-starter because of the resulting impact on small business’ property taxes? Are homeowner perspectives framed exclusively by the “MSRP” sticker price of local government and ignore the generous rebates the state provides? Have homeowners just been conditioned over 40-plus years to expect other citizens to pay for the local government services they receive? Or is it simply that the unique visibility of this tax and the political opportunity that represents will forever trump principles of good tax policy and public finance?
We don’t know the answer, but it’s a problem if for no other reason than property tax policy will continue to devolve into an expensive game of three card monte in which every legislative session targets the latest aggrieved property owner. That will score votes but it will not address the fundamental problems: the opportunity costs created for all other state government-provided services and responsibilities and a local finance system in which responsibility for spending is disconnected from the responsibility of paying for it.