The State of the Minnesota Property Tax

New data and reports offers perspective on Minnesota property tax trends and competitiveness.

Local property taxation is accustomed to being in the media spotlight and receiving the lion’s share of citizens’ attention to tax matters.  As lawmakers struggle with responding to federal tax reform, the property tax has taken a bit of a back seat this year.  We take a moment to look at several reports released since the beginning of the year that provide a helpful snapshot on the affordability and competitiveness of property taxes in Minnesota along with how the tax is trending.

Homeowner Affordability:  Voss Payable 2016

With the usual lack of fanfare accompanying its release and the equally customary media indifference, the Minnesota Department of Revenue’s latest “Residential Homestead Property Tax Burden Report” (a.k.a. “Voss Report”) continues to be a largely overlooked but indispensable tax policy resource.  The Voss Report matches individual homeowners’ property tax burdens with their household income 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.  The report for taxes payable 2016 is now available (data cleaning demands a one-year lag time in results).

As a tax policy topic easily influenced by anecdote, emotion, and case examples that are readily projected onto the population at large, the Voss Report is a powerful fact-based reference point and often serves as a needed antidote to property tax rhetoric.  It drills down from aggregate tax collections, which can mask a multitude of issues and relationships, to capture what the individual property taxpayer’s world actually looks like.

What does the landscape of homeowner property tax affordability look like?  Three findings jump out:

Property tax effort relative to income among homeowners in Greater Minnesota is less than their metro-area counterparts.  Statewide, net median burdens after property tax refunds as a share of homeowners’ income (“effective tax rate”, or “ETR”) edged up from 2.3% in 2015 to 2.4% in 2016.  On a regional basis, the ETR in Greater Minnesota grew from 2.0% to 2.1%; with metro-area homeowner taxes remaining unchanged at 2.6% since 2015.  On an absolute basis, the median net homestead tax in Greater Minnesota was $1,284, representing a $68 increase over 2015 while the $2,417 median metro homeowner tax increased $124 over the previous year.

Affordability changes appear remarkably uniform across the state.  Looking more closely at each of the 20 state regions comprising the report, there is remarkable uniformity in the changes in homestead burden as a share of homestead income.  In 12 regions, the effective tax rate increased 0.1%, in 7 regions it remained the same and in one region (Northwest/Headwaters) the effective tax rate declined by 0.1%.

Even with the recent uptick, property taxes still consume less homeowner income than ten years ago.  As the accompanying table shows, with the exception of the Arrowhead, taxes relative to income have fallen in every region of the state since 2007 (the first year of the Voss report).  For all the ongoing concern about inadequate state support for local governments, property taxes are still routinely eating up around 10%-20% less of median homeowner incomes compared to a decade ago.

Table 1: Change in Net Median Homeowner Property Taxes’ Share of Income, by Region, 2007-2016

The biggest takeaway from Voss 2018 is the continued extraordinary success of the state’s income tested property tax refund (“circuit-breaker”) program.  As the findings show, it remains a simple, effective and powerful influence in keeping property taxes affordable regardless of where taxpayers live.

As informative as these findings are, results over large geographic regions can still mask important trends occurring at the local level.  One wish we have to make the report more useful is that Revenue would provide county level and perhaps city level median and quartile results, which would provide useful benchmarking information for truth in taxation hearings and offer some new perspective on the impact of general purpose aid distribution.

Comparative Burdens and Competitive Position:  2018 50 State Property Tax Comparison Study

More information on property tax competitiveness and affordability comes from the 2018 edition (for 2017 taxes payable) of our 50-State Property Tax Comparison Study – a joint effort with the Lincoln Institute of Land Policy – which has just been published and is available via our home page.  For the uninitiated, the report 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”), in a comparable rural city in each state, and in the largest 50 cities in the country.  States and localities often treat different types of property differently: with variations in tax rates, exemptions, or assessment ratios, for example.  Our study controls for these and other effects to compare effective tax rates – taxes relative to property values – to provide the most meaningful comparison of property taxes between these cities.

The predominant theme of the Voss Report – the continued relative affordability of homeowner property taxes in Minnesota– is also reflected in the latest “50 state” findings.  The 1.35% effective tax rate on the median-valued Minneapolis home is once again below the average for all urban cities – for the 11th time in the last 14 years.  These results should not be surprising given the combined effects of Minnesota’s property tax classification scheme, the homestead value exclusion, and the state’s relatively strong education finance responsibilities compared to other states.  It’s important to recognize that Minnesota’s income tested property tax refund program is not included in these results.  Given our relative generosity compared to refund programs existing in other states, our homeowner property tax rankings would likely be even lower.

Table 2: Selected 50 State Property Tax Comparison Study Results, Payable 2017

Comparatively high burdens on commercial – and to a lesser extent, industrial – property continue to be the case.  Commercial property tax burdens have been higher for years across Minnesota – both in our urban rankings, where Minneapolis’ eighth-place ranking for a $1 million-valued commercial property represents the seventh top ten finish in a row – and in our rural rankings, where Glencoe’s $1 million commercial property ranks second for the sixth consecutive year.  (To understand why choosing different Minnesota cities for national comparison purposes would not make a meaningful difference in these results, see accompanying sidebar.

Sidebar - Why City Choices Don’t Significantly Impact Minnesota Rankings

Our use of Minneapolis and Glencoe to represent “urban” and rural” categories in the study often raises the question: would choosing different Minnesota cities for national comparison purposes would make a meaningful difference in the state’s rankings?  If local levies were the only force driving the relative size of tax bills and resulting rankings that would be the case.  But they’re not.

Property tax systems’ structural features have major influences on tax rankings.  Such features include both technical issues like classification schemes and assessment practices and broader topics related to the fiscal system, such as the existence of any state levies, the relationship between state and local governments, and access (or lack thereof) to revenues outside of the property tax to support local government.  Importantly, these structural influences are not city-dependent but impact the property tax bills of every similar type of property across a state.

The purpose of the 50 State Study has always been to understand how state property tax system design affects property tax burdens.  Our property tax study captures these influences, and the rankings reflect those influences.

To illustrate the considerable influence of state structural features, consider our rural commercial rankings.  Our selection process for rural cities narrows the field considerably to improve comparability.  Generally, we use cities that fall in one of two categories in the U.S. Department of Agriculture’s rural-urban continuum, which classifies cities based on size and geographic location.  All of our rural cities are county seats with populations between 2,500 and 10,000 to ensure as much as possible a set of cities that provide similar public services (especially in the public safety and public works areas) and to eliminate regional centers.  Whenever possible, the cities are located in counties located outside of metropolitan areas, with the exceptions being where such counties do not exist – largely in northeastern states (think “rural Rhode Island”).

Using this typology, 25 Minnesota cities could qualify for inclusion as a “rural” representative of our property tax comparison study.  In conjunction with our payable 2016 report, we calculated the taxes for the $1 million commercial property for each of these 25 cities.  Our report incorporates assessment error using sales ratio data from the Minnesota Department of Revenue, however, that data did not exist for commercial properties in several of these cities given the small number of sales that occurred.  When we – conservatively – substituted the median sales ratio for the cities we did have data for, then in 16 of these 25 cities the $1 million commercial property would have ranked in the top 5 nationally.  In 22 of the 25 cities the property would have ranked in the top seven.  If, instead, we assumed a sales ratio of 100% (the standard procedure for our report), then 21 of the 25 rural cities would have been in the top 5.  Such findings indicate that all cities share in the influence of the structural design of the Minnesota property tax system and that influence has the predominant effect on state rankings.

The state’s rankings for industrial properties fare somewhat better, because these types of properties with their higher levels of personal property (mainly machinery and equipment, inventories, and fixtures/office furniture) benefit much more from Minnesota’s blanket exemption of personal property than commercial properties do.  However, as more states enact exemptions for personal property, Minnesota’s competitive status with respect to business property taxation is increasingly a function of levy amounts rather than structural features.

Looking at the findings through the lens of regional competitiveness conveys a perspective that is slightly less disadvantageous because upper Midwest states are collectively home to some of the highest commercial property tax burdens in the nation.  Our rural rankings remain persistently high; however, the new $100,000 exclusion from the state general tax combined with the reduction in the levy will likely make a noticeable impact on the rural rankings for the $150,000 commercial and industrial parcels – which are more prevalent in rural Minnesota than $1 million or $25 million parcels.  Whether the resulting burden shifting onto higher value properties appreciably exacerbates the tax burden differential for these owners remains to be seen.

Table 3: Property Taxes on $1 Million Commercial Parcel, Payable 2017, Upper Midwest States

Looking Forward:  The 2018 Levy Story

Perusing the Department of Revenue’s certified levies for 2018 brings us to the present and throws light on a couple of interesting developments.  For starters, property tax levies grew appreciably faster in larger cities and counties than in their smaller counterparts.  This is reflected in the notable difference between mean and median levy changes.  Although the average property tax increase for cities was 6.2%, the median change was just about half that, or 3.2%.  Likewise, the average property tax change for counties was 4.1%, but the median change was only 3.6%.  Digging more deeply, property taxes in cities with more than 5,000 people grew by 5.5% (excluding the anomalous 24% growth in St. Paul’s levy as a result of the shift away from Right of Way financing) – which is roughly 40% higher than the 4.0% growth in cities under 5,000.  The moral of the story here is that large increases in the levies for 2018 are typically not being found in small town, rural Minnesota.

Another striking finding involves school property taxes.  Although the levy increase on a statewide basis was rather robust 6.6%, this average masks an incredible diversity of school property tax levy changes across Minnesota.  As the accompanying graph shows, at the extremes 33 districts saw their levies drop by 10% or more (including several in the 30% to 50% range!) while 30 districts had levy increases of at least 21%, including 7 districts where the levy increase exceeded 40%.  Moreover, for all the hue and cry about property tax levels, it’s interesting to note that $82 million of the $179 million in higher school taxes were market value levies – and therefore likely to be voter approved.

Figure 1: Change in School District Levies, Payable 2017 to Payable 2018

The Response – House Property Tax Division Report

With legislative bandwidth and available resources largely dedicated to protecting taxpayers from any TCJA-related effects at the state level and providing an additional dollop of tax relief on top of that, it shouldn’t be surprising that property tax and local government finance is more or less a budgetary afterthought this year.  The House’s Property Tax Division report features $11.5 million in net cost savings and revenue gains for the current biennium out of $3.65 billion in forecasted spending.  Most of that stems from a couple of items: the repeal of the political contribution fund and what has become a fairly predictable poke at the city of Minneapolis, this time in the repeal of its library aid.

Many of the House’s property tax policy elements are of the familiar, mundane nature including TIF and local sales tax provisions and a couple of highly targeted exemptions/abatements with only very modest, if any, redistributional consequences.  However, the division report does include welcome first steps in moving forward on the recommendations of the excellent 2012 Property Tax Working Group report.  The House property tax provisions propose to consolidate all residential property into a single property tax classification, which would eliminate 7 statutory classes of property.  According to House Research, the redistributional consequences of this administrative clean-up are negligible.  In some cases (mainly blind/and disabled homestead ownership) where burdens might rise from classification consolidation, the bill adjusts refund mechanisms accordingly to offset any increases.  The bill also modifies several property tax deadline and due date modifications also per the recommendations of the Working Group report.  Whether these changes move through the process will be an interesting test case of the appetite the state has for embarking on beneficial property tax administrative reforms.  

And looming in the background is Governor Dayton’s stated interest in reinstating the inflator on the state general levy.   Whether this is negotiation fodder or a ”go to the mat” element of the Governor’s proposal remains to be seen.    Either way it adds another dimension of potential intrigue and suggests that even though federal conformity is consuming most of the oxygen, when all is said and done Minnesota’s property tax system will still have its moment in the sun.