A myth-busting look at property taxes

  • Article by: D.J. TICE , Star Tribune
  • Updated: March 7, 2011 - 2:42 PM

Think local levies punish mainly outstate regions and central cities, leaving suburbs unscathed? New data could make you think again.

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Just about everyone agrees that property taxes are a heavy burden on too many Minnesotans.

Gov. Mark Dayton is determined to shield households of modest means from any more of the property tax hikes he and other DFLers fault Republicans for forcing in recent years.

The main way Dayton aims to do that is to end years of reductions in state aids to local governments, which flow most generously to rural communities and to the big cities of Minneapolis and St. Paul. Property-rich suburbs get relatively little state aid.

To decide whether this approach is likely to solve the inequity problem, one might want to know where, in fact, the Minnesotans live who suffer most cruelly from property taxes. Let's define a suffering household.

How about home-owning households with modest total incomes, between $10,000 and $45,000, who pay more than 5 percent of their slim incomes in total property taxes, after all credits and refunds are accounted for? 

In 2008, according to new state research, just more than 16,000 of these struggling households were in Minneapolis and St. Paul. The pain was more widespread outstate, where nearly 28,000 heavily burdened households lived.

But by far the biggest population of these property-tax-poor Minnesotans resided in suburbs in the seven-county Twin Cities area -- more than 44,000 households, slightly more than in the core cities and greater Minnesota combined.

Surprised? Get used to it.

An extraordinary, little-noticed study by the state Department of Revenue is filled with myth-busting revelations about property taxes. Dryly titled the Residential Homestead Property Tax Burden Report, it is dubbed the "Voss Report" for short, after former state Rep. Gordon Voss of Blaine, who advocated for this kind of research years ago.

The study links property tax and income tax records for more than 1.3 million home-owning Minnesota households, all the better to tell us, really for the first time, who is actually getting hammered by property taxes -- and who is getting pampered.

The key breakthrough is that the Voss report measures property taxes as a percentage of income.

A confusing and perverse feature of the property tax is that how much you pay is largely based on the value of your property.

This approach to taxation is something of an historical relic, and it "doesn't say anything about ability to pay," according to Eric Willette, who heads the Voss project as director of property tax research for the revenue department.

Property value is an especially crude measure of wealth nowadays, when many homeowners carry large mortgages on their houses and when the market value of one's four walls often says more about how much one owes than how much one owns.

Nor does house value have much to do with the cost of services a city, county or school district must provide.

The Voss report does for the property tax debate what the Revenue Department's much-discussed Tax Incidence Study does for debates over fairness in Minnesota's overall tax system.

Declaring the department to be the definitive authority on tax matters, Dayton often cites the Tax Incidence research, which measures overall taxes as a portion of income, to support his view that Minnesota's rich pay less than their fair share.

Voss sheds the same kind of eye-opening light on geographic differences in property taxes.

Metro miseries

The Voss report confirms two common complaints about property taxes in Minnesota.

First, it shows that the tax is sharply regressive, taking a bigger bite from smaller incomes than it does from larger incomes. Second, it documents that residents of the state's largest city, Minneapolis, bear some of the heaviest property tax burdens around.

But the Voss data contradict something else we often hear from advocates for local government aids -- the belief that residents of greater Minnesota bear a disproportionate property tax burden compared with those in the wealthier metro area, or at least with those in the suburbs, and can't be asked to pay any more for their own local services.

Mayors Vern Rasmussen of Albert Lea and Dave Larson of Bemidji sounded this theme in a recent commentary, lamenting recent state aid cuts "leading to higher property taxes and reduced services ... in greater Minnesota and the inner city, while those located in high property wealth cities, particularly in the suburbs, have remained unscathed."

But what if it turned out that homeowners with similar incomes are likely to pay higher property taxes if they live in the suburbs than they would if they lived almost anywhere in greater Minnesota -- and about the same as they'd pay in the central cities?

That's the story the Voss report tells.

Let's focus on homeowners with incomes near the middle of the range -- between $45,000 and $65,000 a year.

In greater Minnesota as a whole, the median household in that income range (the one right in the middle), paid 2.4 percent of its total income in property tax in 2008, after all credits and refunds.

In the metro area as a whole, the median household in that range paid 3.5 percent of income -- 46 percent more.

The disparities are bigger when we compare smaller regions. The Voss report divides the state into 20 regions -- 10 outstate regions, 8 suburban regions, and the two big cities.

Our middle-income homeowners faced the state's highest median property tax burdens in southwest Hennepin County, a region including communities like Eden Prairie and Plymouth.

The median middle-income household there paid 3.8 percent of income in property tax. The second-highest burdens for this group, at 3.7 percent, were in Minneapolis and in North Hennepin County (Robbinsdale, Brooklyn Center, etc.).

The state's lightest median burden for the middle-income group was 1.6 percent of income -- less than half the rate in the metro area. It was found in the southwest corner of the state, embracing communities like Worthington and Pipestone.

The second-lightest median burden, 1.8 percent, was in the opposite corner of the state, the Arrowhead region including Duluth and the Iron Range.

And so it goes. The heaviest outstate burden for middle-income homeowners -- 3.0 percent in the Central region that surrounds St. Cloud -- was lower than the median burden for this income group in any region of the metro area.

And this basic pattern holds for every income group.

Some disparities exist within the metro area as well. As noted, Minneapolis has high burdens. Its 2008 median burdens ranked a close second to southwest Hennepin County in every income group except the highest (above $125,000), where Minneapolis ranked first.

St. Paul, however, has modest burdens by metro standards. Its burden was below the metro average in every income group.

But in general burdens differ much less among metro regions than they do among rural regions, and between urban and rural areas.

How much is that in dollars?

The Voss report also sheds light on the dollar cost of property taxes, and perhaps on the question of whether it would be unreasonable to allow property tax increases for some Minnesotans to play a continuing part in balancing government's books.

Statewide, one home-owning household in five paid less than $1,000 in total net property taxes in 2008. Just over one in five paid more than $3,000.

In some places, property taxes may cost some homeowners less than cell phone service.

In four of the 10 greater Minnesota regions (all across northern Minnesota plus the state's southwest corner), more than half of all home-owning households paid less than $1,000 in 2008 net property tax.

In the Arrowhead region, 30 percent of households paid less than $500. In the metro area as a whole, just 1.4 percent of households paid an amount that low.

Willette notes that property taxes vary from place to place for many reasons. Not least, residents in some areas simply receive far less in local government services and amenities.

But will continuing to shower rural Minnesota governments with state tax dollars correct the real inequities in Minnesota's property tax? Or should relief be targeted to specific taxpayers, wherever they live, who actually face high relative property tax burdens?

Before you answer, spend some time with the Voss report.

D.J. Tice is the Star Tribune's commentary editor.

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  • ABOUT THE VOSS REPORT

    Saturday March 5, 2011

    The latest Voss report (named after former state Sen. Gordon Voss of Blaine) is based on 2008 data. The process of "cleansing" the income tax data accounts for the delay,...

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