Property taxes paid as a percent of income have declined for the typical Minnesota homeowner since 2007, according to the Minnesota Center for Fiscal Excellence (MCFE), formerly the Minnesota Taxpayers Association. As noted in the previous article in this series, however, this conclusion is not necessarily warranted by the data. Furthermore, if we look at the longer term, average homeowner property taxes in dollars and as a percent of income have increased sharply.
Because it relied on data from the Residential Homestead Property Tax Burden Report (a.k.a. the Voss Report), MCFE’s analysis was limited to the period beginning in 2007. This time frame omits the period of rapid homeowner property tax growth that occurred during the five years preceding 2007.
During the period from 2002 to 2007, the average homestead property tax in Minnesota (calculated by dividing total homeowner net property taxes by the total number of homesteads) increased by 57.1 percent, compared to just 9.2 percent during the period from 2007 to 2015. The relatively slow growth rate since 2007 was in large part due to a sharp increase in property tax refunds enacted in 2013, which led to a significant dip in net homestead property taxes in 2014. Nonetheless, the total growth in the average homestead net property tax from 2002 to 2015 is 71.5 percent—over twenty percent above the rate of inflation for state and local government purchases.1
Like the MCFE analysis of Voss report data, the preceding analysis of homestead property taxes does not adjust for qualitative changes in the homeowner population over time due to the homeowner exodus resulting from the foreclosure crisis. To partially fill this void in a way that accounts for changes in homeowner income, the following analysis isolates the experience of a householder who in tax payable year 2002 and 2015 owned an average value Minnesota homestead2 and who was subject to average statewide tax rates.3 Tax payable year 2002 was chosen as the baseline year for this analysis because it was the year that major changes to Minnesota’s property tax system enacted in 2001 were first implemented; 2015 is the most recent year for which American Community Survey (ACS) income data are available.
The 2015 income of this household is equal to the average for all owner-occupied households in the state based on ACS data (1-year estimates). The 2002 income was calculated by multiplying the 2015 income by the ratio of average household income for all Minnesotans in 2002 to that of 2015.
Based on this approach, the 2002 and 2015 income, home taxable value, and property tax paid and effective tax rate (i.e., net homestead property tax as a percent of income or ETR4) before and after the property tax refund (PTR) are listed below. The PTR calculation assumes married joint filers with one dependent.
Based on the experience of this Minnesota homeowner, the net effective tax rate (after PTR) increased from 1.88 percent in 2002 to 2.35 percent in 2015. In other words, property taxes paid per dollar of homeowner income increased by 25 percent over this thirteen year period.
The debate over the merits of an increase in state property tax aids and credits will no doubt continue throughout the 2017 legislative session, but the analysis presented above should give pause to those who argue that property tax aid and credit increases are unnecessary because the typical Minnesota homeowner has abundant capacity for additional property tax increases. The property taxes paid by homeowners have increased significantly since 2002 and their ability to bear even more property tax increases is not without limit.
1The fact that statewide homestead property tax growth has exceeded the rate of inflation is not the result of growing local government budgets, which on a statewide basis declined in real dollars over this period; as noted in part one of this series, a major culprit behind the rapid hike in Minnesota property taxes is a sharp decline in state aid to local governments.
2The average value Minnesota homestead was calculated by dividing the sum of residential homestead taxable value by the number of residential homesteads. The 2015 average value homestead includes the portion of value excluded from taxation as a result of the homestead market value exclusion. However, the impact of the exclusion is taken into account when calculating the property tax amount.
3The average net tax capacity tax rate was calculating by dividing the statewide sum of local government spread levies by the statewide sum of taxable tax capacity. The average referendum market value tax rate was calculated by dividing the statewide sum of referendum market value levies by the statewide sum of referendum market value.
4The Voss Report uses the term “effective tax rate” (ETR) to refer to property taxes as a percent of market value. However, as in part two of this series, this article uses ETR to refer to net property taxes as a percent of income in order to avoid repetition of the phase “net property taxes as a percent of income.”