Homeowner Tax Rates Aren’t Necessarily Falling

Local elected officials have argued that property tax increases—including homestead tax increases—combined with declining real per capita local government revenue have fueled the need for an increase in state property tax aids and credits. But not so fast, says the Minnesota Center for Fiscal Excellence (MCFE), formerly the Minnesota Taxpayers Association. The first installment in this series addressed various claims made in a recent MCFE article; this article will address the argument that typical homeowner property taxes as a percent of income have declined significantly since 2007 and thus local governments should simply increase property taxes if they truly need more revenue.

MCFE’s argument is based on the Residential Homestead Property Tax Burden Report, more commonly known as the Voss Report. Based on data from tax payable year 2007 to 2015—the years corresponding to the first and last Voss reports—they observe that the median homeowner tax as a percent of income (referred to hereafter as the homeowner effective tax rate or ETR*) declined from 2.8 percent to 2.3 percent, which they cite as evidence that homeowners should be able to absorb property tax increases. This conclusion assumes that what is happening to the median home property tax is necessarily representative of what is happening to homeowners individually. Such an assumption is not necessarily correct.

Based on American Community Survey (ACS) estimates, the number of owner-occupied housing units in Minnesota declined by 28,700, or 1.9 percent, from 2007 to 2015. The decline in owner-occupied units stands in stark contrast to the growth in total units and rental units over the same period. From 2007 to 2015, the total number of housing units in Minnesota increased by 84,600, or 4.1 percent, and the number of renter occupied units increased by 113,300, or 22.2 percent.

While these trends are likely the result of a number of forces, there can be little doubt that the housing bubble bursting and the subsequent foreclosure crisis played a major role in driving down the number of owner-occupied housing units in Minnesota. To the extent that these former homeowners stayed in Minnesota, they appeared to have entered the ranks of renters. In all likelihood, the Minnesotans who lost their status as homeowners during this period were of relatively low income compared to other homeowners, and less able to withstand the economic shock of a severe recession combined with an unprecedented decline in home values.

This theory is consistent with other ACS data. From 2007 to 2015, median household income in Minnesota increased by 13.8 percent. Over the same period, the median income of homeowners increased by 16.4 percent, while the median income of renters grew by 23.9 percent.

At first blush, these findings appear impossible. The universe of households from which total ACS median income is calculated consists of two groups: households that rent and households that own. How is it possible that the income of each group separately is growing faster than the income of both groups combined? The resolution of this apparent paradox lies in the fact that the homeowner and renter populations are not static, but fluid. A renter one year might become a homeowner in the next. In the aftermath of the recent recession and foreclosure crisis, it appears that the shift was primarily in the opposite direction, with homeowners becoming renters.

The homeowners who were forced into the ranks of renters during the foreclosure crisis were more than likely of lower income than homeowners in general. The exodus of the low-income households from the ranks of homeownership would boost the mean and median incomes of the remaining homeowners, even if the income of each individual remaining homeowner remained constant. In addition, insofar as the households that were departing the ranks of the homeowner and entering the ranks of renters had higher incomes than those who were already renters, their arrival would boost the average and median income of renters. The data is not available to prove this theory conclusively, but it is consistent with ACS and other data that we do have.

The decline in homeowner ETRs is likely due in part to the exodus of lower-income households from the ranks of homeownership. By virtue of their low incomes, these households probably had high ETRs, since the property tax is regressive. As these high ETR households depart the universe of Minnesota homeowners, the mean and median ETRs of the remaining homeowners would fall. In fact, it is theoretically possible that the ETRs of the remaining individual homeowners stayed flat or increased at the same time that the median homeowner ETR fell.

MCFE argues that the Voss report captures “what an individual taxpayer’s world actually looks like.” To quote an old Gershwin tune, “It ain’t necessarily so.” The Voss Report is an excellent resource that provides reams of useful information on the relationship between homeowner incomes and property taxes across the state, but it does not necessarily describe the experience of a typical Minnesota homeowner over time, for the reasons noted above.

The next article in this series will suggest that Minnesota homeowners’ property taxes and effective tax rates have actually increased over time—thereby by negating the argument that increases in property tax aids and credits are unwarranted.

 

*The Voss Report and the MCFE article use the term “effective tax rate” (ETR) to refer to property taxes as a percent of market value. However, to avoid repetition of the phase “net property taxes as a percent of income,” this article uses ETR to refer to net property taxes as a percent of income.