Market value credit disappearance: Property tax sleeper

UPDATE: Here's my conversation with All Things Considered host Tom Crann about the change in how the state cuts you a property tax break.

Keep an ear out for what local officials tell you this fall about next year's property taxes.

They may be providing the absolute truth that they are holding your city or school or county levy flat, but you could still see property taxes rise. It could be headache-inducing both for them and for you.

When Gov. Mark Dayton and legislative leaders finally struck a budget deal last month, lots of attention was paid to what is called Local Government Aid (LGA). The final budget reduced by about $200 million what the state had promised cities to help with their local budgets.

Another change got less attention, partly because it's complicated, but the elimination of the Market Value Homestead Credit could have an even bigger impact on your property taxes. Under the old system, local officials set their total property tax levy and then used a sliding-scale formula to reduce the tax on your house if you were a homesteader. The state then reimbursed them for that reduction.

There was a lot not to like about that system. It kept local officials off balance because determining the amount of state reimbursement took many months into the budget year and, moreover, the state in recent years developed the habit of cutting back on that reimbursement. It did so again last month to the tune of $104 million.

So the program was eliminated and replaced with what is called the Homestead Market Value Exclusion. Instead of figuring your tax and then giving you a credit, the new system effectively "lowers" the value of your home before figuring your tax.

In theory, that's an effort to hold you harmless even as the state pulls its reimbursement. In practice? The impact on your tax will vary, and right now there's a lot of head-scratching going on.

The main thing to realize is that by reducing your property's value before figuring out taxes, local officials suddenly have a lower tax base to deal with. That means even if the total tax levy is held flat, the tax rate will rise.

And that means, first, a greater portion of the total market value in a place will be held by businesses and other non-homeowners. So the property tax burden will shift toward them, i.e. their taxes will rise.

But, second, even for homeowners, if the total tax levy is flat, taxes could rise. In fact, on AVERAGE, they WOULD rise. But the extent to which that happens will vary from place to place, depending on the mix of property classes where you live and what your tax rates are now.

Homeowner tax increases are likelier in low-tax areas and in jurisdictions that are heavily residential, says Steve Hinze, tax analyst for the House of Representatives, who wrote a short analysis of the new rules this week. Hinze says that's because the new law's effect on the tax base is greater in those areas than it will be in, say, a community with a big power plant paying lots of property taxes.

"A zero levy increase is actually a tax increase," Hinze said.

He worked out an example of a $200,000 home, using statewide average tax rates and the assumption that everybody will levy the same total property tax amount next year as this year. He shows property taxes on that house rising from $1,924 to $2,005. That's a 4 percent tax hike on a flat levy.

If local officials are bound and determined to hold taxes (as opposed to the total levy) flat, they're going to have lower the total levy by the amount of reimbursement they've been getting under the old system.

This, of course, stands to reason. Less money coming from elsewhere means either local taxpayers have to pay more or local officials have to spend less.

Yet even that's not a clean formula, Hinze said. The ultimate effect will vary from place to place and "the effects are hard to imagine."

The League of Minnesota Cities is fielding questions and planning a webinar next Friday for city officials to work through the change, which adds to the much more publicized effect of LGA cuts, says league policy analysis manager Rachel Walker. Those folks are already getting their budgets in line for 2012. (The process will be a continuation of the squeeze they've felt for years. For more on the pressures and solutions they've found, see Ground Level's Cities in Crisis coverage.)

So take a look at Hinze's example. You should be able to plug in your home's value and get a rough feel for what lies ahead. Then look at your tax bill to remember your current tax rate. Then, as local officials wrestle even harder than they have in the past with budgets, taxes and service cuts, listen closely.

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