Almost every taxpayer in the state of Minnesota will face increased property taxes next year - even before any tax changes made by counties, cities and school districts - thanks to a tax shift approved by the state legislature in July.
During this year's legislative session, the legislature eliminated a tax break called the Homestead Market Value Credit (HMVC) and replaced it with the Homestead Market Value Exclusion (HMVE).
Under the old program (HMVC), all homesteaded property (either a residential home in town or a one acre house and garage on a farm) worth less than $413,800 received a credit on their property tax statement. This credit reduced property taxes by a maximum of $304 for the first $76,000 of estimated market value, gradually decreasing to zero as property values increased.
Under the program, the state was supposed to reimburse local governments for the sum of the credits granted to taxpayers in their jurisdiction. In practice, this meant that part of the money local governments received came directly from property tax payments and some came from the state as credit reimbursement payments.
In place of the HMVC, the state has implemented a new program, the Homestead Market Value Exclusion. Instead of a credit that reduces the amount of property taxes paid, the exclusion reduces the taxable value of a property for homesteads valued at less that $413,800.
County Assessor Judy Thorstad emphasized that the exclusion does not lower the actual value of a property, just the amount that will be taxed. As a result, there will be a smaller tax base for local governments to levy.
This shift in the way property taxes are calculated and collected will result in changes across the board for taxpayers that are frustratingly hard for officials to predict, said County Auditor/Treasurer Neil Wiese.
In the short term, all taxpayers will likely see an increase on their tax statements for this year. But in the long term, the change should help local taxing jurisdictions (counties, cities and schools, for example) collect all the money levied for each year.
So what is the impact for taxpayers in Stevens County?
In 2010 (taxes payable 2011), around 2,700 of the 7,000 parcels in Stevens County received a credit on their property taxes, for a total of about $600,000 of credit reimbursement from the state. Even if no taxing jurisdictions in Stevens County ask for increases to their levies, taxes across the county will still have to go up about 4.5 percent to make up for the $600,000 that will not be coming from the state.
"The state's not going to give us homestead credit money, so the local taxing jurisdictions will have to come up with it by directly taxing property owners to replace this loss of income," said Wiese.
The problem is that because of the new HMVE program, it's not entirely clear how that increase will be distributed.
At this point, officials anticipate higher-value properties and commercial businesses will be hit the hardest because the exclusion will lower the overall tax capacity for the county by reducing the taxable value on homesteads but not other types of property, said Thorstad.
"[The state] is putting it on the backs of commercial a little bit more," said City Manager Blaine Hill. "I'm not so sure that's the best way to do it, especially when everybody is trying to protect big business. The big businesses got hurt locally."
Despite this initial frustration with the program, both Hill and County Coordinator Brian Giese believe the change will be beneficial in the long-term because it will create more stability in local government budgets.
One problem with the credit program, explained Jim Miller, executive director of the League of Minnesota Cities, is that the state often failed to reimburse local governments for the credit. This meant that local governments levied for money they needed to function but might not actually receive all of it.
"I think it's going to make our job easier if [the state] doesn't touch it again because we'll know what we're going to get," said Hill. "Any time you sit and wait to find out what you're going to get from the state, it makes your job harder."
"The interesting thing about this change is that although the shift will be more directly to local residents to pay that tax, we should in fact get that money," said Giese. "That's something that wasn't happening in the past."