Minnesota Results for the 50-State Property Tax Comparison Study for Taxes Payable in 2019

First published in 1995, this 2020 report (covering taxes payable in 2019) represents the 20^th edition of the 50-State Property Tax Comparison Study[1].  Published in conjunction with the Lincoln Institute of Land Policy, the 50-State Study examines property taxes on homestead, commercial, industrial and apartment properties with specific values located in the largest city in each state (i.e. “urban cities”).  The urban cities group assesses the structure of 53 (rather than 50) cities.  In addition to 50 state systems, there are essentially three “city-states” – Washington DC, Chicago, and New York City – that have their own distinct property tax systems, requiring the additions of Aurora, Illinois and Buffalo, New York to the study to represent the Illinois and New York state systems.  The 50-State Study also offers a nonmetropolitan “rural city” from all 50 states (with population between 2,500 and 10,000), and a separate comparison of the most populous 50 cities in the U.S., which does not include 23 cities in the urban city group.  The Lincoln Institute provides additional analysis of all 73 of these “large cities” (ranging from Burlington VT at 43,000 to New York City at 8.4 million) in appendix tables 1a – 1d of the report.  That data is not discussed as part of MCFE’s Minnesota results.

Minnesota Urban Results

From 2018 to 2019, effective tax rates rose for all Minneapolis property types and values included in the study, ranging from $600,000 value apartments increasing by 0.01% up to $25 million value commercial increasing by 0.17%.  That magnitude of change increased Minneapolis’ $25 million commercial ranking from 9^th in 2018 up to 7^th in 2019.  The comparison that takes in the broadest swath of commercial properties – at $1 million in property value – showed similar results with Minneapolis increasing 0.16% in effective tax rate and moving from 12^th in 2018 to 10^th in 2019.

In 2019, the Minnesota Legislature passed a $50 million reduction on the state business tax (SBT) by removing the inflator and freezing the levy amount for future years.  The effect of this change will be reflected in next year’s 50-State Study for taxes payable in 2020 and will likely offer some respite from the 2019 level of increase.

All levels of homestead properties crept up in Minneapolis as well, but with percentage effective tax rate increases much less in magnitude than commercial increases (0.02%-0.04% vs. 0.13%-0.17%).  Minneapolis’ change in homestead rankings from 2018 to 2019 – up three places to 20^th for median value; up one place to 24^th for $150,000 value; and up three places to 21^st for $300,000 value – are due in part to significant new homestead exemptions in Anchorage, Alaska and Providence, Rhode Island.

Despite an increase in effective tax rate on median-value homes (1.33% in 2018 up to 1.37% in 2019), Minneapolis remains below the average (1.40%) as has been the case for 13 of the last 16 years.  For the actual tax bill on a median-value home, however, Minneapolis did increase from $87 above average in 2018 to $381 above average in 2019.  In addition to new exemptions in Anchorage and Providence, Atlanta also implemented large new exemptions for homesteads in 2019, helping to keep the average increase for all urban cities down.  Minneapolis also had an increase in median market value ($250,400 to $269,500) that was above average on both a dollar and percentage basis – another factor that has an impact on the median-value tax bill comparisons.

Minneapolis apartments were the one urban property type to fall in ranking, moving one place down to 21^st with a negligible increase of 0.01% in effective tax rate.  In three property categories, Minneapolis moved from below the 53-city average to above the average – industrial property at the 60% personal property levels for $1 million and $25 million in value, and for apartments (valued at $600,000).

 Minnesota Rural Results

Effective tax rates on commercial and industrial property values also increased in Glencoe from 2018 to 2019, but by a much lower magnitude than Minneapolis (0.04%-0.06% vs. 0.11%-0.17%).  At the most representative $1 million value, Glencoe remained ranked at 6^th out of 50 rural cities, while moving down one place from 5^th to 6^th at the $25 million commercial value and up one place (from 25^th to 24^th) at the $100,000 commercial value.  Since the first $100,000 in state business tax is now exempt due to a 2017 law change, the $100,000 ranking is somewhat representative of how Glencoe would fare without the state business tax on commercial and industrial property.

Unlike Minneapolis, Glencoe’s effective tax rates on residential property had no change for median value homes (continuing to be ranked at 22^nd) and decreased by 0.04% for both $150,000 and $300,000 value homes.  Despite the decreases in effective tax rate, Glencoe moved up from 23^rd to 21^st in rank for a $150,000 home and stayed at 21^st for a $300,000 home.

Glencoe’s effective tax rate on apartment property had a large drop of 0.58%, causing a fall in rank from 22^nd to 28^th from 2018 to 2019.  The change is largely attributable to an apartment sales ratio of 66% for the 2019 study compared to 96% for the 2018 study.  Comparisons of apartment and industrial property for rural cities can have wide variance from year to year if a big sale doesn’t meet assessed value.  This is due to the limited number of qualified sales in any one year, making it difficult for assessors to find examples of “like” properties needed to recalibrate market values.  In essence, a handful of sales in a given year can produce a wider swing than would be expected in a large city – effectively resetting the assessed value.  For these property types, it is much more informative to look at a rural city over a longer time period for a good sense of its relative position.

Glencoe’s effective tax rate on industrial properties of varying values and personal property composition increased by anywhere from 0.08% to 0.16% from 2018 to 2019, resulting in a ranking increase from 13^th to 10^th for $1 million valued industrial (50% personal property) and from 15^th to 14^th for $1 million valued industrial (60% personal property).  As is the case with Minneapolis, the freeze in the levy amount of the state business tax for taxes payable in 2020 could move Glencoe in the opposite direction next year.

Regional Comparisons Highlight the Tradeoff in Minnesota’s Tax Structure and the Impact of the State Business Tax (SBT)

Minnesota’s unique state business tax (SBT) continues to have a large effect on where Minneapolis and Glencoe rank regionally[2].  A look at the Upper Midwest Region reveals that for urban cities, the region has high taxes nationally for commercial property valued at $1 million, accounting for 6 of the top 12 cities in the urban city group of the 50-State Study.  Minneapolis has a higher tax than Milwaukee but is lower than Chicago, Aurora, Des Moines and Detroit.  Because of the radically lower taxes in Fargo and Sioux Falls, Minneapolis is still 6% above the regional average.  Without the state business tax, Minneapolis would drop below Milwaukee down to 21^st place at 16% below the regional average.

The Upper Midwest Region does not quite rank as high in commercial taxes for rural cities (with 5 out of the top 17 in the study).  Even though Vermillion, South Dakota (25^th) and Devil’s Lake, North Dakota (35^th) both rank a fair bit higher than their instate urban counterparts, Glencoe still checks in at 25% above the regional average and continues to be ranked 6^th overall with a $738 increase (0.06% increase in effective tax rate).  Only Manistique, Michigan has a higher tax in the region on a $1 million commercial property.

Without the state business tax, Glencoe would be on par with Galena, Illinois and Hampton, Iowa, dropping down to 17^th place at just 2% above the regional average.

A comparison of homestead property taxes in the Upper Midwest Region give some insight into how Minnesota differs from others in the region in its treatment of homestead and commercial taxes.  Comparing fixed values for homesteads, as we do for commercial property, it is clear to see that both Minneapolis and Glencoe switch from above the regional average in commercial property taxes to roughly 30% below the average on $150,000 and $300,000 homes.  Only Chicago with its unique property tax system exhibits this kind of swing between commercial and homestead property.  This also gives some insight into why Aurora, Illinois is included in the study as the clear difference in Chicago and Aurora treatment of homestead property is evident.

It’s important to note that the net property taxes experienced by many Minnesota homeowners could be significantly lower if they are eligible for Minnesota’s “circuit breaker” property tax refund which is based on the relationship between income and property taxes.

There are 17 urban cities and 13 rural cities in the 50-State Study that have some form of circuit breaker based on income, but other states that issue refunds do so at a much lower level then Minnesota.  These refunds are often for very low income and do not apply to median-income homeowners at all, as does the Minnesota refund.  Minnesota refunds are projected to be approximately $550 million for all homeowners in 2020.

Since the 50-State Study is designed to capture what level of taxation results from local property tax systems under state laws, state refunds are not estimated in comparing these systems.  From examining circuit breakers in other states, it’s clear Minnesota has the most robust refund in the country.

The only state that applies a more generous circuit breaker is Vermont, but it is not a refund and the income-based calculation is applied to all taxpayers to initially calculate their taxes, therefore Vermont’s circuit breaker is included in 50-State Study calculations since it is part of the overall structure used to determine taxes paid.

Although it is a year or so later than the 50-State Study, Minnesota’s Department of Revenue does model an effective tax rate for homeowners that does include the effect of the Minnesota property tax refund based on income for median valued homes.  This is done as part of the “Voss Report” (Residential Homestead Property Tax Burden Report)[3].  In January 2020, the 2018 Voss Report was released and showed that an owner of a median valued home in Minneapolis had a 1.28% effective tax rate.  Looking back at the 50-State Study for 2018, Minneapolis had a 1.33% effective tax rate without the property tax refund.  Despite a noticeable decrease of 0.05% in effective tax rate, it still would not have been enough to change Minnesota’s ranking in 2018 (23^rd), as 24^th place Phoenix was at 1.27%.  This level of ranking impact (no change) will not necessarily apply in future years.  Ranking in the middle, as Minneapolis does, makes it more likely that Minneapolis could decline from 1-5 places in a given year with a 0.05% effective tax rate reduction due to the Minnesota property tax refund, and unless there is an eligibility change the refund will have a fairly consistent effect.  If nothing else, property tax systems are like shifting sands of various fiscal ecosystems, and the rankings are where the sands wash out in any given year.

For Glencoe, The Voss Report gives only an effective tax rate for the entire Minnesota Valley region (in addition to McLeod county, the Minnesota Valley includes Meeker, Renville, Kandiyohi, Swift, Chippewa, Yellow Medicine, Lac Qui Parle, and Big Stone counties), so it is not necessarily a good indicator of the property tax produced by Glencoe’s local tax system.  Glencoe’s effective tax rate was 1.24% in the 50-State Study from 2018 and the effective tax rate for the entire Minnesota Valley region was 1.02% when adjusting for the property tax refund.  Such a reduction in effective tax rate would have dropped Glencoe nine places in the ranking from 22^nd to 31^st – depending on Glencoe’s local tax rate relative to the region.  It’s possible that Minnesota’s property tax refund has an outsized effect at the median value in Glencoe, but without McLeod County data (at the very least), this -0.22% change should not be viewed as a reliable indicator for future years.

For more discussion of long-term trends and characteristics of Minnesota’s property tax system, see our analysis from 2018[4].