Local govt. looks to make up shortfall after elimination of homestead credit

Local government officials throughout Minnesota are trying to explain a major change in state tax policy to residents who are angry about rising property taxes.

As part of the budget agreement that erased a $5 billion deficit and ended a state government shutdown, in July the Legislature repealed the market value homestead credit which gave homeowners a break on their taxes. Cities and counties reluctantly supported the change, but now they're now taking heat from confused taxpayers.

The big problem for local officials, however, is that they asked for it.

A decade ago, the market value homestead credit briefly worked as designed. The state gave eligible homeowners a break on a portion of their local property tax bill and then reimbursed cities, counties and school districts an equal amount. Although homeowners continued to receive the full credit, local government leaders complain that their reimbursements from the state have repeatedly fallen short in nine of the past 10 years.

"Local governments have either been increasing their levies or cutting programs in response to the state's fiscal irresponsibility," said Keith Carlson, executive director of the Minnesota Inter-County Association.

This year's reimbursements to local governments were $134 million less than the amount paid out in homestead credits, said Carlson, who leads a group that represents many of the state's growing or urban counties. That forced local governments to make up the difference.

To solve that problem, Carlson said, local government groups asked lawmakers to end what they viewed as a funding "charade." He said they got what they wanted in legislators' decision to repeal the market value homestead credit — a change that will have consequences.

"If you take $261 million out of the system, which is the state's savings next year, taxes will go up by that $261 million," Carlson said.

State lawmakers replaced the credit that they repealed with a new homestead exclusion for homes valued under $413,800. Eligible homeowners will no longer have to pay taxes on a percentage of their property's value. But those calculations will result in a lower overall tax base in cities and counties.

Jim Miller, executive director of the League of Minnesota Cities, said local leaders will have to make up for that drop.

"There will be increases in some property taxpayers' bills, and those are most likely to be high value homes, those that are above $400,000, commercial property, industrial property and apartments," he said.

But while those more valuable properties will be taxed the same as they were in 2011, people who own houses of lower value will the taxable value of their homes reduced.

"In order to get the same number of dollars, somebody's got to pay more if somebody is paying less," Miller said.

The Republican-controlled Legislature passed the homestead changes during the special session as part of a broader tax bill. Gov. Mark Dayton signed the bill into law, even though he had vetoed an earlier version that contained the same repeal.

Miller said cities and counties reluctantly accepted the change because continuation of an underfunded credit was no longer viable. He expects the conversion to be painful, but temporary.

"We realize that there's going to be confusion, and that it will affect taxes and the distribution of taxes in communities," he said. "But it should be a one-year issue."

State Sen. Julianne Ortman, R-Chanhassen, who supported the repeal, said local government organizations suggested it. Ortman agrees that the credit program was broken, but she strongly disagrees with the claim that property tax increases are now unavoidable. She said local officials must make that choice.

"There will be some shifting between different types of properties in communities," said Ortman, chairwoman of the Senate tax committee. "But there's no reason to believe that this has to be an increase in the amount that communities levy. In fact, the residents would prefer, I'm sure if they can, for the cities not to increase the levy and find ways to reduce their spending instead."

Dayton said last week that he's looking at options for trying to bring back the market value homestead credit.

Two Democrats, state Rep. Ann Lenczewski of Bloomington and state Rep. Paul Marquart of Dilworth, are proposing to do the same. They already have a bill ready for next session, but they haven't identified a way to pay for the tax break. Cities, counties and the Republican majorities will likely oppose that effort.