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.
By: 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 1970s, 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.' ”

Ruud responds to letters
Rep. Maria Ruud, DFL-42A, Minnetonka

I would like to thank the two Oct. 5 letter writers who wrote in about my work on the issues of lower property taxes and mental health.

Like them, I agree that these are two very important topics facing the residents of Eden Prairie and Minnetonka. Since 2003, Minnesota property taxes have increased by $1.9 billion, or 38 percent. The reason for this increase is simple -- the state has shifted more of the responsibility for paying for things like education, public safety and transportation to homeowners, and that's simply wrong.

I agree with the letter writer that Minnetonka and Eden Prairie home-owners shouldn't be stuck with higher property tax bills to fund our schools and cities. That is why I have supported, and will continue to support, long-term, fair, responsible and permanent property tax relief.

I appreciate that the second letter writer noted my award as “Mental Health Legislative Caucus Legislator of the Year - 2005” from the Minnesota Chapter of the National Alliance on Mental Illness. It is truly an honor to be recognized by a group that lists as its mission the championing of justice, dignity and respect for all people affected by mental illness. During my first term I was proud to co-sponsor legislation dealing with children's mental health, health insurance disparity regarding mental illness coverage, and a new law to eradicate outdated Minnesota statute references describing persons with developmental and mental challenges.

It is a privilege to represent Eden Prairie and Minnetonka residents in the Minnesota Legislature, and have the opportunity to champion issues such as property tax relief and affordable, quality health care. I am committed to working tirelessly on these issues and others on behalf of you and our community.
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Editor's Note: Ruud represents Minnetonka and part of Eden Prairie.

Supports Cullen
by Peter Bozanich

Property taxes went up an average of 11 percent across the state last year. That's faster than most people's income. They are predicted to go up at least as much this next year. The nearby city of Mound is actually considering an 18 percent tax hike. That's phenomenal. Did your income go up 18 percent?

Maria Ruud has a plan. She wants to take the state's surplus (i.e. tax money from you) and spend it on a redistribution program called Local Government Aid (LGA). The problem is: Minnetonka and Eden Prairie don't get any LGA money and they haven't gotten any in a long, long time. In fact, the last time Minnetonka or Eden Prairie saw any LGA was in 2002. And even then it was a paltry sum - we got about $8 per household while big cities like Minneapolis got $1,000 per household.

So that's Rep. Ruud's plan - take money from the hard working people of Eden Prairie and Minnetonka -- the people she is supposed to represent -- and give it to her big city liberal friends in Minneapolis, St. Paul and Duluth. That doesn't sound very fair to me!

Bill Cullen has a plan too. He would simply take the surplus and give it back to the people who paid the taxes. That means, if you live in Minnetonka or Eden Prairie and you pay taxes, you would get some of your money back to use as you see fit.

LOCAL GOVERNMENT AID: THE FACTS

Eden Prairie and Minnetonka got zero LGA in 2003, 2004, 2005 and 2006 (see actual numbers from the MN House Research Department).

Local Government Aid (LGA) Funding 2003-2006 Maria Ruud wants to raise taxes on Minnetonka and Eden Prairie and send it to her friends in Minneapolis
	Proposed 2003 LGA	Actual 2003 LGA	Actual 2004 LGA		Actual 2005 LGA	Actual 2006 LGA
Eden Prairie	$172,335 ($2.90 per person)	$0	$0		$0	$0
Minnetonka	$149,032 ($2.88 per person)	$0	$0		$0	$0
Minneapolis	$117,571,329 ($307.54 per person)	$91,821,825	$82,514,601		$80,338,989	$93,948,100
Saint Paul	$76,129,865 ($264.70 per person)	$63,082,264	$56,488,315		$53,151,835	$59,544,621
Duluth	$30,402,254 ($353.18 per person)	$26,676,033	$26,676,033		$25,653,880	$26,728,606
Source: MN House Research Department

In 2003, there was a small amount ($172,000 in EP and $142,000 in Minnetonka) originally earmarked (but never actually received). That is nothing. Eden Prairie, for example, has a city budget of $28 million. $172,000 represents about 0.6 percent of the total city budget (in other words: NOTHING!).

Meanwhile, the cities of Minneapolis, St. Paul and Duluth were set to receive a combined $224,000,000 in LGA that same year (almost $1,000 per household!). So the statement that the big cities get the lions share of LGA funding is also 100% accurate.

Maria's “solution” to increased property taxes in Minnetonka and Eden Prairie is to use the budget surplus (ie. tax money) to increase LGA. But increasing LGA will NOT lower our taxes out here. Not at all. Not one dime. Eden Prairie doesn't get LGA. Minnetonka doesn't get LGA. Even if the program were expanded, we still do not get LGA. So Maria's “solution”is a lie - a sham.

Even in 2002, the last time our cities got any LGA, it amounted to only about $8 per household. Not anything to write home about. In contrast, residents of Minneapolis got around $1,000 per household. That's a huge difference.

It's a massive transfer of wealth from Eden Prairie and Minnetonka -- the people Ms. Ruud supposedly represents -- to big cities like Minneapolis, St. Paul and Duluth.

You can argue that there are many great reasons to do this. But one argument that you cannot make is that it will help the property tax bills for the hard working people of Minnetonka and Eden Prairie.

Tax shifts are a good idea
By Cynthia L. Olson

In response to the letter from Bill Cullen in the Jan. 19 issue of the Sun-Sailor, I would like to express another point of view on property taxes (and on taxes, in general).

Aside from a rapid increase in assessed property value (which should slow with the cooling of the housing market), there were two important reasons for the 2005-06 spike in property taxes.

[NOTE: Not true. Increased property values DO NOT increase your property tax assessment. If your house doubles in value (and everyone else's does too) your property tax DOES NOT go up.]

To balance the budget with “no new taxes,” the state instituted steep cuts in Local Government Aid, an important mechanism for keeping property taxes low, especially in tax-base-poor communities.

[NOTE: This is very misleading. Minnetonka and Eden Prairie DO NOT receive one dime of Local Government Aid (LGA) and haven't for a long long time. Cutting the LGA does not affect our property tax in Senate District 42.]

The state also delayed payments to local school districts, essentially creating an interest-free loan to the general fund (which will now be paid back with the projected 2006 surplus). To continue providing decent levels of service, local governments and school districts had to go to property owners to make up the difference. This was the original tax shift.

I respectfully disagree with the assertion that shifting the tax burden back to sales and income taxes is a bad idea.

[NOTE: You need to understand what Maria Ruud is proposing here: She is responding to a massive property tax increase -- up an average of 10.8 percent statewide -- by proposing to INCREASE STATE TAXES]

The income tax is the only purely & “progressive” tax that is based on ability to pay and the sales tax is largely a & “consumption” tax, paid disproportionately by those with more disposable income. High property taxes hit those on fixed or lower incomes (the elderly, disabled, laid-off,) hard and can force them out of their homes. It may be true that Eden Prairie and Minnetonka get back less in direct state expenditures than they contribute in sales and income taxes, but this is a shortsighted viewpoint. We all benefit from investments in the University of Minnesota and higher education, modern roads and transit, subsidizing health insurance for the working poor, protection of the environment, and many other vital state government functions. I am grateful that most of these functions survived relatively intact in the budget battle of June 2005.

I have yet to meet anyone who relishes paying his or her taxes. I would welcome a smart and well-considered examination of government programs, but resist a reflexive aversion to any investment in Minnesota's future.

[NOTE: The entire premise of Maria Ruud's letter is to explain how she plans to lower OUR taxes. Her plan doesn't do that at all. She wants to take money from the productive people of Minnetonka and Eden Prairie (the people she supposedly represents) and give it to her DFL friends in the big cities (the people she REALLY represents). And is that really what the people of SD42A want -- a tax and spend big city liberal who wants to tax and tax and tax us to death?]

It's all about cost-effectiveness and taking the long view. I am well acquainted with our moderate and thoughtful Rep. Maria Ruud, DFL-Minnetonka, and I believe she is committed to being a good steward of our collective resources.

[NOTE: Interesting phrase: "Our collective resources" -- and that is ultimately what Maria Ruud and the DFL is all about -- Socialism]

Cynthia L. Olson
Minnetonka

Ruud plan will not lower property taxes
By Bill Cullen, Minnetonka

On Dec. 22, Rep. Maria Ruud wrote a letter to the editor stating that & “residents deserved a property tax break.” I wholeheartedly agree.

Rep. Ruud's threefold solution is for the state to issue relief to local governments, an increase for specific property tax programs and pay back the $701 million dollar accounting shift to our public schools.

The first and second programs are methods for the state to buy down property taxes. A noble idea, but since the same taxpayers fund all state and local taxes, this solution will shift property taxes to income or sales taxes. This is very bad for Eden Prairie and Minnetonka. For every dollar Eden Prairie and Minnetonka residents send to the state, we get back a fraction of that dollar. We are far better off keeping tax burdens local.

The final program, paying back the $701 million dollar accounting shift to our public schools, is part of existing law and will occur without any effort.

It is great to see Rep. Ruud recognize the need for tax relief. What a huge improvement from last session where the DFL was willing to shut down government rather than compromise on their desire to increase government by 14 percent. But we need real solutions that hold the line on government growth, not shifting taxes between income, sales and property taxes.

Bill Cullen
Minnetonka

Residents deserve property tax break
By Rep. Maria Ruud (D - 42A)

I recently attended the Truth in Taxation meetings in our area, both as a legislator and as a taxpayer. From those meetings and figures from the state, the average homeowner in Eden Prairie and Minnetonka can expect anywhere from a 4 to 11 percent increase in their 2006 property taxes.

[NOTE: The average figure statewide is 10.8 percent. Some cities will, of course, see MUCH larger increases!]

One big reason behind the property tax increases was the decision of the state of Minnesota to shift additional financial burdens over to local governments and school districts over the past few years. As a result, property taxes have increased to maintain levels of service.

Minnesotans deserve a break. Under a property tax relief proposal recently unveiled, that break could be on the way soon. The plan has three key steps and uses a portion of the $337 million surplus from the 2005 fiscal year.

First, the state would provide over $118 million in Local Government Aid and Market Value Credit aid to buy-back previous cuts that led to large property tax increases and layoffs of police and firefighters.

[NOTE: What Maria Ruud doesn't say: Not one dime of Local Government Aid (LGA) funding goes to Eden Prairie and Minnetonka. The majority of that money goes to big cities like Minneapolis and Duluth. So, what she is proposing to do is not only increase your property taxes, but increase your STATE taxes as well.]

Second, a refund/rebate increase directly to taxpayers who use property tax relief programs.

[Translation: Take the money from those who earn it and give it to those who do not earn it.]

Finally, the plan will hold the line on levy increases by ensuring that the state keeps its word and uses the projected 2006-07 surplus to pay back our public schools $701 million in accounting shifts.

[NOTE: This is already state law (thanks to former Representative Peter Adolphson) and was taken care of with the recent state budget surplus]

Locally, Eden Prairie and Minnetonka would save over $1.1 million combined.

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Rep. Maria Ruud (D-Minnetonka) represents House District 42A. The district includes southern Minnetonka and northern Eden Prairie.

Minnesotans should ask their local elected officials to support the Taxpayer Survey
By Rep. Phil Krinke (R-53A) (see his website)

Throughout Minnesota, taxpayers are receiving bad news in their mailboxes -- their annual Truth-In-Taxation notices from the counties. Many of those notices are indicating that local government spending is on the rise again.

But what is really sad about the Truth-In-Taxation notice this year is once again there is little a taxpayer can do about the proposed spending and tax increases other than go to a public hearing and vent their displeasure.

There has to be a better way to achieve local government spending accountability. I believe there is a better way.

Last year Governor Pawlenty proposed and I authored and passed through the Minnesota House of Representatives the & “Taxpayer Satisfaction Survey”. This legislation would have given taxpayers better information about local expenditures and would also have allowed taxpayers direct input on local tax decisions.

Simply put, the notice would have had a form at the bottom to mail back to the county, and the taxpayer would simply answer whether or not they approved or disapproved of the proposed spending and tax increases. If 20% of the taxpayers disapproved of the tax increase proposed by their city or county, the increase could not go into effect without a local referendum.

Wow, imagine & “direct citizen input on property taxes” what a novel idea!

But local government officials fought this legislation tooth and nail. The last thing they want is to empower local taxpayers.

The DFL-controlled Senate also refused to embrace direct input from the citizens. But of course this is the same group that wanted to give Minnesota the highest income tax rate in the nation.

For these reasons this idea never became law and therefore citizens don't have a direct voice on property tax increases.

It makes one ponder. What were they afraid of? Why did they fight this proposal so strenuously?

Maybe it was because given the most recent tax increases proposed by cities and counties they knew that having the Taxpayer Satisfaction Survey in place would hinder their plans to raise homeowners' property taxes.

Some of these increases are significant. 16.5% or over $1.4 million more for Hastings. Over a 30% increase, or $415,000 more for St. Peter. Over $15 million more in levy for Minneapolis, even though it just received $16 million in additional aid from the state!

All told, the Department of Revenue projects property taxes will go up over 10% on a statewide basis. And these proposed increases are often on top of additional funds appropriated by the state in the 2005 special session.

So maybe local governments fought the Taxpayer Satisfaction Survey because they didn't want to give the taxpayer more input into local tax and spending decisions. Maybe they didn't want to be accountable to the citizens. And maybe they knew that despite their bureaucratic rhetoric and calls for “investing” more in the community that the taxpayers would object. And maybe the local governments knew that while the public meetings they are required to hold would really only amount to a small bump in the road to higher taxes.

Nevertheless, I urge every citizen that is concerned about the proposed tax increases to go to their Truth-In-Taxation hearings to tell their local officials what they think. I also urge anyone who attends those meetings to demand that their local officials support the Taxpayer Satisfaction Survey.

Because if we can enact Taxpayer Satisfaction Survey legislation in the 2006 session, I know homeowners won't see the same outrageous property tax increases by local governments next year.

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Representative Phil Krinkie (R-Lino Lakes) is chair of the Taxes Committee in the Minnesota House of Representatives. His district 53A includes Shoreview, North Oaks, Circle Pines, Lino Lakes, Blaine and Lexington.