In 2001 state policymakers eliminated the uniform statewide general education levy and reduced other school property taxes.* The next year, school property taxes fell dramatically. Beginning in 2003, however, statewide school property taxes gradually increased to fill the gap—and nullified the 2002 school tax relief efforts. Today statewide school property taxes are as high as they ever were, even adjusted for inflation. At the same time, inflation-adjusted revenue for school districts is about the same as in 2002. Statewide, post-2002 state aid reductions caused most school property tax hikes, not school spending increases.
School property tax levies come in two flavors. The first sort, tax capacity levies, are equal to a property’s market value times the appropriate “class rate” for the category that a property is in. The class rate/tax capacity system shifts taxes from one class of property to another. For example, because homestead properties have lower class rates than businesses, homesteads pay fewer taxes per dollar of taxable value than businesses—provided that the property taxes are spread against tax capacity.
The other type of school levy is the referendum market value levy. Most of these levies must be approved by voters.† Some classes of property—such as agricultural land and cabins—are excluded from referendum market value (RMV), so they pay no RMV levies. The RMV of most other types of property—including homesteads and businesses—equals their taxable value. Without the intervening class rates, levies spread against RMV give no preferential treatment to homeowners relative to businesses. In other words, when it comes to RMV levies, homeowners have the same tax per dollar of taxable value as businesses.
Through a large infusion of state aid, school property taxes fell dramatically from 2001 to 2002. This new aid was used to reduce both tax capacity levies and RMV levies. School property tax revenue derived from tax capacity levies fell from approximately $1.64 billion in 2001 to $776 million in 2002—a reduction of over 50%. School referendum market value levies fell by over a third, from about $337 million in 2001 to $211 million in 2002. In total, school property taxes fell by nearly $1 billion—the largest one-year school property tax reduction in state history.
The huge dose of school property tax relief administered in 2002 began to gradually erode in 2003. Beginning in that year and for most of the following decade, state aid to school districts was either cut or failed to keep pace with inflation, forcing school districts to shift back to property taxes to cover costs.
To adjust for the decline in the purchasing power of the dollar over time, the levy amounts in the following graph are shown in constant (i.e., inflation-adjusted) 2017 dollars.‡
School property taxes dropped dramatically from 2001 to 2002. However, subsequent property tax increases wiped out the 2002 tax relief over the next fifteen years. As real (i.e., inflation-adjusted) state aid declined after 2002, districts relied more on voter-approved referenda to fund school operating costs. As a result, RMV levies shot up from 2002 to 2017, more than quadrupling in nominal dollars (i.e., dollars not adjusted for inflation) and more than tripling in real dollars. RMV levies comprised 36 percent of all school levies in 2017—up from 21 percent in 2002.
By 2017, real school property taxes were back to the 2001 level. The property tax relief distributed in 2002 had vanished. However, statewide real school district revenue was the same as in 2002. The increase in school property taxes since 2002 had gone to backfill state aid reductions. Increases in state aid enacted in 2013 were vitally important, since they helped to restore real per pupil school revenue to the 2002 level, but they did not produce a statewide reduction in school property taxes.
The post-2002 school property tax increases did not affect all property owners equally. Due in large part to the rapid growth in and increased dependence on referendum market value levies, homeowners were hit much harder than businesses. This trend will be explored in part two of this series.
*All dates in this article reflect the tax payable year. Tax payable year property taxes are used to fund school operations in the subsequent school fiscal year. For example, taxes payable in 2002 are used to pay for school operations in fiscal year 2003.
†Some forms of referendum market value levies do not require voter approval; currently, referendum market value levies that do require voter approval comprise 57 percent of all referendum market value levies.
‡The conversion to constant 2017 dollars is based on the Implicit Price Deflator for State and Local Government Purchases, which is the appropriate index to use when adjusting school revenues and expenditures for the effects of inflation. Tax capacity levies for 2001 presented in the graph are reduced by the amount of the Education Homestead Credit to reflect the level of taxes actually paid by Minnesota taxpayers. For the same reason, tax capacity levies for 2002 to 2011 are reduced by the school district portion of the Homestead and Agricultural Market Value Credits. Property tax amounts shown here were calculated using Minnesota Department of Revenue data, and include subtractions for various property tax aids (e.g., disparity reduction aid) and other post-levy adjustments. Levy data from the Minneosta Department of Education—used in North Star’s 2017 School Finance Report—do not incorporate these adjustments. Consequently, the levy amounts shown here differ somewhat from the levy amounts shown in the 2017 school finance report.