City woes: Property value burden shifts to homeowners

As if the grim budget outlooks weren’t enough for cities, along comes a property tax shift toward homeowners that stands to make budget decisions this fall even tougher. And the reason is complicated.

According to an analysis of Minnesota Department of Revenue numbers that the League of Minnesota Cities prepared for Ground Level, commercial-industrial assessed property values posted a year-over-year decline in 2010 for the first time since 1993.

(Residential homestead market values continued a decline begun in 2009. Foreclosures and the deflating housing bubble are still responsible for the overall decrease in values.)

When commercial property values decline, homeowners as a group are on the hook for more of the total tax paid. But add to that shift the fact that commercial property owners pay at a higher rate. In other words, for every dollar a homeowner pays, the owner of a commercial property with the same value pays $2. So as commercial property values come down, the homeowners’ share of the overall tax burden rises disproportionately.

Minnesota Taxpayers Association executive director Mark Haveman says cities are going to have a hard time explaining the effect to the public:

Cities are going to feel their hands are tied. You’re going to see burden shifting to homeowners even if the levy stays constant.

Haveman says one city has contacted him to find out how to adjust the levy to account for the loss of market value.

It’s at least partly a problem of perception. When property values decline people perceive that they are less wealthy even if their income hasn’t changed. And they therefore are less willing to pay higher taxes. So if cities need to compensate for less revenue coming in from the state or elsewhere and they have higher expenses, increasing the total property tax levy even by 1 percent may be too much for some homeowners.

As the League of Minnesota Cities observed in 2009:

Falling homestead market values pose a serious challenge for

cities. Resistance to the property tax grows as homeowners see

their assessed values go down and/or perceive their homes to be

worth much less, but receive bigger tax bills. Cities must balance

those concerns with the pressures put on city budgets caused

by sharp reductions in local government aid and market value

homestead credit reimbursement as well as other stresses.

(from Special Supplement to Minnesota Cities 2009)

Bigger cities saw more dramatic changes.

LMC policy analyst Lena Gould shared more on the trends in homestead market valuations. Larger cities saw more of a dramatic drop in values, but smaller cities showed declines earlier. Another comparison shows 52 percent of Greater Minnesota cities experienced a decline in property values in 2009 – 2010. Almost all metro cities, or 94%, lost residential market value.

league chart- declining values - gmn.jpg

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