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Public Hearing on the 2012-13 Budgetand Proposed 2013 Property Taxes [Put Your School District Name Here] December 2012 Information on changes to school property taxes
Who and what impacts levies? State Legislature and the Governor’s Administration: • Have the sole authority to create levy options for school districts. • Control levy parameters including equalization factors and various tax bases used for levies. • Establish the overall tax policy for the state including income and sales tax levels, property tax classifications and rates.
Who and what impacts levies? School District Officials: • By participating in state education programs financed all or in part by levies. • Control whether or not to ask voters to approve referendums for general operations and major capital projects.
Who and what impacts levies? Property Values: • By increasing over the past five years, but not all classifications are increasing at the same rate. Student Enrollment: • Equalization factors are a function of district property wealth per pupil. • As pupil counts decline a district’s wealth/pupil can increase and therefore reduce equalization aid from the state
Minnesota Price of Government • Remained relatively constant in past 10 years as % of personal income has. • Varied 8% up or down from a median of 15.6% (Source, MN Department of Management and Budget, 2011)
Property Tax Classifications • Understanding property classifications is a key to unpacking changes in your taxes • The Property Tax Classification is listed on the right side of your proposed property tax statement right below the Taxable Market Value • Your 2013 classification and market value were sent to you in the spring of 2012. Nothing can change that now. • Watch for your 2014 statement THIS SPRING and where you can appeal for pay 2014.
Market Value Increases Statewide, Market Values of Property Tax Classifications have been increasing at different rates Classification: Ten Year Increases in Statewide Market Value 2003-2012 Seasonal Rec Residential 158% Farms 146% Commercial and Industrial 145% Residential Homes 45% Apartments 42% Public Utilities 26% (Source: MN Dept. of Revenue)
Effective Tax Rates by Property Classifications Property Classification Rates are set in statute by the Legislature and Governor and result in a range of Effective Tax Rates Property Classifications 2013 Estimated Effective Tax Rates (Net Taxes/Market Value) Farm 0.61% Seasonal Rec 0.97% Residential Homestead 1.48% Apartment 1.83% Public Utility 3.11% Commercial-Industrial 3.87% (Source: MN Dept of Revenue)
Basic Formula & Equalization • The Supreme Court of Minnesota held in 1993 that the Minnesota Constitution creates a fundamental right to a “general and uniform system of education” and requires the state to provide sufficient funding to ensure that each student receives an adequate education. • Since 2001 and Governor Ventura’s “Big Plan” the state has provided for this basic level of funding in two fundamental ways: • Providing 100% of the basic education formula • Using equalization factors for various property tax supported formulas intended to equalize the “tax effort” required of residents to provide for a basic education of the children of their community regardless of the relative wealth of the community which is defined as tax capacity per student. • In principle, this should work, but neither the basic formula nor the equalization factors have kept up with inflation and with increases in the market values of property classifications. • The result has been an increased reliance on the local voter approved Operating Referendum to fund basic educational services with less state support
General Education Formula lost 9% of its buying power over 10 years (Source: MN Dept. of Education)
State Equalization of Levieshas fallen dramatically (Source: MN Dept. of Education)
Effect of 2011 Special Session • The 2011 Legislature repealed the Homestead Market Value Credit, (the homestead credit), and replaced it with a new Homestead Market Value Exclusion. The last year of the credit is for property taxes paid in 2011 and the exclusion begins for property taxes payable in 2012. What is a credit? A credit is a reduction in the amount of taxes due. What is an exclusion? An exclusion is a reduction in the amount of value subject to tax. The old law with the credit was as simple as: X – Y = Z If your initial tax was X, and your credit was Y, then the tax you had to pay was Z. Under the new law, an exclusion changes the initial tax amount (X), and with the credit gone, the new initial tax becomes the final tax (X = Z). Examples given at: http://taxes.state.mn.us/property/Documents/hmve-taxpayers.pdf
Effects of the 2012 Tax Exclusion • FOUR REASONS THE CHANGE FROM A TAX CREDIT TO AN EXCLUSION FOR LOWER VALUED HOMES RESULTS IN PROPERTY TAX INCREASES: • 1) State money is no longer reducing total taxes. For 2012, the state was projected to pay approximately $260 million of local taxes through the credit program. With the change, there will be no state paid credit and the entire local property tax levy will be paid by local property taxpayers. • 2) The reduction in taxable value increases tax rates. With the total taxable value being reducedby the exclusion, raising the same total levy as the prior year requires a higher rate. • 3) The reduction in taxable value shifts the relative burdens of who pays. With homestead values reduced, other property types (and homes with higher values) pay a larger share of the tax. • 4) The exclusion provides less benefit in low tax rate areas than the credit. The computation ofthe exclusion and credit amounts are roughly comparable where the tax rate is close to the state average, but in lower tax rate areas the excluded value provides less benefit. High rate areas may see greater benefit (Source: Minnesota Department of Revenue, 2011)
Summary: Property Taxes On Rise • Because state-wide, market values are increasing. • Because equalization factors are not keeping up with market values, more burden is falling on local taxpayers. • Because ed formulas are losing buying power, causing school boards to ask local voters for increases and renewals of referendum levies. • Because home values are increasing slower than commercial/ industrial and agricultural acreage, this shifts tax burden to farms and C & I. • The 2011 legislature added to this trend with the change from a tax credit to shield lower valued homes (inhabited presumably by lower income citizens) from property taxes with an exclusion paid for by tax payers in other property tax classifications (Ag and C/I) and higher valued homes. But the exclusion doesn’t work as well as a shield as the homestead credit did, so residential homestead taxes are increasing.
What can I do as a taxpayer? • Let legislators and leaders of all three major Minnesota Political Parties know that all forms of revenue need to “be on the table” to fund quality governmental services at the local level (Schools, Counties, Townships and Cities). • Track the 2013 Legislature diligently from Governor Dayton’s proposals for tax reform and education funding reform through the final bills for his signature, and communicate with your legislators throughout the process. The Governor’s administration has been very active with task forces on ed finance and taxes in 2012. • Stay informed at www.mrea.org and for finance and tax issues at http://mnrea.org/issues/school-finance/
What about My District? Did we pass an operating referendum? Did we pass a bond issue? Did our district utilize the newly created OPEB levy / GASB 45? Did our district’s property wealth per pupil increase this year? Did our enrollment decline? If so, did our district fall below an equalization factor for a levy we use? (Operating Capital, Equity, Debt Service, QComp, etc.) Did something happen for a specific class of property such as public utilities in my district that affected property taxes? See equalization values on charts on next two pages….