First I want to make clear that the Homestead Classifications are not going away. A classification means you are the owner of the property and have successfully applied to homestead your property. These classifications have been in place for decades and are not being changed nor going away.
There is another homestead value credit (HVC) to local governments, not homeowners. Because the state was often delinquent on payments to local governments, and nine of the last ten years did not pay what the state said it was going to pay, the legislature has forgone the HVC program and instead implemented the Homestead Market Value Exclusion program.
By replacing the HVC homeowners will see property tax relief and local governments will have more certainty in their budgets. The Market Value Exclusion eliminates the state as a middle-man, applying property tax relief up front.
Some would say that this change will result in an automatic property tax increase, but that does not have to be the case if a local government unit keeps their budget flat and does not increase it in these tough economic times. The main reason for this change in the first place is that this has turned into a failed program on the state's part. The state hasn't been able to make payments to local governments for years, and that's not fair to our local governments and especially not fair to Minnesota taxpayers.
With the change, the prior underfunded credit will now be replaced by the homestead market value exclusion. This new system is structured to give homeowners a similar benefit compared to the old credit, with the benefit going directly to the taxpayers. With the testimony of several local units of government, they told the Tax Committee to get rid of the HVC rather than keep promising money you don't have. It also made it tough for local units of government to set a budget, not knowing what they could count on from the state. This would cause them to have to change budgets in the middle of the year.
It is up to local government officials to decide how much spending is needed to balance their budgets. Property taxes are local and during these extremely difficult economic times, our local officials will have to reexamine spending priorities. This is no different than what the legislature did to close a multi billion budget deficit, and very comparable to what families and businesses have been doing throughout Minnesota.
With this change, the State achieved budget savings of $365 million for the current 2012-13 biennium and $538 million for the 2014 - 2015 biennium by not having to book those expenses, even though they often did not pay part or all of them. Additionally, the intent is to see more direct relief to taxpayers and homeowners and we will see more spending accountability at local levels, direct relief to taxpayers and homeowners, and more certainty during the budgeting process.
Since the new homestead exclusion is calculated on the front end - when tax rates are set, there is no reimbursement to local governments. The local governments will receive the full amount that they levy and there is no possibility of a shortfall in levy receipts due to the state not reimbursing local government for the homestead credit.
The change, which will be implemented next year in 2012, received strong support from a large group of local government associations during the legislative session. The League of Minnesota Cities, the Association of Minnesota Counties, the Minnesota Township Association and the Minnesota Inter-County Association all testified in support of this reform.
As with any major change, there are sometimes unforeseen or unintended consequences. At a recent meeting with elected local government leaders, concerns were raised about this change and it potentially could change their community's property taxes, even if the local government did not budget for the Homestead Market Value Credit or raise their budgets. I will continue to look into this and work with local leaders and pursue changes in the 2012 legislative session, if necessary.
An additional reform-based provision included within the Omnibus tax bill was the $30 million expansion of the homeowner property tax refund program, which provides direct relief to homeowners whose property taxes are high relative to their incomes. Low and middle income taxpayers will now be able to capture more property tax relief through this program directly instead of through local government aid programs.