Memo- 2005 Budget Discussion
r Department of Administration I
.
. MelTIOrandum
To: Hopkins City Council
From: ] im Genellie
Date: August 20, 2004
Subject: 2005 Budget Discussion
The City Council needs to set the preliminary tax levy on September 7. This is the number that will
be used for the truth in taxation notices,
Schedule
August 25 Prepare notice of public hearing for newspaper, Thurs. Sept. 2nd.
August 31 Post Proposed 2005 budget and levy on the Web
Sept. 7 City Council adopts a proposed levy and budget (General Fund department totals
only) and sets a public hearing date for December 13th.
. Sept. 10 City must celiif)r a proposed budget and preliminary tax levy by 9-15 -04 to
County Auditor. (Final levy CalUlOt exceed preliminary levy).
Based upon the estimated budget numbers that have been put together by city staff, the gross levy
would increase by 7.65%. However due to the large increase in tax capacity the average homeowner
would see a tax increase of only 1 % or approximately $10.00 a year.
I have been working with Lori Yager and Deb Dahlheimer to detem1ine the effect of various
changes in the proposed budget. I will be able to present alternatives to the 7.65% at the August 24
Worksession.
.
\2005 budgel MEMO, doc
. LMC League of Minnesota Cities
145 University Avenue West, St Paul, MN 55103-2044
(651) 281-1200 . (800) 925-1122
Lmgu~ of Mi...."""Ul Cili"" Fax: (651) 281.1299 . TOO: (651) 281-1290
Cili... prom"ti..g euelJ~..CIl www,lmnc,org
Property Taxation 101
This guide is intended to describe the basics of Minnesota's property tax system. This system
collected more than $5,7 billion in 2004 to help fund the services of schools, counties, cities,
townships, and special districts and the state general fund. One of the challenges of trying to
understand this system is the complex array of terms involved. As new terms are introduced in
this guide, they are shown in italics. A glossary at the end of the guide includes short definitions
of these terms.
Assessment and classification
The property tax system is a continuous cycle, but it effectively begins with the estimation of
property market values by local assessors. Assessors attempt to determine the approximate
selling price of each parcel of property based on the current market conditions,
Along with the market value determination, a property class is ascribed to each parcel of
property based on the use of the property. For example, property that is owner-occupied as a
personal residence is classified as a residential homestead. The "use class" is important because
. the Minnesota system, in effect, assigns a weight to each class of property, Generally, properties
that are associated with income production (e.g. commercial and industrial properties) have a
higher classification weight than other properties.
The property classification system defines the tax capacity of each parcel as a percentage of each
parcel's market value. For example, a $75,000 home, which is classified as a residential
homestead has a class rate of 1.0 percent and therefore has a tax capacity of $75,000 x .01 or
$750. (A sample of the class rates are included in Table A.)
[parcel market value] * [class rate] = [parcel tax capacity]
The next step in calculating the tax burden for a parcel involves the determination of each local
unit of government's property tax levy. The city, county, school district and any special property
taxing authorities must establish their levy by December 28 of the year preceding the year in
which the levy will be paid by taxpayers. The property tax levy is set after the consideration of
all other revenues including state aids such as LGA.
[city budget] - [all non-property tax revenues] = [city levy]
For cities within the seven-county Twin Cities metropolitan and on the iron range, the levies are
reduced by an amount of property tax revenue derived from the metropolitan and range area
fiscal disparities programs (see the Fiscal Disparities 101 document for more information).
.
AN EQUAL OPPORTUNITY/AFFIRMATIVE ACTION EMPLOYER
. Property Taxation 101
Page 2
Local tax rates
Local governments do not directly set a tax rate, Instead, the tax rate is a function of the levy and
the total tax base. To compute the local tax rate, a county must determine the total tax capacity
to be used for spreading the levies. The total tax capacity is computed by first aggregating the
tax capacities of all parcels within the city. Several adjustments to this total must be made
because not all tax capacity is available for general tax purposes. The result of this calculation
produces taxable tax capacity. Taxable tax capacity is used to determine the local tax rates.
[city levy] I [taxable tax capacity] = [city tax rate]
The city tax rate is computed by dividing the city levy (minus the fiscal disparities distribution
levy, if applicable) by the taxable tax capacity. Under the current property tax system, the tax
rate is expressed as a percentage. For example, the average 2004 city tax capacity rate is
approximately 40.03 percent. Dramatic changes to the tax system in 2001 increased the average
city rate significantly in 2002. This same calculation is completed for the county based on the
county's levy and tax base, the school district and all special taxing authorities. The sum of the
tax rates for all taxing authorities that levy against a single property produces the total local tax
rate. This total local tax rate is then used to determine the overall tax burden for each parcel of
property .
. Parcel tax calculations
The property tax bill for each parcel of property is determined by multiplying the parcel's tax
capacity by the total local tax rate, The tax statement for each individual parcel itemizes the taxes
for the county, municipality, school district, and any special taxing authorities.
[parcel tax capacity] * [total local tax rate] = [tax capacity tax bill]
To complicate the tax calculations, voter-approved referenda levies are applied to the market
value of each parcel, not tax capacity, As a result, each identically-valued parcel, regardless of
the property's use, pays the same amount of referenda taxes (with the exception of certain
agricultural and seasonal recreational properties, which are exempted from referenda taxes), In
2004, three counties, 43 cities and 337 school districts levied market value-based levies, These
communities must have a separate calculation for a market value referenda levy by the total
taxable market value of each corrnmmity,
[parcel market value] * [market value tax rate] = [market value tax bill]
[tax capacity tax bill] + [market value tax bill] = [total tax bilI]
State property tax
New to the tax system in 2002 was a state property tax on all commercial, industrial, seasonal
recreational, and utility real property. In 2004, this new tax raised $621 million statewide; the
. proceeds are deposited in the state general fund. Prior to 2002, the state last collected a property
tax in 1968.
. Property Taxation ] 01
Page 3
Property tax credits
Several tax credits for various types of properties are available in certain instances. These
amounts are subtracted from the overall taxes for each parcel to determine the net tax bill for the
individual owner. Minnesota also provides additional property tax relief directly to individual
homeowners, cabin owners, and renters through the circuit breaker and the targeting refund
programs.
Property tax intricacies
The technical details of computing property taxes mask many other intricacies of the property tax
system. Many communities over the past several years have experienced situations where
individual property taxes rise much faster than the increase in the levies that are certified by local
units of government.
The most common factor that results in an increase in an individual parcel's tax is the change in
the parcel's estimated market value. Without any change in local levies, a property owner can
experience a tax increase due almost exclusively to any valuation increase.
The Legislature frequently changes the classification system. Changes to the classification
system can shift property tax burdens from one type of property to another. Table A
. demonstrates some of the changes the Legislature has made to class rates since 1997.
Commercial, industrial, and apartment properties received significant reductions in their class
rates. This shifts tax burden to other classes of property that did not receive class rate reductions.
In an effort to minimize the effect of these shifts, the Legislature reduced school levies across the
state and created the market value homestead credit, This credit reduces property taxes for
homesteads by 0.4 percent of the homestead's market value up to a maximum $304 dollars. As
part of the credit program, the state has reimbursed cities for the amount by which the credits
reduce cities' tax receipts. The 2003 Legislature, however, made significant reductions to the
program as part of the budget fix, While cities were estimated to receive about $86 million in
credit reimbursement in 2004, they will receive only about $66 million.
Economic factors that may affect broad classes of property can also influence the overall tax
changes for individual parcels of property. For example, in the early 1990s the metropolitan area
experienced major declines in the valuation for commercial and industrial properties. These
valuation declines shifted taxes from property classified as commercial and industrial to all other
types of property. Valuation declines also may have accentuated the levy changes by local units
of government.
A 2002 law change exempted agricultural and cabin property from voter-approved referenda
levies. In some jurisdictions where these types of property are a significant part of the tax base,
this change shifted taxes onto other classes of property.
. Legislative changes in state aid programs can also affect the revenue needed to be raised from
the property tax. In 2002, the Legislature eliminated HACA and increased the other major aid
. Property Taxation 101
Page 4
program, LGA, by $140 million. In 2003, the Legislature reduced 2003 LGA by about $120
million and 2004 LGA by about $150 million, Levy limits also impact local levy decisions. For
eight of the last nine years, the Legislature has imposed strict levy limits on cities over 2,500
population. During the 2003 session, cities that had been previously covered by levy limits lost
any unused levy authority. Levy limits expire for 2005.
This discussion is only a general overview of the current Minnesota property tax system. Over
time, the system has become more complex and difficult for taxpayers to understand.
Unfortunately, local officials must frequently explain how the system works and take the blame
for the complicated features of the system. Local officials, however, can only control local levy
decisions. They have no direct ability to modify the overall structure of the tax system and are at
the mercy of the Minnesota Legislature
Glossary of Terms
Circuit breaker-A state-paid property tax refund program for homeowners who have property
taxes out of proportion with their income. A similar program is also available to renters.
Class rates-The percent of market value set by state law that establishes the property's tax
. capacity subject to the property tax. See Table A for a sample list of class rates.
Fiscal disparities programs-Local units of government in the Twin Cities metropolitan area
and on the Iron Range participate in property tax base sharing programs. Under these two
programs, a portion of the growth in commercial and industrial property value of each city and
township is contributed to a tax base sharing pool. Each city and township then receives a
distribution of property value from the pool based on market value and population in each city.
Homestead and agricultural credit aid (HACA}---A $200 million property tax relief program
that was eliminated in 2001.
Local government aid (LGA)-A state government revenue sharing program for cities and
townships that is intended to provide an alternative to the property tax. The formulae for
distributing the aid payments were changed for 2004 and beyond. 2004 LGA is distributed using
different formulae for cities over 2,500 and cities under 2,500, Large city formula factors are:
pre-I 940 housing percentage, population decline over last decade, accidents per capita, average
household size, metro or non-metro, and adjusted net tax capacity per capita. Small city formula
factors are: pre-1940 housing percentage, population decline over last decade,
commerciaVindustrial property percentage, and population. These new formulae will begin to
impact city aid amounts in 2004. Transition mechanisms built into the new LGA law mean that it
will be several years before all cities are fully "on" the new formula.
.
. Property Taxation 10 1
Page 5
Local tax rate- The rate used to compute taxes for each parcel of property, Local tax rate is
computed by dividing the certified levy (after reduction for fiscal disparities distribution levy and
disparity reduction) by the taxable tax capacity.
Market value-An assessor's estimate of what property would be worth on the open market if
sold. The market value is set on January 2 of the year before taxes are payable.
Market value homestead credit-This credit offsets a portion of each homestead's property tax
burden equal to .4 percent of the homestead's market value up to a maximum credit of $304.
Property class-The classification assigned to each parcel of property based on the use of the
property, For example, owner-occupied residential property is classified as homestead.
Property tax levy-The tax imposed by a local unit of government. The tax is established on or
around December 28 of the year preceding the year the levy will be paid by taxpayers.
Targeting refund-A state paid property tax refund for homeowners whose property taxes have
increased by more than 12 percent. A similar program is available to cabin owners,
. Tax capacity The valuation of property based on market value and statutory class rates. The
property tax for each parcel is based on its tax capacity.
Total tax capacity-The amount computed by first totaling the tax capacities of all parcels of
property within a city. Adjustments for fiscal disparities, tax increment and a portion of the
powerline value are made to this total since not all tax capacity is available for general tax
purposes.
Truth in taxation-The "taxation and notification law" that requires local governments to set
estimated levies, inform taxpayers about the impacts, and hold a separate hearing to take
taxpayer input.
.
. Property Taxation 10]
Page 6
Table A: Sample Property Class Rates
Property Class Taxes Local Taxes Local Taxes State Tax Payable
Payable 1997 Payable 2003 Payable 2004 2003/04
Residential Homestead:
<$76,0001 No state tax
$76,000-$500,000 1.0% 1.0% 1.0%
2.0 1.0 1.0
>$500,000 2.0 1.25 1.25
Residential Non-homestead:
Single unit:
<$76,0001 2.3 1.0 1.0 No state tax
$76,000-$500,000 2.3 1.0 1.0
>$500,000 2.3 1.25 1.25
2-3 unit buildings 2.3 1.25 1.25
Market-rate Apartments: 3.4 1.5 1.25 No state tax
Commercial/Industrial:
<$100,0001 3,0 1.5 1.5 1.5
$100,000 - $150,000 4.6 1.5 1.5 1.5
>$150,000 4.6 2.0 2.0 2.0
Seasonal Recreational Residential:
. <$76,001
$76,000-$500,000 1.75 1.0 1.0 0.4
>$500,000 2.5 1.0 1.0 1.0
2.5 1.25 1.25 1.25
IFirst tier limit was $72,000 for 1997, $76,000 for 2000, and $500,000 for 2002
lFirst tier limit was $100,000 for 1997, $150,000 thereafter
. Updated: 7/23/04
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