When Truth in Taxation statements come in the mail this November, the average Minnesota homeowner will likely see his or her real estate taxes either decline or remain flat for the first time in 12 years, according to projections from the nonpartisan House Research Department. Working- and middle-class Minnesotans are expected to see significant property tax relief, thanks to progressive lawmakers’ work this year overhauling the state’s tax system and increasing education funding.
Property owners in southwestern Minnesota cities are projected see their 2014 taxes decrease significantly more than the statewide average for most property classes. Even before factoring in tax refunds that go directly to property owners, on average existing west-central Minnesota city homesteads are projected to see a nine percent drop in property taxes, compared to a 3.1 percent statewide decline, according to House Research.
When it comes to commercial/industrial properties, owners are projected to see about a 5.6 percent drop in west-central Minnesota cities.
Statewide, Minnesota 2020—a nonpartisan think tank—projects on average homesteads should see a 6.4 percent (more than $200 million) property tax decline once direct refunds are factored in. All classes of property statewide should see a 1.5 percent average property tax cut after accounting for direct refunds. Not enough information is available at this point to pin down central Minnesota averages when including refunds.
This property tax relief is due to a significant shift from past state fiscal policy. Under a decade of “no-new-tax” dogma, state lawmakers balanced recurring budget deficits by cutting aid to cities, counties, and school districts, forcing locals to cut services and raise property taxes.
In Granite Falls for example, Local Government Aid (LGA) had been cut significantly from 2002 to 2013, falling from $398 to $253 per capita in constant 2013 dollars. This represented a 45 percent aid cut to the city’s budget in 2013 dollars. As was the case throughout Minnesota, city leaders cut services and increased property taxes.
New state revenue and a refined funding formula enacted last spring will provide each city a modest LGA boost.
A bipartisan Minnesota legislature first distributed LGA in 1972 in an attempt to ensure all the state’s communities had adequate funding to provide a base level of services, such as police, fire, and libraries. Adjusting for inflation and population growth, city aid peaked in 1990. By 2013, total city aid was less than half of what it was in 2002 and less than a third of what it was during the 1990 peak. Not surprisingly property taxes had risen.
Since 2003, LGA cuts, county aid reductions, and a 15 percent inflation-adjusted per pupil state education funding cut, translated not only into higher property taxes, but cuts in education, public safety, libraries, parks, and city infrastructure. To help reverse these trends, the 2013 legislature invested $80 million in additional LGA funding beginning in 2014 and nearly one-half billion for schools.
Page 2 of 2 - Looking just at city LGA, the real per capita LGA of all Minnesota cities is still only half of what it was in 2002, even after the $80 million increase approved by the Legislature for 2014.
Property taxes are among the most unfair taxes because they aren’t based on the ability to pay. Minnesota legislature and Governor Dayton have brought fairness back to Minnesota’s tax system by investing in Local Government Aid and other forms of property tax relief. These actions will ensure that southwestern Minnesota cities will have the police, fire and other public services needed to maintain vibrant communities and a thriving local economy.
Matt Entenza, is a Senior Fellow and Jeff Van Wychen is the Director of Tax Policy with Minnesota 2020, a progressive think tank focused on what really matters: education, health care, transportation, clean energy, and economic development.