Property taxes are simple, and complex – Twin Cities

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Edward Lotterman

Property taxes are up sharply for the coming year and a lot of taxpayers are upset about it. This is certainly the case for St. Paul, where a particular conjunction of factors for the city itself, for Ramsey County and for St. Paul Public Schools are all contributing to higher bills.

A community computer usenet in the relatively affluent, high-education neighborhood where I live lit up with angry posts as new numbers came out. Some comments were harsh critiques of the school system, rare in a politically liberal part of the city. So what is going on? The answer is many different things, but to understand them it’s best to review the basics.

Historically, going back to colonial days, local government was financed by taxes on property. This included not only real estate — land and buildings — but also on personal and business property. Minnesota got rid of the personal property tax a half century ago, so “real estate taxes” and “property taxes” are pretty much the same thing. But if you want to know how many sows and bedsteads your great-grandparents owned in 1913, dig around in their county’s tax records.

“Local government” generally means counties; cities, towns and rural townships within counties, and school districts. Those are the big three. There are other minor units of government — often connected with water in Minnesota. So we have lake improvement, soil and water drainage and other districts. And there may be councils linking the myriad municipalities in some metro areas, such as the once-pioneering Metropolitan Council for the Twin Cities. These can have minor taxing power.

The basic process is centuries old. The value of taxable property is determined and totals tabulated. Local government decides how much money it needs. The money needed divided by the total value of property is the “mil rate,” the percentage of the value of each piece of property that must be paid in tax.

Note that in this system, total taxes paid depended on how much local governments decided to “levy.” Taxes owed did not rise as average property values rose unless there was an increase in the levy. That is still true, but much misunderstood.

That simple model remains the underlying process, but there are many complications. Different classes of property exist — owner-occupied “homesteads” versus rented housing, residential vs. commercial vs. industrial vs. agricultural. Property of churches and other nonprofit entities such as colleges are exempt as is government property. Some property is affected by “tax-increment financing.” There are rules for fair and uniform assessment of the value of individual buildings or land. Public notices, hearings, equalization procedures, protests and appeals all figure in.

Moreover, there were inequities in the simple system. A school district that happened to include an iron mine or 600 megawatt power plant could have lavish schools with low taxes on homes and small businesses, while a nearby district without any large business property would have much higher rates on most people and more modest schools.

This was true across the nation. But Minnesota led the way in trying to make the system more just. Now tax money that flows to the state is redistributed back to school districts and to cities and counties according to formulas that redistribute collections from property-richer areas to poorer ones. There is agreement that, for education in particular, services available to children and citizens in general should not vary with the siting of a packing plant or oil refinery one mile to the east or west.

All well and good, but the contemporary system is highly complex. This too is often misunderstood. Few would guess that only 22% of St. Paul school revenue comes from the property taxes that have just risen. Some 47% is from state aid and another 21% from the federal government. Grants, fees and other miscellaneous sources bring in the rest.

The proportions would look quite different for Minneapolis, since it has many fewer government buildings and colleges that its eastern neighbor has. And it has proportionately more big office towers. Inner- and outer-ring suburbs such as Roseville or Maple Grove would be still different from the two old central cities.

The formulas for state aid to local governments are as complicated as railroad scheduling for the German army in 1914 — said to drive many brilliant people to insane asylums. And there inherently are consequences that seem perverse to property owners.

For example, if home values rose in St. Paul, the mil rate could drop. You would not pay more taxes on your house even if its market value soared. But if property values rose faster in St. Paul than elsewhere, we would not be as poor a district and aid from the state of Minnesota would drop. So local taxpayers would have to pony up more.

Such differentials in property value changes have effects within local government units as well. In the last few years, house prices have risen nearly everywhere, but not equally. The rise was much higher in attractive St. Paul neighborhoods such as Mac-Groveland, Highland and St. Anthony Park. The increase was much less in Frogtown or Payne-Phalen. So even if the total amount of tax money raised in the district as a whole does not change, the value of property in highly desirable neighborhoods will make up a higher fraction of the total. Taxes paid by these neighborhood owners will rise.

There also is much misunderstanding about the differential effects of inflation. There is a popular belief that “the cost of living,” as determined on prices paid for goods and services by households, should somehow apply to churches, condominiums, colleges and schools or other local government units. But the set of purchases these institutions must make vary widely from those of consumers.

Natural gas prices have spiked, in great part because of the war in Ukraine. The St. Paul school district’s spending on gas more than doubled in the last fiscal year compared to the two preceding ones. Electricity outlays, now dependent in part on the price of gas, increased by nearly 40%. Combined, the increases added $4 million to 2022 outlays compared to the prior two years. And they probably will be higher in fiscal year 2023.

Concerned citizens should look at some of the information available. The “Truth in Taxation Hearing — Pay23 Levy Information” for SPPS is excellent. The “price of government” tabulations put out by the state also teach many people things they did not know. These reports and others are easily available on the internet.

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