HomeMy WebLinkAboutProperty Taxation 101
LEAGUE OF
MINNESOTA
CITIES
CONNECfING & INNOVATING
SINCE 1913
Property Taxation 101
This guide is intended to describe the basics of Minnesota's property tax system. This system
collected more than $6.8 billion in 2008 to help fund the services of schools, counties, cities,
townships, and special districts and the state general fund. One of the challenges of trying to
understand this system is the complex array of terms involved. As new terms are introduced in this
guide, they are shown in italics. A glossary at the end of the guide has short definitions of these
terms.
Assessment and classification
The property tax system is a continuous
cycle, but it effectively begins with the
estimation of property market values by local
assessors. Assessors attempt to determine the
approximate selling price of each parcel of
property based on the current market
conditions.
Along with the market value
determination, a property class is ascribed to
each parcel of property based on the use of
the property. For example, property that is
owner-occupied as a personal residence is
Glassified as a residential homestead. The
"use class" is important because the
Minnesota system, in effect, assigns a weight
to each class of property. Generally,
properties that are associated with income
production (e.g. commercial and industrial
properties) have a higher classification
weight than other properties.
The property classification system
defines the tax capacity of each parcel as a
percentage of each parcel's market value.
For example, a $75,000 home which is
classified as a residential homestead has a
class rate of 1.0 percent and therefore has a
tax capacity of$75,000 x .01 or $750. (A
sample of the class rates are included in table
A.)
145 UNIVBllSITY AVE. WEST
ST. PAUL. MN 55103-2044
[parcel market value] * [class rate] == [parcel
tax capacity]
The next step in calculating the tax
burden for a parcel involves the
determination of each local unit of
government's property tax levy. The city,
county, school district and any special
property taxing authorities must establish
their levy by December 28 of the year
preceding the year in which the levy will be
paid by taxpayers. The property tax levy is
set after the consideration of all other
revenues including state aids such as LGA.
[city budget] - [all non-property tax
revenues] == [ city levy]
For cities within the seven-county Twin
Cities metropolitan and on the iron range, the
levies are reduced by an amount of property
tax revenue derived from the metropolitan
and range areafiscal disparities programs
(see Fiscal Disparities 101 for more
information).
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Local tax rates
Local governments do not directly set a tax
rate. Instead, the tax rate is a function of the
levy and the total tax base.. To compute the
local tax rate, a county must determine the
total tax capacity to be used for spreading the
levies. Th€ total tax capacity is computed by
first aggregating the tax capacities of all
parcels within the city. Several adjustments
to this total must be made because not all tax
capacity is available for general tax purposes.
The result of this calculation produces
taxable tax capacity. Taxable tax capacity is
used to determine the local tax rates.
[city levy] / [taxable tax capacity] = [city tax
rate]
The city tax rate is computed by dividing the
city levy (minus the fiscal disparities
distribution levy, if applicable) by the taxable
tax capacity. Under the current property tax
system, the tax rate is expressed as a
percentage. For example, the average 2008
city tax capacity rate is approximately 36.29
percent. Dramatic changes to the tax system
in 2001 increased the average city rate
significantly in 20Q2. This same calculation
is completed for the county based on the
county's levy and tax base, the school district
and all special taxing authorities. The sum of
the tax rates for all taxing authorities that
levy against a single property produces the
total local tax. rate. This total local tax rate is
then used to determine the overall tax burden
for each parcel of property.
Parcel tax calculations
The property tax bill for each parcel of
property is determined by multiplying the
parcel's tax capacity by the total local tax
rate. The tax statement for each individual
parcel itemizes the taxes for the county,
municipality, school district, and any special
taxing authorities.
[parcel tax capacity] * [total local tax rate] =
[tax capacity tax bill]
To complicate the tax calculations,
voter-approved referenda levies are applied
to the market value of each parcel, not tax
capacity. As a result, each identically valueQ
parcel, regardless of the property's use, pays
the same amount of referenda taxes (with the
exception of certain agricultural and seasonal
recreational properties, which are exempted
from referenda taxes). In 2008, three
counties, 50 cities and 335 school districts
levied market value-based levies. These
cQmmunities must have a separate calculation
for a market value referenda levy by the total
taxable market value of each community.
[parcel market value] * [market value tax
rate] = [market value tax bill]
[tax capacity tax bill] + [market value tax
bill] = [total tax bill]
State property tax
New to the tax system in 2002 was a state
property tax on all commercial, industrial,
seasonal recreational, and utility real
property. In 2008, this new tax raised $655
million statewide; the prQceeds are deposited
in the state general fund. Prior to 2002, the
state last collected a property tax in 1968.
Property tax credits
Several tax credits for various types of
properties are available in certain instances.
These amounts are subtracted from the
overall taxes for each parcel to determine the
net tax bill for the individblal owner.
Minnesota also provides additional property
tax relief directly to individual homeowners,
cabin owners, and renters through the circuit
breaker and the targeting refund programs.
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Property tax intricacies
The technical details of computing property
taxes mask many other intricacies of the
property tax system. Many communities
over the past several years have experienced
situations where individual property taxes
rise much faster than the increase in the
levies that are certified by local units of
government.
The most common factor that results in
an increase in an individual parcel's tax is the
change in the parcel's estimated market
value. Without any change in local levies, a
property owner can experience a tax increase
due almost exclusively to any valuation
Increase.
The Legislature frequently changes the
classification system. Changes to the
classification system can shift property tax
burdens from one type of property to another.
Table A demonstrates some of the changes
the Legislature has made to class rates since
1997. Commercial, industrial, and apartment
ptoperties received significant reductions in
their class rates. This shifts tax burden tCul
other clasSes of property that did not receive
class rate reductions. In an effort to minimize
the effect of these shifts, the legislature
reduced school levies across the state and
created the Market Value Homestead Credit.
This credit reduGes property taxes for
homesteads by 0.4 percent of the homestead's
market value up to a maximum $304 dollars.
As part of the credit program, the state has
reimbursed cities for the amount by which
the credits reduce cities' tax receipts. The
Legislature made significant reductions to the
reimbursement amounts for cities in 2003
and 2004 and later extended those reductions
to 2005 and 2006. The reimbursements were
restored for 2007.
Economic factors that may affect broad
classes of property can also influence the
overall tax changes for individual parcels of
property. For example, in the early 1990s the
metropolitan area experienced major declines
in the valuation for commercial and industrial
properties. These valuation declines shifted
taxes from property classified as commercial
and industrial to all other types of property.
Valuation declines also may have
accentuated the levy changes by local units of
government.
A 2002 law change exempted
agricultural and cabin property from voter-
approved referenda levies. In some
jurisdictions where these types of property
are a significant part of the tax base, this
change shifted taxes onto other classes of
property .
Legislative changes in state aid programs
can also affect the revenue needed to be
raised from the property tax. In 2002 the
legislature eliminated HACA and increased
the other major aid program, LGA, by $140
million. In 2003, the Legislature reduced
2003 LGA by about $120 million and 2004
LGA by about $150 million. In 2005,
however, th.e Legislature added about $48
million to the LGA program for 2006 and
beyond, $4 million of which is directed to
cities under 5QOO via a per Gapita aid base.
Levy l~mits also impact local levy decisions.
During the 2003 session, cities that had been
previously covered by levy limits lost any
wnused levy authority. There were no levy
limits in place for 2008 but the Legislature
did pass new levy limits for cities over 2500
fQr taxes payable in 2Q09, 2010, and 2011. ,
This discussion is only a general overview of
the current MinnesQta property tax system.
Over time, the system has become more
complex and difficult for taxpayers to
understand. Unfortunately, local officials
must frequently explain how the system
works and take the blame for the complicated
features of the system. Local officials,
however, can only cQntrollocallevy
decisions. They have no direct ability to
modify the overall structure of the tax system
and are at the mercy of the Minnesota
Legislature.
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Glossary of Terms
Circuit breaker - A state-paid property tax
refund program for homeowners who have
property taxes out of proportion with their
income. A similar program is also available
to renters.
Class rates -The percent Qf market value set
by state law that establishes the property's
tax capacity subject to the property tax. See
Table A for a sample list of class rates.
Fiscal disparities programs - Local units of
government in the Twin Cities metropolitan
area and on the iron range participate in
property tax base sharing programs. Under
these two programs, a portion of the growth
in commercial and industrial property value
of each city and township is contributed to a
tax base sharing pool. Each city and
townsl1ip thert receives a distribution of
property value from the pool based on market
value and population in each city.
Homestead and agricultural credit aid
(HACA) - A $200 million property tax relief
prograln that was eliminated in 2001.
Local government aid (LGA) - A state
government tevenue sharing program for
cities and townships that is intend€d to
provide an alternative to the property tax.
The formulae for distributing the aid
payments were changed for 2004 and
beyond. Transition mechanisms built into
the new LGA law mean that it will be several
years before all cities are fully "on" the new
formula. LGA is distributed using different
formulae for cities over 2,500 and cities
under 2,500. Large city formula factors are:
pre-1940 housing percentage, population
decline over last decade, accidents per capita,
average household size, metro or non-metro,
and adjusted net tax capacity per capita.
Small city formula factors are: pre-1940
housing percentage, population decline over
last decade, commercial/industrial property
percentage, and population. The 2006
Legislature implemented a new $6 per capita
aid base for cities under 5000.
Local tax rate - The rate used to compute
taxes for each parcel of property. Local tax
rate is computed by dividing the certified
levy (after reduction for fiscal disparities
distribution levy and disparity reduction) by
the taxable tax capacity.
Market value - An assessor's estimate of
what property would be wol1:h on the open
market if sold. The market value is set on
January 2 of the year before taxes are
payable.
Market value homestead credit - This
credit offsets a portion of each homestead's
property tax burden equal to .4 percent of the
homestead's market value up to a maximum
credit of $304.
Property class - The classification assigned
to each parcel of property based on the use of
the property. For example, owner-occupied
residential property is classified as
homestead.
Property tax levy - The tax imposed by a
local unit of government. The tax is
established on or around December 28 of the
year preceding the year the levy will be paid
by taxpayers.
Targeting refund - a state paid property tax
refund for homeowners whQse property taxes
have increased by more than 12 percent. A
similar program is available to cabin owners.
Tax capacity - The valuation of property
based on market value and statutory class
rates. The property tax for each parcel is
based on its tax capacity.
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Total tax capacity - The amount computed
by first totaling the tax capacities of all
parcels of property within a city.
Adjustments for fiscal disparities, tax
increment and a portion of the powerline
value are made to this total since not all tax
capacity is available for general tax purposes.
Truth-in- Taxation - The "taxation and
notification law" which requires local
governments to set estimated levies, inform
taxpayers about the impacts, and hold a
separate hearing to take taxpayer input.
Table A: class rates
Property Class Taxes Local Taxes State Tax Payable
Payable 2007 Payable 2008 2008
Residential Homestead:
<$76,0001 1.0% 1.0% No state tax
$76,000-$500,000 1.0 1.0
>$500,000 1.25 1.25
N on-bomestead Residential:
Single unit:
<$76,0001 1.0 1.0 No state tax
$76,00~-$SOO,OOO 1.0 1.0
>$500,000 1.25 1.25
2-3 unit buildings 1.25 1.25
Market-rate Apartments: 1.25 1.25 No state tax
Commercial/Industrial: Subject to state
<$100,0002 1.5 1.5 levy (Commercial-
$100,000 - $150,000 1.5 1.5 industrial rate)
;>$150,000 2.0 2.0
Seasonal Recreational Residential: Subject to state
<$76,001 1.0 1.0 levy (seasonal-
$76,000-$500,000 1.0 1.0 recreational rate)
>$500,000 1.25 1.25
IPirst tier limit was $72,000 for 1997, $76,000 for 2000, and $500,000 for 2002
2Pirst tier limit was $100,000 for 1997, $150,000 thereafter
Rachel Walker, League of Minnesota Cities -Updated August 2008
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