Here's my most asked question: Why are my taxes going up?

Minnesota’s tax system overall is inherently unfair.  The hard numbers are if you are in the middle, you pay about 11.7% of your income in state and local taxes.  If you are in the top 10%, you pay about 10.3% of your income in taxes. (2013 Minnesota Tax Incidence Study, Minnesota Department of Revenue)  And that is income, not dividends and stock returns that the truly wealthy live off of. So the Minnesota tax system overall puts a higher burden on the middle class and less on the wealthy. 

For the property tax specifically, if you were right in the middle, you paid 2.5% of your overall income in property taxes.  If you were the wealthiest 10% however, you paid 1.4% of your income in property taxes, about half.  (2013 Minnesota Tax Incidence Study) 

It wasn’t always this way. There have been several major changes that have driven up property taxes for  Minneapolis residents over the last 15 years:

Classification Rate Changes

This has been a clear choice of previous legislatures and governors to shift burden off the wealthy and onto the middle class, beginning in about 1995. The major way was by changing the “tax classification rates.”  The tax classification rates are how we weight different kinds of property for tax purposes. For example, if we want to encourage home ownership over revenue-producing businesses, we weight homes at a lower rate than business property.  For example, say you have a house worth $100,000 and building with a business also worth $100,000.  We can have a 1% classification rate for the home and a 2% rate for the business.  In this way, the business (absent any other adjustments) would pay twice as much in property taxes as the home. 

In 1995, the classification rates for homes were:

  • 1% for the value less than $76,000
  • 2% for the value from $76,000 - $500,000
  • 3% for value over $500,000

The classification rates for businesses were:

  • 3.3% Under $150,000
  • 5% Over $500,000

For taxes in 2013, the rates for home are: 

  • 1% for homes less than $500,000
  • 1.25% for homes over $500,000

For businesses:

  • 1.5% for value up to $150,000
  • 2% for value over $150,000

As you can see, only middle and lower value homes didn’t have a reduction in their class rates.  Taxes are like a balloon. When you squeeze it down in on spot, it pops up in another, In this case, reductions in taxes for the higher values homes and business property means taxes have popped up for middle class homeowners.  This has, in part, driven substantial increases in property taxes for homeowners. 

Cuts in Local Government Aid 

The City gets money from the state called Local Government Aid. LGA was begun in the 1970's as a way for the state to share revenue from the income and sales taxes, which are more fair taxes than the property tax.  It was also a way of helping the core cities share the burden of being centers for the state.  This money was used for basic services like police, fire, streets and parks. 

But what has happened over time is that each time the State has a budget crisis, it has cut LGA to cities and counties.   In 2002, Minneapolis got about $110 million in LGA from the state.  In 2014, Minneapolis will get slightly more than $60 million.  This has resulted in substantial cuts to core city services. Staffing has declined from about 5000 full-time equivalents to about 4000.  And taxes have increased to offset these losses also.  In the last several years, there have been increases in LGA but not enough to reverse the years of LGA reductions.

Economic Cycle

Part of what determines how much an individual pays in property taxes is how much everyone else in the City pays.  Values of some kinds of property can go up while other decline.  This can shift burden among various types of properties.  The technical term is this is the "hydraulic nature of property taxes" but I like to think of it like a balloon. When you squeeze it down on one end, it pops up on another.  When the values of one type of property go down, the tax burden on other properties increases.  Understanding why your taxes went up or down means also understanding what happened with all the other properties in the City.

In 2001 and 2002, we went through an economic slowdown. Employment fell and demand for downtown office buildings declined.  When demand for downtown office space goes down, the value of the properties go down, along with the amount of property taxes they pay.  At the same time, home values started increasing.  This shifted tax burden onto homeowners and off commercial properties.  Even though the economy recovered, home values continued to go up faster than commercial property, continuing to shift burden off businesses and onto homeowners. The housing bubble burst around 2008 or so and home values began to decline.  But at the same time, we found ourselves in the worst recession since the Great Depression.  So despite home values declining, commercial property values were declining even faster, which shifted more burden onto homeowners.   In Minneapolis, homeowners used to pay slightly more than 30% of the overall property tax bill (with commercial and rental properties paying the balance).  Now homeowners pay almost 60% of the overall property tax bill.  Or, another way of thinking about it is that from 1996 to 2013, my taxes went up 130% while the IDS's taxes went down 32% (or about $3.3 million). 

Both commercial and residential markets have now stabilized and are rebounding but the question is how much one rebounds compared to the other.  There has been some good news in that the overall number of homes in Minneapolis has finally been increasing.  From about 1970 through about 2012, the number of residential units in Minneapolis was about 177,000.  This stable number surprises many, with the large growth of housing in downtown and around the University of Minnesota.  New housing units have mostly been offset by demolishing houses and by de-converting multifamily housing back to single family housing.  Only since 2012 has there been a real increase in the number of housing units.  There is quite a number of new units planned or coming on line in the next several years which will increase the tax base if the City does not demolish a substantial number of houses.  This will help expand the tax base and reduce taxes overall, all other things held constant.

Other choices that affect property taxes

The elected officials of the City of Minneapolis have also made other choices which have affected property taxes, although some indirectly. The one that has gotten the most discussion recently was the decision to divert Minneapolis sales taxes to pay for the new Vikings stadium instead of using them for property tax relief. This will cost Minneapolis taxpayers about $60 per year per person for 30 years.  In addition, funds are also being used for the Target Center.

Other choices have also been made.  For example, the City chose to build parking ramps for the Walker Art Center and the Guthrie Theater that operate at a loss that is ultimately made up through property taxes.  A special property tax district was created to fund a trolly.  The City chose to renew tax increment districts after their bonds had been paid off rather than letting the funds go back to the general property tax base.   The Legislature chooses to fund the operations of outstate parks but leaves Minneapolis taxpayers to pay for regional parks.  There are others. All of these choices add up to higher taxes for Minneapolis residents.


How does the property tax work?

What do you do if your home is overvalued?  Appeal to the City Assessor.  85% of people who do, get their home value reduced.  And it is easy.  Just call the City Assessor and inquire at 612-673-2382.

Who pays what taxes in Minnesota?  Look at the "Minnesota Tax Incidence Study"

How much was collected in various taxes?  Look at "Minnesota in Brief"

Who gets a tax break in Minnesota?  Look at the Tax Expenditure Report.

How do property taxes vary around the state? Read the Voss Report.

Need more budget geekery?  Read the Minnesota Budget Project.