Property Tax Principles and Indicators

Eric WilletteMinnesota Department of Revenue

Presentation to House Property Tax DivisionFebruary 9, 2011

Introduction to the Property Tax System

• Property is taxed according to value• Predictable for government• May not reflect ability to pay

A brief history of the property tax

• 1849: 1st Territorial Legislature enacts property tax

• 1913: Classification of property• 1968-1972: ‘Minnesota Miracle’• 2001: ‘Big Plan’

Administering and monitoring the system

• Administered by 87 counties– 3,300 individual taxing jurisdictions– 2.5 million property parcels– Total market value of taxable property is $580 billion– Over $8 billion in tax revenue

• Department of Revenue Oversight– Equalization of local assessments– Monitoring compliance– Licensing, education and training– Research

For Governments:

Property Tax Levy ÷ Tax Base = Tax Rate

For Taxpayers:

Parcel Tax Base x Tax Rate = Parcel Tax Bill

Levies are impacted by:

Number and scope of taxing authorities

Service demands/mandates

Property Tax Aids and other Revenues

State-imposed levy limitations

Tax Bases are impacted by:

Exemptions

Exclusions

Special valuations/deferments

Tax base definitions/ classification

Tax Rates are impacted by:

Disparity Reduction Aid

Special service areas

Parcel Tax Bills are impacted by:

Credits

Senior Deferral Program

Refunds

Property Tax Inventory Map

Property Tax Preferences: Estimated Market Value to Net Tax

Estimate

d Mark

et ...

Taxab

le Mark

et V...

Net Ta

x Cap

acity

Net Ta

x after

Ref...

0%10%20%30%40%50%60%70%80%90%

100%

ExemptPersonalBusinessResidentialCabinFarm

Tax Principles• Simplicity• Efficiency• Equity• Stability• Competitiveness• Responsiveness

Transparency, Understandability,Simplicity & Accountability

Taxpayers should understand how their tax is determined, which governmental unit is responsible for the tax and what services are funded by the tax.

– Is the system clear for taxpayers?– for public officials?– for administrators?– Are decision makers identified?

Efficiency & Compliance

The tax should maximize voluntary compliance, minimize economic distortions caused by tax-motivated behavior, minimize compliance and administrative costs.

– What are state and/or local administrative costs?– What are taxpayer compliance costs?– Can administrators easily make determinations?

Equity

The tax should minimize regressivity (vertical equity). The system should treat similar properties similarly (horizontal equity).

– Do tax burdens decrease or increase as income rises?– Are similar properties or taxpayers taxed similarly?

Stability & Predictability

The tax should provide stable revenues over the economic cycle. Significant unexpected changes in tax laws, tax bills to taxpayers and revenues to governments should be minimized.

– Is system stable / predictable for taxpayers?– For public officials?– For administrators?

Competitiveness for Businesses

The system should minimize any competitive disadvantage of the state relative to other states and nations.

– Does tax harm ability of Minnesota businesses to compete?

– Consider services funded by the tax as well.

Responsiveness to Economic Conditions

Tax should change with changes in value. Lags in system between a market change and a corresponding tax change should be minimized.

– Does tax change with value in a timely way?– Are data for aid, credit and refund formulas current?

Major Indicators

Price of Government Report

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20112012

2013$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

$35.0

$40.0All Other RevenuesOther TaxesProperty Tax

Fiscal Year

Billi

ons o

f Dol

lars

Total Own Source Revenues for State & Local Govern-ments

Price of Government Report

Source: Minnesota Department of Revenue and Price of Government, End of Session 2010

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%16

.6%

17.3

%

17.4

%

17.9

%

17.6

%

17.6

%

17.4

%

17.3

%

15.7

%

15.9

%

15.6

%

15.5

%

15.0

%

15.2

%

15.4

%

16.2

%

15.9

%

15.8

%

15.0

%

15.6

%

16.1

%

15.8

%

15.8

%

State

Local (Non-school)

School Dis-trict

Calendar Year

Perc

ent o

f Per

sona

l Inc

ome

Price of Government Report

Minnesota Price of

Government____________

State and Local Revenues as a % of Personal

Income

Property Tax Levies

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Pre-lim 201

1

$0.0

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

$7.0

$8.0

$9.0Property Tax Levies by Jurisdictions

State

Towns and Special Districts

School Districts

Cities (incl. TIF)

Counties

Billi

ons o

f Dol

lars

Calendar Year2011 pre-

lim

Source: Minnesota Department of Revenue

Market Value Trends

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-10%

-5%

0%

5%

10%

15%

20%

25%Market Value Percent Change by Class

Agricultural Seasonal/Rec Residential Comm/Ind

Assessment Year

Effective Tax Rates

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

2010-1%

0%

1%

2%

3%

4%

5%

6%

7%

Effective Tax Rates by Class

Agricultural Residential Homestead Other Residential Comm/Ind/Util

State Tax Rankings

1995 1996 1997 1998 1999 2000 2002 2004 2005 2006 2007 2008 -

10

20

30

40

50

5 5 5 5 5 8 7

18 20 18 20 18 15

19 20 15

24 26 23

37 35 34 32 31

Minnesota's Tax Ranking State and Local Tax Collections as a Percent of Personal Income

Total State and Local TaxesProperty Tax

Rank

(of 5

1)

Source: Census Bureau, Fiscal Year Data and MN Department of Revenue

*Data is unavailable for FY2001 & 2003. The U.S. Census Bureau did not publish state-by-state local government finances for those years.

Homestead Property Tax Burden Report

Regional Median Tax Burdens

25

Determinants of Property Taxes

Parcel share of tax base and total local leviesThese are affected by:• Level of public services• Intergovernmental aid and other non-property

tax resources• Tax base composition and property tax

classification system• Property tax refunds, credits, exclusions

Homestead Property Tax Burden Report

Homestead Tax Burden by IncomeIncome range* Median burden

before MVHCMedian burden

before PTRMedian burden

after PTR

$10,000 -$30,000 7.6 6.4 3.8$30,000 - $45,000 4.8 4.2 3.3

$45,000 - $65,000 3.7 3.3 3.1$65,000 - $90,000 3.1 2.8 2.8

$90,000 - $125,000 2.6 2.5 2.4$125,000 or more 1.9 1.8 1.8

Overall 3.3 3.0 2.8

*Homesteads with income under $10,000 not shown due to data issues

27

Arrowhea

d

Centra

l

East C

entra

l

Minnesota

Valley

North Cen

tral

Northwest

/Hea

dwaters

South Cen

tral

Southea

st

Southwest

West Cen

tral

Anoka

Carver/

Scott

Dakota

Minneapolis

North Hen

nepin

Saint P

aul

Southea

st Hen

nepin

Southwest

Hennep

in

Suburb

an Ram

sey

Washingto

n0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

Burden Greater than 5% of IncomeHomesteads with income over $10k

Before PTR After PTR

Other Indicators

• Tax Incidence Study• Tax Expenditure Budget• Assessment sales ratio study• Local impact notes

Commercial to Homestead Property Tax RatioBased on $300,000 urban property

0

1

2

3

4

5

6

7

Mas

sach

uset

tsSo

uth

Car

olin

aC

olor

ado

Haw

aii

Rho

de Is

land

Ariz

ona

Kans

as DC

Wes

t Virg

inia

Alab

ama

Mis

sour

iIo

wa

MIN

NES

OT

AU

tah

Loui

sian

aM

issi

ssip

piTe

nnes

see

Idah

oIn

dian

aVi

rgin

iaN

ew Y

ork

Penn

sylv

ania

Mic

higa

nVe

rmon

tN

ew M

exic

oM

aryl

and

Ohi

oM

onta

naSo

uth

Dak

ota

Geo

rgia

Ore

gon

Okl

ahom

aAr

kans

asFl

orid

aC

onne

ctic

utM

aine

Kent

ucky

New

Jer

sey

Texa

sC

alifo

rnia

Was

hing

ton

Wis

cons

inN

evad

aN

orth

Car

olin

aAl

aska

Wyo

min

gN

ebra

ska

Nor

th D

akot

aIll

inoi

sD

elaw

are

New

Ham

pshi

re

Source: Minnesota Taxpayers Association

Questions?