The Return of Voss-New Insights on Property Tax Affordability and Fairness

From our Nov-Dec 2009 edition of Fiscal Focus.  Analysis of a Department of Revenue report that matches a homestead's property tax burden to the homeowner's income. The most recent such report is available from the Department of Revenue at .

Lost in the attention surrounding the release of the state economic forecast was the publication of a long-awaited report (at least by us) by the Minnesota Department of Revenue. The report, Residential Homestead Property Tax Burden Report – Taxes Payable 2007 includes findings from the re-creation of the "Voss database" that matches property taxes paid with actual incomes of Minnesota homeowners. Such information could not come at a more opportune time. Property tax affordability is front and center in current state and local budget debates. For the first time in over a decade data is available to help us understand the magnitude and severity of the ability-to-pay problem with respect to property taxes.

Eighty-three of Minnesota's 87 counties provided the data to develop the report, representing about 94% of the total residential homestead market value in the state. Because of data confidentiality requirements, the report aggregates the information into 20 regions roughly corresponding to the state's economic development regions. Summary statistics on estimated market values, tax burdens, homestead incomes, tax refunds, and effective tax rates are provided for each area. The report is available at .

Quantifying the Issues

Much of the report confirms what we already know about property taxes in Minnesota while adding new perspective and color. Chief among these issues are the regressivity of the tax and the crucial role the state property tax refund program plays in reducing this regressivity. Before the property tax refund (PTR) is included, the median property tax burden for homeowners statewide with household incomes in the $10.000 – $30.000 range is 6.2%. This rate declines steadily as incomes rise to only 1.8% for homeowners with incomes above $125.000. However, the influence of the state's property tax refund program in mitigating this regressivity is also clearly evident. After property tax refunds, the median burden for homeowners in the $10,000 – $30.000 income range falls 40% to a rate of 3.7%, with more modest declines for all income ranges up to $90,000. It's powerful evidence that refund programs targeted to those least able to pay have great value in reducing a tax's structural regressivity.

New information is also available on the affordability of the property tax in the state. As might be expected, there is considerable variation across incomes and regions of the state with respect to how much homeowner income is consumed by property taxes. Median net property taxes (after PTR) ranged from $726 per year in the far southwest corner of the state to $3,257 per year in southwest Hennepin County. Median net property tax rates ranged from 1.72% of income in the far southwest to 3.60% of income in Minneapolis. Statewide, over 55% of Minnesota homeowners pay 3% or less of their income (after PTR) for county and city services and some portion of school operations. Nearly 80% pay 4% or less. 1 Of the 20 regions in the report, only in Minneapolis do median homeowner property taxes exceed 4% of income prior to the PTR. Post-refund, the median rate there falls to 3.6%. Obviously, whether these rates are affordable or not is a subjective matter – 3% of homeowner income may be a source of outrage to one person but entirely reasonable to the next door neighbor. It is worth noting that future reports capturing the effects of the recession and higher levels of unemployment are likely to yield a jump in these rates.

Metro vs. Outstate

The real eye-catching finding concerns the differences in tax rates between metro cities and greater Minnesota. The study reports a median property tax burden (after PTR) of 3.17% of income for the metro region but 2.30% of income for greater Minnesota. In other words, the median property tax burden in greater Minnesota would have to increase by nearly 38% to equal the median property tax burden paid in the seven-county metro area. Some might argue that greater metro area incomes make this higher burden easier to assume, but this neglects to account for the higher cost of living in the metro – driven largely by housing costs. According to the report, the median metro home value is 68% higher than in greater Minnesota. An analysis that factors in higher mortgage and interest payments would show total housing costs as a percent of homeowner income to be much higher for metro homeowners compared to most outstate areas. 2

Most telling is the variation in property tax burdens among income equals across the state. To illustrate, Table 1 compares the median property tax burdens (after PTR) for one income cohort – the $45.000 to $65.000 household income range – across all 20 regions. For these incomes (which includes the state median income), property taxes in the metro region consume almost 50% more household income than in greater Minnesota at the median. Similar results are found for all income strata. Also of note is the geographical difference in the proportion of homeowners experiencing what might be called "property tax stress" (tax burden >5% of income after PTR). The frequency of homeowners above this threshold in the metro region is over four times that of greater Minnesota.

Table 1

Property Tax Burden as a Percent of Income, By Region

Metro Region Median Burden Burden >5% Count % of Total
Anoka 3.2% 969 5.2%
Carver/Scott 3.6% 1,398 15.8%
Dakota 3.3% 1,925 9.8%
Washington 3.3% 1,073 9.6%
Minneapolis 3.6% 2,490 17.9%
North Hennepin 3.6% 1,694 11.9%
Southeast Hennepin 3.7% 1,836 14.6%
Southwest Hennepin 3.8% 2,196 24.7%
Saint Paul 3.1% 782 7.0%
Suburban Ramsey 3.5% 1,145 10.1%
Metro Region Total 3.4% 15,508 11.9%
Greater Minnesota
Northwest/Headwaters 1.9% 132 1.8%
Arrowhead 1.7% 325 2.0%
West Central 2.0% 213 1.8%
North Central 2.0% 195 2.2%
Central 3.0% 941 4.7%
East Central 3.0% 455 5.2%
Minnesota Valley 2.1% 197 2.2%
Southwest 1.5% NA NA
South Central 2.2% NA NA
Southeast 2.5% 751 3.1%
Greater Minnesota Total 2.3% 3,396 2.8%
Table 1: Notes
  • NA: Not Available
  • Homeowner Income Range $45,000 to $65,000
  • Property Tax Burden After PTR

Implications for State Aid Programs and Property Tax Relief

Such findings have important implications for current state aid debates and for finding the best mechanisms for property tax relief. Advocates of state aid to cities have long argued that LGA creates greater fairness in property taxation across the state. In 2007, the year of this study, Minneapolis and St. Paul received approximately 30% of the LGA pool. But of the remaining amount, 93.2% went to communities in Greater Minnesota while only 6.8% went to cities in the metro region. Comparing this aid distribution to the findings highlighted above, it's difficult to understand just what kind of fairness is being accomplished. It is certainly not the tax fairness principle of "horizontal equity" – treating equals equally. The significant geographic disparities in homeowner effective property tax rates are attributable to many factors but are undoubtedly influenced by LGA. If ensuring adequate services at reasonable tax prices is the goal of LGA, then this report suggests many metro area cities are also "needy" and the LGA formula is in need of serious overhaul.

LGA cuts – past, present, and future – have triggered a firestorm of criticism, especially among city officials in greater Minnesota and their advocates. It's been argued that critical service cuts are inevitable because local citizens simply cannot afford the property tax increases needed to fully make up for aid cuts. One recent report on the damaging effects of LGA cuts in greater Minnesota was titled "Bleeding Communities Dry." Are greater Minnesota taxpayers at or already beyond the tolerable threshold of property tax affordability? It might be worthwhile to ask metro homeowners whose property tax burden is commonly 40% more than their outstate counterparts on equivalent income.

More fundamentally, this report once again brings an important philosophical debate regarding property taxation into sharp relief. There are two potential paths to assure good local public services at reasonable tax prices. The first is to let local governments control their own property tax destiny and establish whatever levy they determine necessary to deliver on their citizens' desires and expectations concerning public services. The state assists in this goal by providing targeted relief based on ability-to-pay. The other path involves the direct subsidization of city services through state aids and credits. Some of this subsidy may accrue to property tax payers; some may accrue to the public sector (e.g. more public sector jobs or higher compensated jobs). But any property tax relief that actually materializes will be shared equally among rich and poor in the community. It's ironic that in a state which values fairness in its tax system above all else, so much effort is invested in advocating and defending the more regressive approach.

  • 1 According to the report 4.8% of homeowners pay more than 9% of their income in property taxes, much of which originates from households with incomes below $10.000. However, as with the incidence study, the Department cautions against interpretations based on this lowest income cohort because of the frequently special and unusual circumstances in this subgroup. Since the property tax burden is overstated for this income range, the report does not include regional counts for it.
  • 2 Assuming a 30 year fixed, 5% mortgage on the median value home in each region, total cost of housing as a percent of income averages 35% higher in the metro.