Real Estate Consulting & Sales | Residential + Commercial

Minnesota Property Taxes rising in a down market

Today’s Star Tribune article explains the recent changes to Minnesota State law that will effect nearly all property owners in the State.  Unfortunatley when our governor and legislature compromised on a budget deal, the property tax issue was a piece of the deal that was not readily understood until just recently.  The bottom line.. property taxes are going up in a down economy that will affect most homeowners, something none of are happy about in a recession.

Across Minnesota, tax bills and confusion about to rise

Nearly all Minnesota homeowners will pay more property taxes next year, even before factoring in what happened to the value of their homes and before their city, county or school district decides how much they will tax for 2012.

The increase results from a tax shift — approved in the state budget deal reached in July — that is so broad and complex that counties expect a flood of calls from confused property owners when they receive truth-in-taxation notices in November.

Those notices will include a carefully worded explanation, which officials are still crafting, of what has changed.

The change arises from the elimination of a tax break called the homestead credit, which saved homeowners as much as $304 a year and next year would have required the state to pay $261 million to local governments to make it up.

In its place is a new “homestead market value exclusion” that, at no cost to the state, shrinks the portion of the market value that can be taxed on homes valued under $413,800.

The change leaves a smaller property base available to tax; between Hennepin and Ramsey counties, for example, it translates to a combined $7 billion drop in value.

Just to fund existing budgets will mean taxing most property owners at a higher rate to make up the difference.

“There are a number of assessors that feel that this is going to be the most difficult truth-in-taxation period ever,” said Ramsey County assessor Stephen Baker. Because the economy is shaky, “everybody is a little shell-shocked anyway and people are nervous whenever anything is changed,” he said.

Ramsey County’s tax division will have 15 people answering phones, more than double the usual crew.

“Most properties are going to go up because of this,” said Chris Samuels, Ramsey County property tax services manager. “I think the notices, when they go out, will give every person a reason to call us.”

Ken Rowe, a manager in Hennepin County’s property tax division, also expects a deluge of calls. “In the first year of any change like this there are going to be people that benefit and people that are hurt by it and that is always a difficult time.”

‘Exclusion’ from being taxed

The market value exclusion eliminates from taxation some of the market value of owner-occupied homes valued below $413,800.

It excludes 40 percent of the first $76,000 in market value, up to a maximum exclusion of $30,400. Following a formula, the exclusion declines as the price of homes increase until it hits zero exclusion at a market value of $413,800.

Each exclusion shrinks the city, county and school district tax base.

To raise the same amount of taxes on a smaller tax base, local governments have to raise their tax rate, which means that all properties — especially higher priced homes, apartments, and businesses — could face bigger bills.

For example, the new formula applied to a $116,000 home would exclude $26,800 from being taxed and generate $989 in taxes. Under the previous formula, the full parcel would have generated a tax of $1,227, offset by a homestead credit of $268, for a net tax of $959, according to the state Department of Revenue. That $30 increase doesn’t include the effects of changes in value from one year to the next or what local governments might do to their levies.

Holding the line elsewhere

To cushion against this shift, the seven metro counties and many cities are trying to hold down their levies.

Dakota and Washington counties have proposed a zero increase levy; Hennepin and Scott each agreed on a levy increase of no more than 1 percent; Ramsey County has proposed a 1.7 percent increase and two counties plan to lower their levies: Carver will drop by 2.2 percent and Anoka by 7.4 percent from this year.

Among cities, Minnetonka, for example, is planning a 0.9 percent levy increase, the lowest for the city in seven years, said City Manager John Gunyou.

Even if all levies stay steady, taxes will go up — at least a little — for most homeowners because of the change to market value exclusion, tax officials say. How much taxes will increase will vary by community.

In Hennepin County, figuring in only the changes caused by the market value exclusions, homestead property taxes will increase from 1 percent to 3.5 percent depending on the community. Higher-priced homes, apartments and commercial properties will go up from 1 to 7 percent depending on the community.

A $206,700 home in Eden Prairie will see a 1 percent increase in taxes due to the change, while the increase for a $383,200 home in the same city will be 2.3 percent. In Minnetonka taxes on a $348,200 home will go up 2.5 percent due to the shift. In Bloomington the taxes on a $251,300 home will rise by 2.5 percent due t the shift.

In Brooklyn Center, Crystal and Robbinsdale, the market value exclusion on homestead property will result in a roughly 7 percent increase in the taxes on apartments, commercial properties and non-homestead homes. Those are the largest increases in these categories in Hennepin County.

In Ramsey County, $100,000 homes will see anywhere from a 3.2 percent decrease to a 6 percent increase in property taxes due to the shift. Homes valued at $400,000 will see an increase of between 3.7 and 5.8 percent.

Ramsey County commercial property increases range from 1.6 percent to 2.9 percent depending on the community. Apartment property taxes will go up by 3.9 percent to 6 percent depending on community.

Not easy to explain

County officials also are concerned about how homeowners will react to the drop in taxable values.

“These are going to be values that they haven’t seen before if they have a homesteaded property,” Baker said. Although the exclusion is for tax purposes only and does not affect market value, it may jolt some people already concerned that their market values have fallen too far, Baker said.

In Hennepin County, Rowe is expecting to hear from people who don’t understand “how could my value fall by so much and yet my taxes go up.”

Counties say their phone crews will have a script for answering general questions.

“So much of it is so difficult to explain that we sometimes get a certain amount of incredulity,” Baker said. People listen to the explanation and then say things like “that can’t be true or you are just trying to confuse me.”

After the confusion clears, Rowe said, he thinks people will comprehend the market value exclusion. “They can understand that a portion of my market value is not going to be taxed.”

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