Does anyone see a coincidence with the last four years being the "No New
(State) Taxes" era?
A plurality of us voted for him so we deserve what we got.
We need honest math and honest politicians in St. Paul.
Over the last four years they have been passing the buck to the
cities, counties, and school boards.
The property tax is the worst kind of tax.
Oct. 16, 2006
October 15, 2006
Part 1: Property taxes hitting home
Once a relatively stable cost of owning a home, property taxes
are bulking up at a steroid-like pace for many Minnesotans. With more
increases to come, homeowners have no relief in sight.
Mike Meyers and Jackie Crosby, Star
Tribune
Reeling from your latest property-tax estimate? You're not alone.
Minnesota residential property taxes have entered an era of overdrive and are
on pace to double every six years.
From 2002 through 2006, residential property taxes in the state bounded up
an average of 58 percent -- nearly three times the 21 percent gain in personal
income in that same period, according to a Star Tribune analysis of state
records. That's more than quadruple the pace of 1997 to 2001, when residential
property taxes rose 12 percent while personal income climbed 27 percent.
Both urban and rural counties are feeling the shocks, and new
reverberations will be felt over the next month, as preliminary notices for
2007's taxes go out in the mail.
Homeowners such as Dick Kleinbaum are feeling caught in a "squeeze
play."I'm watching the inflation rate at 3 or 4 percent, and I'm watching my
tax rate rise at 17, 23 and 27 percent," said Kleinbaum, 62, who bought a
boarded-up house near downtown St. Paul in 1979 and since has turned it into a
showpiece. "If things persist on the track we're on, the middle class is going
to have to start screaming foul."
Residential property taxes in the past four years have climbed at nearly
triple the increase in personal incomes in Hennepin County, and at nearly five
times the pace of income gains in Ramsey County. Outstate, property taxes rose
at three to four times the pace of income in 19 additional counties. The
situation was worse in Freeborn and Marshall counties, where property taxes
outpaced income gains by five and six times, respectively.
Minnesotans are on track to pay about $1.6 billion more in residential real
estate taxes in 2007 than they did in 2002. For the average household, that
means about $800 more next year than they paid five years ago -- or more than
double the $348 income-tax break they received when the state cut its income
taxes in 1999-2000.
Some wonder how long the trend can continue.
"Is it sustainable?" asked Tom May, the Hennepin County assessor. "When you
look at the numbers, you'd have to say no."
Tilting the burden
The property tax surge wasn't supposed to happen.
The changes in state law that have fueled the phenomenon were expected to
lower the average residential property burden. For one year, 2002, they did.
Then the climb began.
Runaway local spending isn't to blame. Cities and counties this year will
spend only about 14 percent more than they did four years ago. Residential
property taxes have climbed at four times that pace.
In part, that's because a housing boom pushed up the value of residential
property at a far faster pace than commercial and industrial real estate
during the past four years. But it's more directly a result of three changes
in state tax law that have left community governments relying more heavily on
homeowners for revenue as other sources have receded.
What were the three changes?
The Legislature in 2001 lowered taxes on commercial property. The idea
was to improve the business climate and reduce taxes that state researchers
said ultimately are passed along to customers, employees and shareholders. The
effect was a shift from a "hidden tax" on companies to residential tax
increases that were glaringly obvious.
Lawmakers decided in 2001 that beginning the next year the state would
pick up school costs once paid by local property taxes, then allowed aid for
schools to ebb in the years that followed. School boards were left with little
choice but to trim spending, bring in more tax money or both.
The state in 2003 cut homestead aid to many cities. The move helped to
balance the state budget. But cities were left with the choice of cutting
services or raising taxes to make up for lower levels of state reimbursement
for homestead credits granted to homeowners.
Assessing the impact
How did those changes play out?
Residential property in Hennepin County (excluding apartments) went from
about 60 percent of the total property tax base in 2002 to 70 percent
projected for 2007, according to the assessor's office. Commercial/industrial
property has fallen from 28 percent to 21 percent during that same period.
For Hennepin County businesses, the shift meant that property taxes on
average fell 1.6 percent from 2002 through 2006, even as taxes rose 51 percent
on homesteads and 129 percent on non-homestead residential property (excluding
apartments).
Viewed from another angle, the tax bill on a $152,000 median-value home in
St. Paul this year would be $1,567 -- $641 more than in 2002. According to the
Ramsey County auditor's office, $203 of that increase was the direct result of
local taxpayers making up for lost revenue sharing, lost homestead credit and
other shifts in the tax burden. More than half of the remainder was the result
of higher school taxes. In many cases, voters approved the increases at the
polls.
From 2002 through 2006, revenue sharing to Ramsey County declined by more
than $10 million, while state homestead tax credits fell by $7 million.
The county approved a 5 percent property tax increase for this year and is
proposing a 6 percent increase for 2007.
Current law caps how fast individual property tax bills can rise, but that
brake is scheduled to expire in four years.
The result is that of the three major taxes collected in Minnesota --
income, sales and property -- the tax on residential real estate is the only
one on a steady upward trajectory while also being the least tied to a
person's ability to pay.
"Somehow, there will have to be a rebalancing of the three major taxes,"
said Lee Munnich, senior fellow at the University of Minnesota's Hubert H.
Humphrey Institute.
Getting squeezed
For Russell Rathbun and his wife, Jeanne DiMeglio, the property tax bite
has significantly outpaced the growth in market value of their St. Paul home,
as well as the growth of their earnings.
This year, they'll pay about $1,100 in property taxes -- 130 percent more
than they paid five years ago. The estimated market value of their home --
$172,000 -- has increased 95 percent in that same period.
Rathbun, 41, a minister at House of Mercy in St. Paul, just got his first
cost-of-living wage increase in four years.
"The federal government can make cuts that put a great burden on state
government, which makes cuts, which then puts the burden on the city, and then
on the property owners," he said. "The fault all around is made up by
individual families."
Larry LaBonté and his wife, Kathryn Shaw, are small-business owners who
were "cash-poor but house-rich" in the past, having looked on their previous
three homes as savings accounts. In 1994, they bought a house on White Bear
Lake that was sold as a tear-down. Twelve years later, the home's estimated
market value has more than tripled to $880,000.
The couple's property tax has gone up $2,400 -- 58 percent -- in the past
five years, while the taxable value of their home has risen nearly 80 percent
in that period. On paper, LaBonté is still coming out ahead, but he's unhappy
with the trend.
"I never objected to paying taxes because they're for the benefit of the
community, a way to gauge our sense of compassion," said LaBonté, 54. "Having
said that, I don't think property taxes are a fair way to fund community
institutions, education in particular. The fairer taxation really is on
income. If we were being taxed on our income, we'd be paying a lot more."
'Out of touch' assessments
Greg Murphy of Shoreview jokes that property taxes "have been my obsession
for the last 15 years." He believes current assessments are based on market
values set at the peak of the housing boom, leaving people paying taxes on
values that no longer exist.
He and his wife, Sharron, built their house in 1974 for about $45,000.
Property taxes have increased 50 percent in the past five years, keeping pace
with the home's taxable market value.
But Murphy thinks the value is out of whack with reality. The home
currently is assessed at $280,000. While it was on the market last fall, the
highest bid was $260,000, he said.
"Something's wrong here. They're completely out of touch," he said of
assessed values. When he unsuccessfully challenged the assessment, he learned
his home had been compared with ones in Roseville rather than any in his
neighborhood.
Murphy, 69, who works at a Twin Cities brokerage, said he sees a tax revolt
coming.
"There has to be. Otherwise, we'll go broke at this rate."
Similar sentiments are being expressed across the country. Ten states have
cut, or are proposing to pare, property taxes in the face of taxpayer ire,
according to a national survey by USA Today. Nearly four of 10 Americans
consider property taxes the "worst" state or local tax -- nearly twice the
number who single out income or sales taxes, according to a survey this year
by the Tax Foundation, a nonpartisan research group based in Alexandria, Va.
Worse to come?
Last year, separate efforts were made by Republicans and Democrats to
provide Minnesotans with property tax relief. Both failed.
Even if the Legislature takes action next year, coming demographic changes
threaten to make it difficult for lawmakers to avoid presiding over a steady
diet of property tax increases in the future.
The population of Minnesotans over age 65 is expected to grow rapidly in
the years ahead -- from less than 600,000 in 2000 to nearly 800,000 in 2015.
By 2030, the state is expected to be home to nearly 700,000 more seniors than
it had in 2000.
As people retire, their incomes fall, so they typically pay less in income
and sales taxes. Minnesota state economist Tom Stinson provided examples of
how the surge in the retiree population could affect government revenue. A
couple who once had an annual income of $65,000 might live on $45,000 in
retirement, and pay $2,695 less in annual income and sales taxes as a result,
Stinson demonstrated. That's a decline of 58 percent. A couple with a
pre-retirement income of $35,000 could see their income and sales tax bills
fall 72 percent.
What would be left to government as a rising source of revenue in such an
environment? The third leg of the tax stool -- property taxes.
"Our current tax system produces a substantially larger percentage decline
in tax liability" as the population ages, Stinson said. "That means, other
things being equal, that there's going to be further financial stress in the
future and that there's going to be increasing pressure on the property tax."
Inherent instability
Jay Kiedrowski, senior fellow at the Humphrey Institute and the
commissioner of finance in the administration of former Gov. Rudy Perpich,
said the state has "an inherently unstable tax system."It's easy to do the
[government] finances in good times and nearly impossible in bad times,"
Kiedrowski said.
George Karvel, real estate professor at the University of St. Thomas, said
he foresees the possibility that soaring tax bills could prompt a Minnesota
taxpayer revolt, much like California's "Proposition 13" in the late '70s,
which imposed a cap on property taxes.
"I think that's where we're going to be heading in Minnesota," Karvel said.
"You're laying the foundation for significant taxpayer unrest."
Kleinbaum, the owner of the St. Paul fixer-upper who has been watching his
property taxes increase at a double-digit clip, would like to see a revolt if
the cost of owning a home doesn't moderate but said he's not optimistic that
there will be a change.
"Taxes are complex issues," he said. "It's a whole lot easier to watch
'Dancing with the Stars.' "
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