The property tax gap

Elizabeth Page grew excited as she scanned her property tax statement last fall.

According to Hennepin County records, the value of her house in northeast Minneapolis jumped 8.2 percent from the prior year to $487,000.

That spelled good news to Page, who was planning to sell her home. Much to her dismay, however, she could wrangle only $430,000 for her two-bedroom townhouse.

"That's a huge difference," said Page, a graphic designer. "I don't see how it is possible to jump $37,000 [in value] in one year. I don't know how the county estimates home values."

As the deadline for paying the first half of this year's property taxes fast approaches, homeowners are confronting the complex and often puzzling system of how local officials value homes and dole out property taxes. While people may not have paid much attention to property taxes in the past, soaring property values and sizable tax bills have firmly planted the issue in the minds of homeowners.

Property taxes are expected to rise $590 million this year to an all-time high of $6.3 billion, according to the Minnesota Center for Public Finance Research, the research arm of the Minnesota Taxpayers Association (MTA). As state aid to cities and towns dwindles, local governments are turning to property taxes to help fund public services. School boards, for instance, have new powers to levy up to $140 million in property taxes to spend on K-12 schools.

"This means that the property tax system is more accountable to voters, but it also means that taxpayers across the state must become educated about how the property tax system works," the MTA says.

One thing that mystifies homeowners such as Page is the wide discrepancy between the value that local officials assess homes and the price that the house can actually fetch on the market.

"I'm seeing a lot of it," said Michael Sharp, a real estate agent with Re/Max, who recalled a customer selling a condo for $280,000 even though the county valued the property at $329,000. "There is an automatic [value] appreciation in the [property tax] system even though we haven't seen it" in the actual marketplace.

Market values and property taxes are rarely in lockstep. That's because the process of calculating, imposing and collecting Minnesota property taxes for a year actually spans two calendar years.

For instance, for taxes payable in 2005, the cycle begins on January 2, 2004, and doesn't end until the final payment is made in October and November 2005.

Anything can happen to real estate prices in that two-year window. While Minnesota and the rest of the United States have witnessed a housing boom during the past several years, there are signs that the market is cooling off. That will lead to greater gaps between taxable values and market prices, some analysts say.

The number of houses placed on the market in the Twin Cities metro area in March smashed records, rising 23 percent compared with the same period last year, according to a report released Wednesday by the Minneapolis Area Association of Realtors.

It was the eighth consecutive month of record-setting listing activity in the 13-county metro area. With nearly 11,000 new listings on the market last month -- compared with about 8,800 in March 2005 -- buyers have negotiating power they didn't have last year, and sellers appear to be more willing to compromise on price.

"More people need to look at the taxable market value," Sharp said. "They have to pay the extra tax for a property that doesn't command the value" in the market.

Other homeowners also are often confused about why local officials tax their house much higher or lower than other houses in the same neighborhood or street.

Brian Kompelien, a financial planner who lives in the Fulton neighborhood near Lake Harriet, said a neighbor is paying half the taxes that Kompelien owes even though the neighbor's house is on a better street.

"That really caught my eye," he said.

Generally, the values of properties in a community don't grow uniformly and often depend on market conditions and quality of property, according to the MTA. Factors such as recent renovations, comparable home sales, and regular maintenance affect the value of the property.

Those explanations don't satisfy Kompelien.

"There doesn't seem to be a connection between the houses and taxes," he said. "Something is not fair with the system."

Matt Spector saw the property taxes on his townhouse in southeast Minneapolis jump 14.9 percent. He called the city assessor's office, and an assessor was sent to take a second look at his home. Eventually, the city knocked down the increase to 3 percent. Spector, who is president of his homeowners association, said the city revalued 13 of the 20 townhouses to a lower rate.

While Spector said he was "pleasantly surprised" how quickly the city resolved his complaint, he wonders how local officials could value his home and other townhouses so high in the first place.

"It's an inexact science," Spector said. "You think [cash-strapped local governments] are just trying to see who doesn't react [to a big property tax increase]? Perhaps. ... The increase was just astronomical. I see evidence [my townhouse] wouldn't sell for that kind of money."

Spector advises other homeowners to pay attention to property tax notices they receive throughout the year, follow up quickly with local officials, and present them with detailed information about their homes.

The real problem with the property tax system is a lack of transparency and accountability, said David Strom, president of the Taxpayers League of Minnesota, an advocacy group.

"No one knows who is responsible for a property tax," said Strom, who has been pushing for a "Taxpayers Satisfaction Survey" that he says would give taxpayers greater input on local tax decisions such as property taxes.

If 20 percent of the taxpayers disapproved of the tax increase proposed by their city or county, the increase would not go into effect without a local referendum.

"I like to pay for city services," Spector said. "But I would also like to see some fiscal restraint."

Thomas Lee • 612-673-7744