Continued: Sagging home values hit the cities right in the tax base

The foreclosure-ravaged Minneapolis property tax base has shrunk for the first time since the mid-1990s. St. Paul is reporting an even bigger drop.

That means that property owners would have to pay higher tax rates next year just for the cities to collect the same amount of money in property taxes.

Minneapolis Assessor Patrick Todd told a City Council committee Monday that the estimated market value of property in the city fell by 2.7 percent between the start of 2007 and 2008. St. Paul's tax base took an even bigger hit, at 3.6 percent.

The driving factor in both cases is an erosion in home values, triggered by a surplus of homes on the market because of foreclosures and tightening credit.

In the 2008 assessment, estimated values dropped for four out of every five detached single-family homes in Minneapolis. The 2008 assessment affects taxes paid next year.

Todd said Minneapolis home values decreased by 6.1 percent citywide in the last year. That's despite $534 million in new residential construction completed in 2007, mostly for condos. St. Paul's residential tax base shrank by 6.8 percent.

Other classes of Minneapolis city property continued to grow in market value: 8.7 percent for the city's dwindling industrial areas, 6.3 percent for office and retail businesses, and .7 percent for apartments. In St. Paul, the commercial-industrial tax base grew by 6.2 percent, according to Ramsey County Assessor Stephen Baker.

For the rest of Hennepin County, the aggregate value of single-family homes rose by 1.1 percent when new construction was included, according to county Assessor Tom May. Other major property classes also gained value.

The drop in market value could increase pressure on the Minneapolis City Council's policy of raising the city property tax collection by 8 percent annually. That's easier to sustain politically when values are rising.

The drop in values is uncharted territory for the current council. The last time Minneapolis' property tax base fell was a four-year slide between 1990 and 1994.

The magnitude of the 2.7 percent drop in the Minneapolis market value is magnified by the assessor's office projection made last May that overall values would rise by that amount. But the home market worsened over the summer and fall.

The impact of the property value decline will be softened by a state formula used to figure an area's "tax capacity." The formula has the effect of magnifying the tax paid by apartment buildings, commercial-industrial property, and homes worth more than $500,000. Once that formula is applied, the 2.7 percent drop in Minneapolis market value translates to a minuscule .4 percent gain in tax capacity.

City officials presented some examples of how the change in property assessments would affect homes at different values, but those were based on no increase in the city levy -- something that hasn't happened in years.

With values falling, city taxpayers will face a choice between paying higher tax rates or seeing cuts in city services such as police and fire, garbage collection and street repair. That decision will be made by the Council next fall

"People are hurting obviously, so that sometimes puts a larger demand on city services," said Council Member Paul Ostrow, who chairs the budget committee. "But also people that are hurting have less capacity to pay any bill, including property taxes."

Ostrow had already been pressing the council to revisit the annual 8 percent increases in the city's property tax collections.

"We're absolutely going to have a discussion about where we want property taxes to go," he said.

Among the St. Paul neighborhoods showing the sharpest residential declines were Dayton's Bluff, the North End, Frogtown and Summit-University, all of which saw median values for detached single-family homes drop by at least 16 percent.

In Minneapolis, the city broke out estimated values by council ward for detached single-family homes, not including condos and townhouses. The citywide drop was 9.6 percent, but the biggest drop on a percentage basis came in the far north Fourth Ward, at 14.2 percent. The Isles-downtown 7th Ward was the only ward to notch a gain in values, at a fractional .5 percent.

Steve Brandt •sbrandt@startribune.com• 612-673-4438

Anthony Lonetree • alonetree@startribune.com • 651-298-1545