Q: We just got our tax statement from the county. What they are telling us is, as the value of your home goes up, the Homestead Tax Credit that you receive goes down. That doesn’t seem fair, and we’re wondering if that’s correct. If you could check that out ... .
A: Yup, that’s the way it’s designed. And there’s really just one reason — money.
Ask Us Guy, in the other part of his job, had to write about the issue eight years ago when there were controversial changes to the tax credit.
Here’s how it works. Minnesotans who live in their own homes often qualify for what’s called the “Homestead Market Value Exclusion,” which reduces the amount of property taxes they have to pay.
For many years, it was known as the “Homestead Credit.” And for every dollar that qualifying homeowners didn’t have to pay in property taxes, the state would promise to reimburse a dollar to the local governments and school districts funded by property taxes.
The program was a substantial expense for the state. So if the Homestead Tax Credit was provided for the entire value of even the swankiest homes, it would have cost the state even more. That’s why lawmakers designed it to get smaller and ultimately disappear as the assessed value of a home climbs higher — to save money in the state budget. Also, that system focused the tax savings on owners of lower-valued homes rather than providing it to owners of mansions.
Even with the tax credit being less generous to owners of higher-valued homes, it still totaled up to roughly a quarter of a billion dollars. And when the state ran into budget shortfalls earlier this century, sometimes the governor and the Legislature would balance the budget in part by reneging on the promise to pay cities, counties and school districts the full amount owed to them for the savings provided to homeowners. That would leave those local governments with unanticipated red ink in their budgets.
In 2011, Republicans who controlled the state House of Representatives successfully pushed to replace the Homestead Credit with the Homestead Market Value Exclusion. The official rationale was that the Legislature so often short-changed local governments, there was no point in continuing the program. The decision also reduced spending in the state budget by $260 million dollars — one of the elements of the Legislature’s attempt to erase a $5 billion budget shortfall without raising taxes.
But simply eliminating the tax credit would have directly increased the property taxes of average Minnesota homeowners. Hence, the Homestead Market Value Exclusion was created, which reduced the property taxes of eligible homeowners but didn’t reimburse schools, cities and school districts for the lost revenue.
Now, it’s important to remember that those local governments don’t directly decide how much to tax individual properties. The Legislature sets the various tax rates for different classifications of property (business property pays a higher rate than residential, a million-dollar home pays more than 10 $100,000 houses, rates on apartment buildings are steeper than those on farmland). So, local governments set an overall budget, including the total amount of revenue from property taxes. Then, the county collects the money based on the valuations and classification rates of all the different parcels in the taxing jurisdiction.
Therefore, and in conclusion, the Homestead Market Value Exclusion now shifts the property tax burden from those eligible for the credit to all other types of properties within a city, county or school district. If it wasn’t phased out as home values rise, that shift to businesses, farmland, apartment buildings and industrial properties would be even more pronounced.
That’s why you get less as your home value rises — to reduce the pain of the tax-burden shift on owners of other property types.
Q: Why is there constantly water running down the hillside to the sidewalk and street on South Riverfront Drive between Marshall and Sibley Parkway when the surrounding terrain is dry?
A: “My question is, ‘Do you read the column?’” Mankato City Manager Pat Hentges said when the South Riverfront Drive query was forwarded to him for the third time in the past year.
Yes, this has come up before in Ask Us, most recently on June 23. But Ask Us Guy recognizes that some readers’ eyes may glaze over when reading about Homestead Market Value Exclusions and such, and they may not always reach the end of the column.
As it turns out, Hentges, who had previously said the city would look at the causes of and possible solutions to the water problem, actually had a more specific answer this time. (He had just gotten an update from Assistant City Engineer Michael McCarty.)
“We’re going to do some improvements there that involve some tiling,” Hentges said.
And not just tiling, because the seeping hillside causes problems beyond extremely icy sidewalks on the southern side of Riverfront Drive in cold-weather months. The constant moisture is also undermining the pavement. So the project will include adding drainage tile, tying it into the storm sewer and repairing the damaged pavement.
“It’s hopefully something we can do before winter,” he said.
Contact Ask Us at The Free Press, P.O Box 3287, Mankato, MN 56002. Call Mark Fischenich at 344-6321 or email your question to firstname.lastname@example.org; put Ask Us in the subject line.