MN2020 Property Tax Report 2002-2010

Table of Contents
Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Recommendations: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
II. 2002 Property Tax Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
III. State Aid Reductions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
IV. The Role of Property Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
V. Explaining Homestead Property Tax Growth. . . . . . . . . . . . . . . . . . . . . . . . . . 22
VI. Trends in Specific Communities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
VII. Focusing on Cities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
VIII. Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Appendix A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Appendix B. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Appendix C. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Executive Summary
During the last eight years, the state has pushed its budget problems off to local governments,
forcing both service cuts and property tax increases. “No new taxes” policy at the state level has
led to more regressive taxes at the local level and deep cuts
in education, infrastructure, and public services. This is
“No new taxes” policy at
not the way to move Minnesota forward. Minnesota needs
the state level has led to
more progressive tax policy which doesn’t stick those least
more regressive taxes at the
able to pay with a disproportionate share of the bill and that
local level and deep cuts in
doesn’t force local councils, commissions, and school boards
education, infrastructure,
to slash critical public investments.
and public services.
From 2002 to 2010, property taxes in Minnesota increased by 26.8 percent in inflation-adjusted
dollars and by 71.8 percent in nominal dollars.* Statewide property taxes during this eight year
span increased at a faster annual average pace than had been seen in at least a generation.
From 2002 to 2010, local property taxes (excluding the state property tax) increased by $1.7 billion
in constant 2010 dollars. However, this growth in property taxes cannot be attributed to growth
in local government budgets; since 2002 total local government revenue declined by $613 million.
The primary cause of statewide property tax growth is reductions in revenue sharing with local
governments known as state aid. In the last eight years, aid to local governments declined by $2.6
billion in constant 2010 dollars. Local property tax increases replaced approximately two-thirds of
* “Nominal dollars” are dollars that have not been adjusted for inflation.
Minnesota 2020 - www.mn2020.org 1

state aid cuts. Local governments closed the remaining budget gap primarily by spending down
reserves and cutting services, such as public safety, education, and parks and recreation.
A consistent pattern of aid loss and property tax increases is seen when examining all three major
levels of local government—counties, cities, and school districts—separately. State aid reductions,
not local spending increases, were the driving force behind property tax increases for each level of
government since 2002.
Homeowner property taxes have increased particularly rapidly over the last eight years. From 2002
to 2010, residential homestead property taxes have increased by 38.2 percent in inflation-adjusted
dollars and by 87.1 percent in nominal dollars—a growth rate significantly greater than the growth
in total property taxes for all types of property.
After accounting for growth in the number of homesteads, the inflation-adjusted average Minnesota
homeowner property tax increased by 28.6 percent from 2002 to 2010, while statewide per capita
property taxes grew by “just” 19.2 percent. The more rapid rate of growth in homestead property
taxes has been improperly attributed to rising homestead values. While statewide homestead
estimated market value (EMV) has grown rapidly during most of the last eight years, it has
declined as a share of statewide EMV and thus homestead EMV growth does not explain the more
rapid rate of growth in homeowner property taxes.
Changes to the property tax system passed in 2001 and implemented in 2002 are the likely cause of
the more rapid rate of growth in homeowner taxes relative to most other types of property.
2 Minnesota 2020 Property Tax Report: 2002 - 2010

The 2001 tax act gave substantial property tax relief to homeowners and other property owners in
2002. However, it also put into place forces that caused homestead property taxes to increase more
rapidly in subsequent years.
These include:
• The structure of the homestead market value credit, whereby the amount of the credit shrinks
as homestead value increases.
• The phase-out of the limited market value program, which contributed to growth in
homestead taxable value and property taxes through at least 2006.
• The culmination of a decade of “class rate compression,” which contributed to a shift of
property taxes on to homesteads in 2003 and 2004.
• The new state property tax on commercial/industrial property, which partially insulates
business properties from the local property tax increases that push taxes on homesteads and
other properties upward.
In addition, declining real per pupil state aid to school districts The 2001 tax also put
contributed to rapid growth in “referendum market value” levies. into place forces that
These levies fall more heavily on homeowners than do ordinary caused homestead
property tax levies. The rapid growth in referendum market value property taxes to
levies since 2002 shifted a larger share of total statewide property increase more rapidly
taxes on to homeowners. in subsequent years.
In 2010, the change in statewide property taxes departed from the trend seen during most of the
preceding seven years. Inflation-adjusted statewide per capita property taxes increased only slightly
(0.6 percent), while the average homeowner property tax fell by 1.6 percent.
Increased public resistance to tax hikes due to the troubled economy contributed to the low rate of
growth in aggregate property taxes. Another factor was that a large portion of the aid cuts in 2010
occurred after local governments had set their property tax levy for the year, so aid cuts could not
be recovered through property tax increases until 2011.
Furthermore, many of the forces that had caused the more rapid rate of growth in homestead
property taxes from 2002 to 2008 were of diminished importance in 2010. The LMV phase-out and
class rate compression ceased to be major contributors to homestead tax increases. Referendum
market value levies did not grow. Finally, the market value homestead credit stopped decreasing
because homestead values stopped increasing. The abatement of these factors allowed the decline in
homesteads’ relative share of EMV—a trend that had been in place since 2005—to finally manifest
itself in the form of lower homeowner property taxes.

However, celebration would be premature. Some of the forces that drove property taxes higher
during most of the period since 2002 could resurface. For example, with a looming state budget
deficit of nearly $7 billion, more state aid cuts are a distinct possibility. Just as they have in the past,
more aid cuts will translate into less revenue for funding public services and infrastructure and
higher property taxes.
In addition, some of the forces that caused especially rapid growth in homestead property taxes
could also resurface. For example:
With a looming
• Resumption of growth in school referendum market value state budget deficit
levies is a distinct possibility, given that real per pupil state of nearly $7 billion,
aids are already projected to decline even before the state more state aid
tackles the anticipated FY 2012-13 budget deficit. cuts are a distinct
• Business property will continue to be partially insulated from possibility.
local property tax increases through the state property tax
levy, which does not increase to keep pace with population growth. Over time, this will likely
contribute to a lower rate of growth in business property taxes relative to homesteads and
other non-business properties.
• Future growth in homestead EMV would lead to further reductions in the market value
homestead credit, which will in turn cause an accelerated growth in homestead property
taxes, all other things being equal.

Recommendations:
The property tax is an unfair and unpopular tax because it falls disproportionately on households
with the least ability to pay. For this reason, state policymakers should adopt reforms that ensure
that trends observed since 2002 do not reemerge. These reforms should include:
• An increase in state revenues so that the state budget A system in which

problems will not be shifted disproportionately to local homeowners are
government and property taxpayers as they have been since paying more while
2002. While belt tightening and spending reforms continue local governments are
to be necessary, there is no reason why equitable revenue forced to make deep
increases cannot also be part of the budget solution. cuts to services and
• Appropriate funding of school operating costs at the state infrastructure is not a
level so that the need for new referendum market value path to prosperity for
levies is mitigated. Minnesota.
• Restructuring of the market value homestead credit so that
the credit does not automatically shrink as taxable market values grow.
• Linking growth in the state business levy to the combined rate of inflation and population
growth.
A system in which homeowners are paying more while local governments are forced to make deep
cuts to public services and infrastructure investments is a system that lacks accountability and is
not a path to prosperity for Minnesota. Yet this is precisely the system that’s developed. The current
budget crisis affords Minnesota policymakers an opportunity to take the difficult and complex
actions needed to reduce dependence on regressive property taxes and to fix Minnesota’s system of
state and local government finance.

I. Introduction
Since 2002, property taxes in Minnesota increased at a rate that far surpassed that of inflation and
population growth. Homestead property taxes grew at a particularly rapid rate. Tax payable year
2010 saw a rare deviation from this trend, with total statewide property taxes growing only slightly
and homestead property taxes declining slightly. However, 2010 is likely to be only a temporary
interruption of the longer-term trend.
The statewide growth in real (i.e., inflation-adjusted) per capita property taxes in Minnesota from
2002 to 2009 was the result of state aid cuts, not growth in local government spending. Various
changes in state law first implemented in 2002 further exacerbated growth in homestead taxes. The
slight decline in homestead property taxes in 2010 was largely the result of a decline in homestead
valuation relative to other types of property, in addition to an abeyance in some of the forces that
had been pushing homestead property taxes higher in previous years. Each of these trends will be
examined below.
It is important to adjust for the impact of inflation when

The statewide growth in real
assessing changes in state and local government revenue
per capita property taxes
and expenditures over time so as to distinguish between
in Minnesota from 2002 to
real spending growth versus growth caused by erosion
2009 was the result of state
in the purchasing power of the dollar. Unless otherwise
aid cuts, not growth in local
noted, dollar amounts and changes over time presented in
government spending.
this analysis are adjusted for inflation in the cost of state
and local government purchases. 1
Dates used in property tax discussions can create confusion, because property taxes payable in one
year are based upon valuations that were set in the preceding year. To further complicate matters,
property taxes paid to school districts are budgeted within the subsequently numbered school
fiscal year (FY), which begins on July 1 of the calendar year. For example, valuations set in 2009
are used to determine property taxes payable in 2010, which are part of a school district’s FY 2011
budget. For non-school local governments, the year in which property taxes and state aids are paid
corresponds to the year in which these revenues are budgeted. For example, city property taxes
paid in 2010 and aid received in 2010 are part of a city’s 2010 budget.
1 All inflation adjustments in this report are based on the implicit price deflator (IPD) for state and local government purchases, which is a better
measure of inflation for the types of goods and services purchased by state and local governments than is the Consumer Price Index (CPI). The specific
indices used here correspond with the most recent state budget forecast (February 2010). For more on the inflation adjustment used in this report, see
“Taking the Spin out of Inflation Estimates,” Minnesota 2020, September 9, 2008. (http://tinyurl.com/yfo2zgo)

Dates used in this report will refer to the property tax payable year, unless otherwise noted. For
example:
• “2010 values” will refer to values that were used to determine property tax payments in 2010
• “2010 property taxes” will refer to property taxes paid in 2010
• “2010 aid” amounts will refer to aids received by non-school local governments in their 2010
budget year and by school districts in their FY 2011 budget year.
A portion of this report focuses on homestead property. Generally speaking, a “homestead” refers
to a residential property that is occupied by the owner of the property (i.e., the “homeowner”).2
In regard to homestead property, this report will focus primarily on residential—as opposed to
agricultural—homesteads. Residential homesteads comprise more than 96 percent of all homestead
estimated market value3 in Minnesota for the 2009 assessment year, corresponding to taxes payable
in 2010. In this report, the term “homestead” will refer to residential homestead property unless
otherwise noted.
II. 2002 Property Tax Changes
Tax payable year 2002 is the baseline year in this analysis because it was a transitional year for
Minnesota’s property tax system. In the preceding year, the legislature enacted a series of changes
to Minnesota’s property tax system; 2002 marked the first year these changes were in effect. These
changes included:
1) T
he elimination of the general education property tax through full state funding of general
education
2) The culmination of over a decade of class rate compression
3) The creation of a new state property tax on business and seasonal recreational property,
4) The phase-out of the limited market value program, and
5) Creation of a new “market value homestead credit.”
2 Residential property occupied by a parent, stepparent, child, stepchild, grandparent, grandchild, brother, sister, uncle, aunt, niece, or nephew can also
qualify for homestead treatment under Minnesota law.
3 “Estimated market value” (or EMV) as defined by the Minnesota Department of Revenue refers to what a property would sell for in an open market
transaction based on sales and market value income approach trends as estimated by county or local assessors. For more on this, see: http://bit.ly/dvMlYU.
Estimated market values in Minnesota are based primarily on land and building values.

Elimination of general education property tax
Perhaps the most prominent of the changes enacted in 2001 and implemented in 2002 was a shift
in responsibility for funding general education away from local property taxes and into the state’s
general fund. In the same year, the state also reduced transit property taxes by assuming funding
for transit operations, although the dollars involved in this takeover were small in comparison to
the general education takeover.
Through these swaps, state general fund spending increased while local property taxes fell.
Statewide net property taxes per capita fell by 12 percent, while the average residential homestead
property tax fell by 16 percent. While there were many other factors at work, the princip cause of
the decline in property taxes from 2001 to 2002 was the state takeover of general education funding.
However, the dark side of full state funding of general State aid to school districts
education became apparent in subsequent years. While the fell by $1,366 per pupil in
legislature leapt at the opportunity to eliminate the general constant FY 2011 dollars,
education property tax, it declined to increase state taxes while school property
by the amount necessary to maintain the state funding taxes increased by $1,012
commitment at the 2002 level. Since 2002 (school fiscal year per pupil.
2003), state aid to school districts has fallen, which in turn
caused an increase in school property taxes and a decline in total school revenue. From tax payable
year 2002 (corresponding to school fiscal year 2003) to 2010 (fiscal year 2011), state aid to school
districts fell by $1,366 (13.9 percent) per pupil in constant FY 2011 dollars, while school property
taxes increased by $1,012 per pupil (64.0 percent). 4
Homeowners were hit particularly hard by the decline in state aid to public schools. Largely in
response to declining aid, many school districts sought to obtain revenue through locally approved
referendum levies. Many of these new levies were “referendum market value levies;” total school
referendum market value levies increased by 170 percent from 2002 to 2010. Unlike other levies,
levies spread against referendum market value afford no preferential tax treatment to homeowners;
for this reason, an increase in referendum market value levies translates into a larger percentage
increase in homestead taxes than business taxes. This phenomena is described more fully in the
next section on “class rate compression.”
Class rate compression

Another major feature of the tax changes enacted in 2001 and implemented in 2002 was the
culmination of more than a decade of “class rate compression.” A “class rate” refers to the
percentage by which the value in a particular class of property is multiplied in order to determine
the tax base against which levies are actually spread. Because business property is subject to higher
class rates than homestead property, businesses pay higher taxes per each dollar of land and
building value than do homesteads.
4 For more on the decline in school aid and the increase in school property taxes since taxes payable year 2002 (FY 2003), see the recent Minnesota
2020 analysis at: http://bit.ly/mn2020_school_finance

For example, consider the following hypothetical school district with four homesteads each with
land and building value of $250,000, one business property with land and building value of
$2,000,000, and a school property tax levy of $10,000. Under a system in which the school district’s
levy is spread directly against land and building value, the calculation of school property taxes for
each property is shown below.
School Tax School

Land & Building
Property Rate = Levy ÷ Property Tax =
Value
Total Value Tax Rate X Value
Homestead A $250,000 0.333% $833

Homestead B $250,000 0.333% $833
Homestead C $250,000 0.333% $833
Homestead D $250,000 0.333% $833
Business $2,000,000 0.333% $6,667
District Total $3,000,000 $10,000
In this system, the distribution of school property taxes among each property would be in direct
proportion to each property’s share of total land and building value in the school district. For
example, in our hypothetical school district the business property comprises two-thirds of the land
and building value in the district and thus pays two-thirds of the total school property tax levy.
Under Minnesota’s system of property classification, a “class rate” is assigned to each class of
property. The class rate for each class of property is multiplied by a property’s land and building
value to get its “tax capacity.” The property tax levy is then spread not directly against the value
of each property, but against its “tax capacity.” The effect of the class rate/tax capacity system is to
shift the relative tax burden from one class of property to another.
For example, let’s return to our hypothetical school district. In the following example, the property
values and school levy are the same as in the previous example; what is different is that the
distribution of the school levy among properties is not based directly on land and building values,
but on each property’s tax capacity. In this example, the tax capacity of homestead property is
determined by multiplying land and building value by 1 percent, while the tax capacity of business
property is determined by multiplying land and building value by 5 percent. The table below
shows the calculation of the school property tax for each property under this system.
School Tax Rate School Prop. Tax

Land & Tax Capacity =
Property Class Rate = Levy ÷ Total Tax = Tax Rate X Tax
Building Value Value ? Class Rate
Capacity Capacity
Homestead A $250,000 $2,500 9.091% $227

Homestead B $250,000 $2,500 9.091% $227
1%
Homestead C $250,000 $2,500 9.091% $227
Homestead D $250,000 $2,500 9.091% $227
Business $2,000,000 5% $100,000 9.091% $9,091
District Total $3,000,000 $110,000 $10,000

The total property tax collected by the school district in both examples is $10,000. However, the
distribution of property taxes by property type changes significantly under the class rate/tax
capacity system. Because homestead property is assigned a much lower class rate than business
property, the taxes paid by each of the homesteads in our hypothetical district falls from $833 .
under a system in which taxes are distributed based directly on land and building value to $227
under the class rate/tax capacity system. Meanwhile, the business property tax increases from
$6,667 to $9,091.
The primary goal of “class rate compression” was to reduce business property taxes and increase
the share of local property taxes borne by homeowners by reducing the disparity between the
highest business class rate and the lowest homestead class rate.5 The ratio of the highest business
class rate to the lowest homestead class rate fell from 5.25 to 1 in 1989 to 3.4 to 1 in 2001. As a result
of the changes enacted by the legislature in 2001, the disparity fell further to 2 to 1 in 2002, where it
remains today.
A comparison of homestead and business class rates is not an entirely accurate way to gauge the
property tax disparity between homesteads and businesses for four reasons:
1) Unlike most states, Minnesota does not tax personal property (e.g., fixtures, equipment, and
inventories).6 Because personal property comprises a larger percentage of business value
than of homestead value, businesses derive a greater benefit from the personal property
exemption than do homesteads. A simple comparison of homestead and business class rates
ignores the relative advantage that businesses receive as a result of the personal property
exemption and thereby overstates the business taxes relative to homestead taxes.
2) A comparison of the highest business class rate to the lowest homestead class rate overstates
business property taxes relative to homesteads because 13.3 percent of commercial/industrial
value is assessed at a rate below the highest rate, while 4.6 percent of homestead value is
assessed at a rate above the lowest rate (based on data for taxes payable in 2010).
3) A comparison of business and homestead class rates overlooks the fact that a significant
percentage of property taxes are spread against referendum market value—an alternative tax
base which is not subject to class rates. In 2010, 10 percent of the gross property tax levy in
Minnesota is spread against referendum market value. By ignoring referendum market value
levies,7 a simple comparison of class rates again overstates business property taxes relative to
homesteads.
5 Class rate compression also focused on reducing the class rate disparity between rental property and homestead property. The primary focus of the
discussion here is on the business-homestead class rate disparity, which is the largest disparity both in terms of the class rate gap and in terms of the
amount of value involved.
6 The exception here is electrical generation machinery, which is taxed in Minnesota. Electrical generation machinery comprises less than two percent of
taxable business value in the state in the 2009 assessment year, corresponding to taxes payable in 2010.
7 For levies spread against referendum market value, businesses enjoy a tax advantage relative to homesteads because the tax advantage that
businesses derive from the exemption of personal property still applies, while the preferential treatment that homesteads derive through the class rate/tax
capacity system does not. For this reason, referendum market value levies impose a higher effective tax rate (i.e., property tax as a percentage of total real
and personal market value) on homesteads than on businesses.

4) H
omesteads receive some forms of tax relief that business properties do not. For example,
homestead property taxes are reduced through the market value homestead credit, the
taconite homestead credit, and the homeowners’ property tax refund. A simple comparison
of class rates ignores these additional forms of property tax relief that homesteads receive.
In addition to providing business property tax relief, the goal of class rate compression was to
discourage local government spending growth by shifting a larger share of marginal property tax
increases on to homesteads. Lost on proponents of class rate compression was the fact that per
capita county and city spending levels were essentially flat during the 1990s,8 so to some extent
compression was addressing a problem that did not exist.
Class rate compression results in a shift of property taxes from business properties on to
homesteads. However, in 2002 homestead property tax increases were prevented in the vast
majority of Minnesota communities through the elimination of the general education property
tax and through the market value homestead credit, discussed below. In fact, on a statewide
basis homesteads enjoyed greater property tax relief than businesses in 2002. From 2001 to 2002,
aggregate homestead property taxes declined by 14 percent, while commercial/industrial taxes
declined by 4 percent.
However, residual effects of class rate compression upon homesteads that occurred after 2002 were
not “bought off” through new forms of property tax relief and thus homestead property taxes
increased. In 2003, homestead property taxes in the metropolitan area increased because of the
interaction between the 2002 class rate compression and the metropolitan tax base sharing program,
commonly referred to as the fiscal disparity program. Because of a year lag in the tax base data
used to make fiscal disparity calculations, the effects of class rate compression first implemented in
2002 did not affect fiscal disparity tax collections until 2003. The corresponding decline in revenue
generated through the fiscal disparity program in 2003 meant that a larger share of local certified
levies were borne by homeowners in the metropolitan area.9
The property tax changes enacted in 2001 also reduced rental (i.e., non-homestead residential
properties and apartments) class rates, some of which did not occur until taxes payable in 2003 and
2004. The rental class rate reductions occurring in 2003 and 2004 produced a shift in taxes on to
homesteads and other non-rental properties that was not bought off through increased state aids .
or credits.
8 Based on annual city and county expenditure reports from the Office of the State Auditor adjusted for inflation, per capita total city expenditures
declined by 0.9 percent and county expenditures declined by 0.1 percent from 1990 to 2000.
9 A similar shift also occurred in 2003 in the taconite relief area due to an interaction between class rate compression and the taconite fiscal disparity
program. However, because the value involved in the taconite fiscal disparity program is small in comparison to total taxable value, the shift on to
homesteads was small.

Class rate compression also had an impact on how state aid cuts that occurred after 2002 would
affect homeowners. After the class rate compression enacted in 2001, homesteads comprised a
larger percentage of the local tax base; for example, primarily as a result of class rate compression,
homesteads jumped from 47 percent of the statewide city “tax capacity” tax base in 2001 to 53
percent in 2002. As local governments raised property taxes to replace a portion of the reduction in
state aid, a larger share of the property tax increase fell on homeowners than would have been the
case prior to 2002.
As noted above, the growth in referendum market value levies, which was in part due to the
decline in school aid after 2002 (FY 2003), also contributed to the increase in homestead property
taxes. Referendum market value levies are distributed among property types based directly on total
land and building value, similar to the first hypothetical example described above, except that some
classes of property—such as agricultural land and residential cabins—are exempted entirely. Unlike
levies that are distributed among properties based on the class rate/tax capacity system, levies
distributed based on referendum market value afford no preferential tax treatment to homesteads.
Thus, as referendum market value levies increase as a percentage of total levies, the share of total
property taxes paid by homeowners increases.
A new state property tax
The elimination of the general education property tax combined with class rate compression
would have produced a huge windfall of business property tax relief in 2002. In order to reduce the
magnitude of business property tax relief and to generate additional revenue for the state general
fund, the state imposed on businesses a new state property tax. The new state tax also applied to
seasonal recreational residential property.10
In future years, growth in the state property tax was linked to

The presence of the
inflation as measured by the implicit price deflator for state
state property tax levy is
and local government purchases. However, the state levy was
one of the reasons why
not linked to growth in the state’s economy or population;
homestead property taxes
consequently, the real (i.e., inflation adjusted) per capita state
have increased more
property tax levy on businesses actually declined by about six
rapidly than business
percent from 2002 to 2010.
property taxes since 2002.
The state property tax levy also helped to insulate a portion of business property taxes from growth
in local property taxes that was occurring as a result of the reduction in state aid. While homestead
property taxes were increasing, approximately one quarter of statewide business property taxes
were declining in real per capita dollars. The presence of the state property tax levy is one of the
reasons why homestead property taxes have increased more rapidly than business property taxes
since 2002.
10 Effective for taxes payable in 2006, the seasonal recreational portion of the state property tax base was separated from the business portion and
subjected to a lower state tax rate.

Phase-out of the limited market value program
The limited market value (LMV) program was implemented in 1994 to protect owners of
homestead, agricultural, and cabin property from tax increases resulting from rapid growth in
value.11 Under the LMV program, growth in the taxable value of eligibile property is limited to
a percentage of the prior year taxable value or a portion of the assessed value growth from the
prior year to the current year, whichever is greater. By restricting the rate of taxable value growth
in a single year, the LMV program helps to spread over time the impact of property tax increases
resulting from rapid escalation in property values.
Assessors generally oppose programs such as LMV which result in properties being taxed at less
than full market value. Assessors point out that the LMV program can create tax fairness issues,
since it can result in owners of identical properties located in the same taxing jurisdictions paying
different property taxes. Proponents of LMV argue that the program simply cushions property
owners from the effects of rapid value growth by spreading tax increases out over time; any tax
unfairness resulting from LMV, they argue, is temporary.
In 2001 the legislature sided with opponents of LMV and required that the program be gradually
phased-out beginning for taxes payable in 2003; during the phase-out period, caps on valuation
growth would gradually be loosened, allowing for more rapid growth in taxable value. Under the
2001 tax act, LMV would have been fully eliminated for taxes payable in 2008; however, in light of
rapid property tax growth among properties eligible for the LMV program, the legislature opted
to extend LMV for two additional years. Tax payable year 2010 is the first year since 1993 with no
LMV restrictions on taxable value.
In the years immediately following the implementation of the LMV phase-out (2003 through
approximately 2006), the phase-out contributed to higher aggregate statewide homestead property
taxes. After that, it is not clear if the LMV phase-out was causing higher or lower aggregate
homeowner property taxes because no one has calculated what homestead property taxes would
have been if the parameters of the LMV program in 2002 (i.e., prior to the phase-out) had been left
in place unchanged. While the impact of the LMV phase-out upon aggregate statewide homestead
property taxes is unclear, there is no doubt that the majority of homesteads in the state received no
benefit from the LMV program during the entire phase-out period.
It is difficult to know with certainty if statewide homestead property taxes would be higher or
lower in 2010 if the LMV program as constituted for taxes payable in 2002 would have been left in
place. However, we can safely conclude that the LMV phase-out contributed to growth in statewide
homestead property taxes in 2003 and the years immediately thereafter.
11 The LMV program was later expanded to include timberland. An LMV program was also in effect for Minnesota for tax payable years 1974 to 1980.

Market value homestead credit
The market value homestead credit was enacted in 2001 and implemented for taxes payable in
2002 as a replacement for the “education homestead credit” and as a way of preventing possible
homestead property tax increases that could occur as a result of class rate compression.
The amount of the market value homestead credit for a particular property is entirely dependent on
the taxable market value12 of the property. For homesteads with a taxable value of $76,000 or less,
the market value homestead credit equals 0.4 percent of the property value. Thus, a homestead with
a taxable value of $76,000 would receive a market value homestead credit of $304 ($76,000 x 0.4%).
As home values grow beyond $76,000, the credit shrinks at rate of 90 cents per every $1,000 of value
until hitting zero at a value of $413,778; all homesteads with a value of $413,778 or more receive no
market value homestead credit.
12 Taxable market value is equal to the “estimated market value” (see footnote 2) minus value excluded from taxation as the result of special statutory
programs, such as the Limited Market Value program or “Green Acres” program. For more on homestead taxable market value, see: http://taxes.state.
mn.us/property_tax_administrators/pages/admin_ed_calc_course_part1_1.aspx

Statewide homestead taxable value grew from 2002 to 2008 before leveling off in 2009 and declining
in 2010. The homestead value growth from 2002 to 2008 caused a significant decline in the market
value homestead credit. The graph below shows the statewide homestead taxable value (left axis)
and the market value homestead credit (right axis). To facilitate comparison, both amounts are
shown in nominal dollars (i.e., unadjusted for inflation).
The graph illustrates how statewide market value homestead credit payments are inversely related
to homestead taxable value. As homestead taxable value increased from 2002 to 2008, the nominal
statewide market value homestead credit declined by $59 million or 18.2 percent. Flat homestead
values from 2008 to 2009 translated into virtually no change in the amount of the statewide
market value homestead credit. Finally, the decline in statewide homestead values in 2010 led to a
corresponding increase in the credit.
In constant 2010 dollars, the market value homestead credit declined by $159 million (36.6 percent)
from 2002 to 2010. As the amount of the credit declines, the net homestead property tax increases
by an equivalent amount, all other things being equal. This is yet another feature of the 2001 tax act
that has contributed to growth in homestead property taxes over time.
III. State Aid Reductions
The 2001 tax act did not mandate state aid reductions in future years. However, the act did extend
state spending commitments in ways that were unsustainable in the long term without new state
revenues. With a governor committed to a “no new tax” agenda, broad based revenue increases
were off the table and state budget reductions became inevitable. A disproportionate share of these
budget reductions took the form of cuts in state aid to local governments.

These state aid cuts are the primary cause of statewide property tax increases since 2002. The graph
below examines the change in statewide local government revenue, property taxes, and state aid in
constant 2010 dollars since 2002.
From 2002 to 2010, property taxes imposed by local governments increased by $1.7 billion in
constant 2010 dollars.13 However, this growth in property taxes cannot be attributed to growth in
local government budgets; since 2002 total local government revenue declined by $613 million.14
The primary cause of statewide property tax growth is reductions in state aid to local governments.
From 2002 to 2010, state aid to local governments declined by $2.6 billion (21.7 percent) in constant
2010 dollars. The local property tax increase was sufficient to replace approximately two-thirds of
state aid cuts. The balance of the state aid cut was dealt with primarily by cutting local budgets.
It should also be noted that at the same period that local government revenue fell by $600
million, the statewide population that local governments must provide services to increased by
approximately six percent (although statewide school enrollment declined by 1.2 percent).
13 Amounts in this section are calculated based on data from the 2010 End-of-Session Price of Government (POG) report. POG data for 2008 through
2010 (FY 2009 and FY 2011) are estimates.
14 The particularly large decline in total local government revenue from 2007 to 2008 was driven in part by aid unallotments in 2008 that occurred
after property tax levies for that year had been set. Because local governments were unable in increase property taxes in 2008 to replace even a portion
of the aid cuts, total local revenue declined. Local governments were able to levy to replace some of these aid cuts in 2009, which explains a portion of
the revenue increase from 2008 to 2009. 2008 was also a relatively high inflation year for state and local governments, which contributed to a decline in
inflation-adjusted revenue.

The following graph adjusts for the impact of population growth by showing the change since 2002
in total local property taxes and school,15 county, and city revenue on a per capita basis.16 School
revenues are shown on a per capita basis to facilitate comparison to other data in the graph. In
addition, because school costs are driven more by changes in school enrollment than on changes in
the entire statewide population, the change in school revenue is also show on a per pupil basis.
On a statewide basis, local property taxes increased by 24.3 percent from 2002 to 2010. However,
the property tax increases were not sufficient to replace the cuts in state aid that occurred over this
period. As a result, per capita county and city revenue and per pupil school revenue declined over
this period. The following information is based on the 2010 end-of-session Price of Government
report from Minnesota Management & Budget, which includes nearly all revenue and state aid
dollars received by local governments.
15 School revenues shown here exclude estimated one-time federal dollars, with the exception of $500 million that school districts received in FY 2010 to
replace a one-time cut in state general education aid. One-time federal dollars are excluded because they exaggerate the revenue available to fund school
operations on an ongoing basis; based on data used in the 2010 Price of Government report, one-time federal dollars go away after FY 2011 (corresponding
to taxes payable in 2010).
16 Omitted from this graph are township and special taxing district revenues, which comprise less than five percent of total local government revenue
based on Price of Government data for 2009.

• For counties, per capita state aid is projected to fall by 33.8 percent from 2002 to 2010. This
projected decline in aid is the principal cause of a 13.3 percent increase in per capita county
property taxes and an 8.7 percent decline in total per capita county revenue.17
• For cities, per capita state aid is projected to fall by 45.8 percent from 2002 to 2010,
contributing to a projected 14.0 percent growth in per capita city property taxes and a 15.1
percent decline in per capita city revenue.
• For school districts, per pupil state aid is projected to fall by 13.9 percent from fiscal year
2003 to 2011, corresponding to tax payable years 2002 to 2010. This state aid loss has driven
a 64.0 percent increase in property taxes per pupil and a per pupil revenue decline of about
2.7 percent, excluding one-time federal recovery dollars. The percentage increase in school
property taxes is extremely high because school property taxes for 2002 were extremely low
due to the elimination of the general education property tax.
Over the eight year span from 2002 to 2010, total local revenues fell despite new cost drivers that
were foisted on local governments. For example, new testing requirements and higher achievement
standards were mandated for public schools. In addition, the state shifted responsibility for
incarcerating short-term felony offenders to counties and mandated that counties pay ten percent of
the medical assistance costs for nursing homes stays in excess of 90 days for people under age 65.
State aid reductions, not All three levels of local government follow the same basic
local spending increases, pattern: cuts in state aid caused both reduced funding for local
were the driving force services and infrastructure and higher property taxes. State aid
behind property tax reductions, not local spending increases, were the driving force
increases since 2002. behind property tax increases since 2002.
The relationship between aid reductions and property tax increases is complicated when aid cuts
occur after aid to local governments is already certified. The Minnesota Department of Revenue
notifies counties and cities of the County Program Aid (CPA) and city Local Government Aid (LGA)
they will receive in a calendar year based on current law during the summer of the preceding year;
the act of notifying counties and cities of their anticipated CPA and LGA payments is known as “aid
certification.” For example, CPA and LGA for 2010 were certified during the summer of 2009. The
state certifies CPA and LGA during the summer of the preceding year so that counties and cities
know how much CPA and LGA they will be receiving when they set their property tax levy in the
fall for the upcoming year.
However, occasionally CPA and LGA are reduced after aid amounts have been certified. This
can occur through unallotment or through statutory changes. Cuts to certified aid amounts have
become more common in recent years due to large state budget deficits. Reductions in certified CPA
and LGA occurred in 2003, 2008, 2009, and 2010.
17 These amounts include an approximate adjustment for the partial state takeover of court administration costs. Without this adjustment, the decline in
per capita county aid and total revenue would have been 36.8 percent and 9.9 percent respectively.

Typically, reductions in certified CPA and LGA amounts occur after local jurisdictions have set
their property tax levy for the upcoming year. Because local governments can no longer increase
property taxes to replace their CPA or LGA reduction,
local governments are left with a hole in their budgets ... local governments are left
which must be made up through expenditure with a hole in their budgets
reductions, utilization of budget reserves, or, if which must be made up
necessary, borrowing. through expenditure reductions,
utilization of budget reserves,
Generally, CPA and LGA reductions can be recovered or, if necessary, borrowing.
through property tax increases in the subsequent year.
For example, a reduction in the city LGA certified in the summer of 2008 for calendar year 2009 can
be recovered (in part or in total) through an increase in property taxes payable in 2010. The bottom
line is that reductions in certified CPA and LGA amounts that occur after the levy for the upcoming
year is set do not impact property taxes until the year after the cut occurs.
In each of the last three years, the state also cut the market value homestead credit payments
received by local governments.18 Market value credit payments are not certified to counties and
cities in the way that CPA and LGA are. Nonetheless, cuts in market value credits made after the
levy certification date leave counties, cities, and towns (to date, school districts have not been
subject to market value credit cuts) with an unanticipated shortfall in their budgets that must be
made up for through expenditure reductions, utilization of budget reserves, or borrowing.
As with CPA and LGA reductions that occur after the date that the final levy is set, market value
credit cuts can be recovered through a property tax levy increase in the subsequent year. For this
reason, a spike in property taxes and revenue can occur in the year after CPA, LGA, and market
value credit cuts are made.
For example, the 2008 cuts in LGA, CPA, and county and city market value credit payments .
caused a significant drop in county and city revenues in that year. In 2009, counties and cities were
able to increase property taxes to recover a portion of the aid and credit cuts made in 2008, causing
an increase in county and city revenues in 2009 relative to 2008. This can be seen in the graph on
page 17.
Furthermore, the small increase in property taxes from 2009 to 2010 was likely due in part to the
fact that 2009 county and city aid cuts made after 2009 levies were set were slightly lower than cuts
made in the preceding year. In addition, the absence of large property tax increases in 2010 despite
large cuts in county and city aid is partially because many of the 2010 aid cuts were made after
2010 property tax levies were set and thus could not be recovered in the 2010 property tax year.
The timing of state aid cuts affect whether the cuts impact property taxes in the current year or the
subsequent year.
18 In recent years, the county share of the market value homestead credit was cut in 2008 and 2010, the township share was cut in 2009 and 2010, and
the city share was cut in 2008, 2009, and 2010. In some state publications—and elsewhere in this report—credits, such as the market value homestead
credit, are referred to by the generic term “state aid.” Technically, “aid” refers to payments made by the state to local governments prior to levy certification.
Credits—on the other hand—refer to state paid property tax relief targeted to specific classes of property. “State aid” typically reduces the property taxes
paid by all properties within a jurisdiction by reducing the local tax rate, whereas credits provide relief only to a specific subset of properties.

While there have been property tax and revenue fluctuations Local property tax
among local governments since 2002, the overall pattern is increases have
clear. Local property tax increases have been unable to fully been unable to fully
compensate for large state aid cuts, so total local revenue has compensate for large
fallen. Aggregate statewide property tax increases over the state aid cuts, so total
last eight years are the result of state aid reductions, not local local revenue has fallen.
spending increases.
IV. The Role of Property Valuation
Property values plays an important role in determining the property tax borne by a property.
However, the relationship between property valuation and property taxation is often not fully
understood.
An increase in the value of a property from one year to the next does not necessarily translate into
a property tax increase for that property. The critical variable in determining how property value
affects property taxes is not the absolute growth or decline in value, but rather how a property’s
value compares to the rest of the tax base.
To illustrate, consider a hypothetical situation in which property taxes are driven exclusively by
the local levy and local property values. Suppose the value of a homestead increases by 10 percent
from one year to the next. Further suppose that the levy of
The critical variable in the city where the homestead is located remains constant. If
determining how property the value of other property in the city also increases by 10
value affects property taxes percent, then the value of the homestead will not increase
is not the absolute growth relative to the rest of the tax base and the portion of the city
or decline in value, but property tax borne by the homestead will also not increase.
rather how a property’s In this simplified example (which ignores the complexities
value compares to the rest resulting from classification, credits, and so forth), the critical
of the tax base. factor in determining the property tax paid by a homeowner
(or any other property owner) is not the value of his property
in isolation, but the value relative to all other properties in the city.
During the period from 2002 to 2008 (corresponding to assessment years 2001 to 2007), the
estimated market value of all Minnesota homesteads increased by a whopping 79 percent in
nominal dollars. This large growth has led some to conclude that homestead value increases must
have been driving homestead property tax increases. For example, in 2007 the Minnesota Taxpayers
Association stated that the period since 2002 “marked a rapid increase in home values relative
to other properties and their corresponding assumption of a greater share of the property tax
burden.”19
19 Fiscal Focus (Minnesota Taxpayers’ Association publication), May-June 2007.

In fact, homestead estimated market values (EMV) grew less rapidly than the rest of the tax base
during the period under consideration. Thus, the homestead share of statewide EMV declined
from 2002 to 2008 and thus growth in homestead EMV does not explain the growth in homestead
property taxes during this period.20 The graph below shows statewide homestead EMV as a percent
of total Minnesota EMV during the entire period from 2002 to 2010.
While trends in homestead EMV do not explain the growth in homestead property taxes from 2002
to 2008, they do play a role in explaining the leveling and decline of homestead property taxes in
2009 and 2010. With the foreclosure crisis and the decline in home values, homestead EMV shrunk
as a percentage of total EMV. This factor, combined with the waning of other forces that had been
pushing homestead property taxes higher in previous years, explains the leveling and decline in
homestead property taxes in 2009 and 2010.
20 It is important to distinguish between “estimated market value” (EMV) and “taxable market value” (TMV). As noted above, TMV differs from EMV
in that TMV does not include value excluded from taxation due to special statutory programs, such as the limited market value (LMV) or “Green Acres”
programs. Homestead TMV as a percentage of total TMV increased slightly from 2002 to 2007 (assessment year 2001 to 2006), but declined slightly from
2002 to 2008 (assessment year 2001 to 2007). Even during the period when homestead TMV increased as a percentage of total TMV, that growth was not
due to growth in homestead EMV, but to the legislative decision to phase-out the LMV program, described above. Thus, it would be a mistake to conclude
that market forces were responsible for the slight increase in the homestead share of total TMV during the period from 2002 to 2007.

V. Explaining Homestead Property Tax Growth
As noted above, property tax increases in Minnesota since 2002 have been driven primarily by state
aid reductions, not increases in local government spending. However, aid reductions do not explain
why homestead property taxes have risen more rapidly than property taxes in general. This section
will compare homestead property taxes to total Minnesota property taxes from 2002 to 2010 in light
of factors identified in previous sections of this report, including:
• Changes in estimated market value (EMV),

• The phase-out of the Limited Market Value (LMV) program,
• Class rate compression,
• The state tax on commercial/industrial property,
• Growth in referendum market value levies, and
• The structure of the market value homestead credit.
The table below shows statewide residential homestead and total Minnesota property taxes from
2002 to 2010 in constant 2010 dollars. The amounts include local property taxes plus state property
taxes collected from commercial/industrial and seasonal-recreational properties.
State Total Constant 2010 dollars, in millions
2002 2003 2004 2005 2006 2007 2008 2009 2010

Res. Homestead Tax 2,534 2,846 3,001 3,110 3,323 3,427 3,436 3,562 3,501
Total Property Tax 6,210 6,518 6,675 6,672 6,948 7,185 7,342 7,819 7,877
The graph below examines the percent change in statewide residential homestead and total
property taxes since 2002 based on the amounts from the above table.

From 2002 to 2010, residential homestead property taxes increased by 38.2 percent, while total
statewide property taxes increased by 26.8 percent. (The increase in nominal dollars over this same
period is 87.1 percent for homesteads and 71.8 percent for total property taxes.)
Growth in homestead EMV played a small role in the homestead property tax growth in 2003, since
homestead EMV increased as a percentage of the total EMV of all properties in that year. However,
homestead EMV as a percent of all EMV remained essentially flat over the next two years, yet
growth in homestead property taxes still exceeded growth in total property taxes.
After 2005, homestead EMV as a percent of the total EMV of all properties dropped steadily. By
2010, homestead EMV was just 52.6 percent of total EMV, a decline of 6.7 percent over the course of
five years. All other things being equal, homestead property taxes should have declined or grown
less rapidly than total property taxes over this period based on trends in EMV.
However, all other things were not equal. Other factors offset the property tax relief that
homesteads should have received as a result of their decline as a percentage of statewide EMV.
The first of these was the phase-out of the limited market value (LMV) program, which began in
2003. Despite the fact that homestead EMV as a percentage of the statewide total was essentially
flat from 2003 to 2005, the homestead share of taxable value steadily increased as more homestead
value became taxable as a result of the LMV phase-out. This contributed to homestead property
tax increases in these years. After 2005, it is difficult to know with certainty the impact of the LMV
phase-out upon growth in homestead property taxes.21
In addition to the phase-out, the recent decline of homestead The homestead property
values began to make the LMV program increasing tax increases resulting from
irrelevant to a large number of homeowners. Even without compression that occurred
a phase-out, the amount of property value excluded from in 2003 was primarily the
taxation under LMV declines when property EMVs are flat result of an interaction
or declining. However, during the early years of the LMV with the tax base sharing
phase-out that began in 2003, the phase-out did contribute to program known as “fiscal
higher homestead property taxes. disparities.”
The class rate compression enacted by the legislature in 2001 also contributed to homestead
property tax increases in 2003 and, to a lesser extent, in 2004. The homestead property tax increases
resulting from compression that occurred in 2003 was primarily the result of an interaction with
the tax base sharing program known as “fiscal disparities.” As a result of the large commercial
and industrial class rate reductions that occurred in 2002, the levy dollars generated from business
properties through the fiscal disparity program dropped significantly in 2003, which resulted in a
larger share of local certified levies being borne by homesteads and other non-business properties.
21 It is difficult to know precisely when or if aggregate statewide homestead property taxes began to decline as a result of the LMV phase-out. While
annual LMV reports from the Department of Revenue (http://taxes.state.mn.us/legal_policy/pages/research_reports_content_lmv_studies.aspx) show the
shift of taxes among property classes that results from the LMV program within a single year, it does not show what property taxes by class would have been
if the LMV parameters in effect for taxes payable in 2002 (the last year before commencement of the LMV phase-out) would have remained in effect.

The largest fiscal disparity program in the state is within the seven-county metropolitan area22 and
thus the greatest impact of the interaction between class rate compression and the fiscal disparity
program upon homestead property taxes is in that part of the state. This contributed to higher
homestead property tax increases in the metro area in 2003. The information in appendix C shows
that from 2002 to 2003 the disparity between homestead and total property tax growth was 2.7
percent greater in the metropolitan area than in greater Minnesota.
The state levy on business The class rate compression adopted by the legislature in
property partially 2001 also included class rate reductions for non-homestead
insulates these properties residential properties in 2003 and apartments in 2003 and 2004.
from the impact of state This also contributed to property tax increases on homestead
aid cuts that were pushing and other non-rental properties during these two years,
local property taxes especially in communities with large concentrations of rental
upward. property.
After 2004, class rate compression had little impact in terms of contributing to the higher rate
of growth in homestead property taxes, except insofar as compression interacted with state aid
reductions. As noted above, real state aid reductions that began in 2003 contributed to local
property tax increases. As a result of class rate compression, homesteads comprised a larger share
of the local tax base; consequently, the tax increases resulting from aid cuts fell more heavily on
homesteads than they would have prior to 2002.
The state commercial/industrial property tax levy also contributed to the higher rate of homestead
property tax growth relative to business property. The state levy on business property partially
insulates these properties not only from the impact of increasing spending demand arising from
population growth, but also from the impact of state aid cuts that were pushing local property taxes
upward. The presence of the state property tax contributed to a lower rate of business property
tax growth relative to homesteads during the period 2002 to 2010. Approximately one-quarter of
property taxes paid by Minnesota businesses is in the form of the state property tax levy.
22 The taconite relief area also has a fiscal disparity program, but it is small in comparison to the metropolitan program both in absolute dollars and as a
percent of the local tax base.

The growth in referendum market value levies also contributed to the more rapid growth in
homestead property taxes. Largely in response to declining real state aid, school districts began
to rely more heavily on “referendum market value” levies to fund school operating expenses. The
graph below tracks the growth in statewide referendum market value levies (which are primarily
for school operating costs) from 2002 to 2010 in constant 2010 dollars and as a percentage of total
levies. This graph includes non-school referendum market value levies, which comprise about four
percent of total referendum market value levies in 2010.
Referendum market value levies increased by 167 percent from 2002 to 2010. Over the same period,
referendum market value levies as a percentage of total statewide levies increased from 4.5 percent
to 9.7 percent. As noted above, referendum market value levies fall more heavily on homesteads
than do ordinary tax capacity levies. Thus, the increased reliance on referendum market value
levies contributed to the higher rate of growth in homestead property taxes.
The referendum market value trend from 2009 to 2010 also helps to explain the relative decline in
homestead property taxes in that year. Referendum market value levies increased very little in that
year as the result of (1) a below average amount of revenue submitted to voters via referendum and
(2) a below average rate in the portion of proposed revenues that were approved. With little change
in referendum market value levies from 2009 to 2010, one of the forces that had been causing larger
homestead property tax increases during the preceding seven years was removed.

Finally, the structure of the market value homestead credit also contributed to the faster rate
of property tax growth among homesteads. The growth in homestead EMV from 2002 to 2008,
combined with the phase-out of the LMV program, contributed to a sharp rise in homestead .
taxable value. Because the market value homestead credit is
inversely related to taxable homestead value, the credit declined The structure of
as homestead taxable value increased from 2002 to 2008. The the market value
decline in the credit contributed to the increase in net homestead homestead credit also
property taxes. contributed to the
faster rate of property
Statewide homestead EMVs flattened and then declined in 2009 tax growth among
and 2010. In addition, the increase in homestead taxable value homesteads.
resulting from the LMV phase-out diminished in 2009 and 2010 .
as the phase-out reached its conclusion. For these reasons, the market value homestead credit
decline ceased in 2009; in fact, the credit increased in 2010. This removed, at least temporarily, one
of the factors than had been pushing homestead property taxes higher during the period from 2002
to 2008.
In fact, many of the forces that had caused the more rapid rate of growth in homestead property
taxes from 2002 to 2008 were of diminished importance in 2009 and 2010. The LMV program ceased
to be a major contributor to increases in homestead taxable value. The class rate compression
enacted in 2001—which contributed to a shift of taxes on to homesteads in 2003 and 2004—was no
longer contributing to year to year changes in property taxes. Referendum market value levies did
not grow. Finally, the market value homestead credit stopped dropping.
The demise of these forces allowed the decline in the homestead share of statewide EMV—a trend
that had been underway since 2005—to finally manifest itself in the form of reduced homestead
property taxes in 2010. From 2009 to 2010, aggregate statewide homestead property taxes declined
by $61 million (1.7 percent) in constant 2010 dollars and the homestead share of total statewide
property taxes declined by 1.1 percent.
The above discussion has focused on statewide data. Appendix C shows the growth in homestead
and total property taxes, as well as homestead EMV as a percent of total EMV, within the following
groups of communities:
• Seven county metropolitan area

• Greater Minnesota
• Cities broken into 15 groups based on cluster analysis23
23 Using a statistical technique known as “cluster analysis,” the League of Minnesota Cities has classified Minnesota cities into 15 groups or “clusters”.
Each city is assigned to one of these clusters based upon its characteristics, with similar cities being placed in the same cluster. A description of the
methodology used by the LMC and a list of the cities within each cluster can be found at: http://www.lmc.org/media/document/1/clustermethodology.pdf.

The general pattern observed in the aggregate statewide data—that is, growth in homestead
property taxes that exceeds the growth in total property taxes—is also observed within all
Minnesota cities, all Minnesota towns, metropolitan cities, and greater Minnesota cities. It is also
observed within 13 of the 15 city clusters.
The city cluster that most clearly deviates from the statewide pattern in this regard is the “metro
high income cities,” which include 20 high income suburbs in the metro area.24 During the period
from 2002 to 2010, homestead property taxes among the cities in this cluster increased by 34
percent, compared to 45 percent growth in total property taxes paid by all types of property. The
characteristics of these cities that caused them to deviate from the statewide pattern include:
• Relatively high homestead values. The 2010 average homestead value among “metro
high income cities” is $593,000, compared to a statewide average of $218,000. Given that
homesteads with a taxable value greater than $413,778 receive no market value homestead
credit, relatively few homesteads in metro high income cities receive this credit and among
the homesteads that did receive it, the amount is small in comparison to homesteads
elsewhere in the state. Thus, property taxes on homesteads in metro high income cities were
affected relatively little by the decline in the market value homestead credit, since these
homesteads received relatively little or no credit in the first place.
• A lower rate of growth referendum market value levies. From 2002 to 2010, referendum
market value levies within metro high income cities increased by 97 percent in constant 2010
dollars, compared to a statewide growth of 167 percent. The lower rate of referendum market
value levy growth in metro high income cities contributed to a lower rate of homestead
property tax growth relative to other types of property.
• A tax base comprised overwhelmingly of homestead value. Metro high income cities have an
exceptionally high concentration of homestead value and a low concentration of commercial/
industrial value relative to other parts of the state. With such a homogeneous tax base, the
disparity between the homestead property tax growth and total property tax growth is
diminished because the vast majority of all property taxes paid in these cities are derived
from homestead properties.
• A relatively low dependence on fiscal disparity distribution levies. The shift of property taxes
on to homesteads in 2003 resulting from the interaction between class rate compression and
the metropolitan fiscal disparity program was muted in metro high income cities because
these communities have a very low dependence on fiscal disparity distribution levies relative
to the rest of the metro area.
• An above average decline in homestead EMV relative to total EMV. In metro high income
cities, homestead EMV as a percent of total EMV declined by eight percent (82.8 percent to
74.8 percent) from 2002 to 2010, more than in any other cluster in the state. The exceptionally
large decline in the relative share of homestead EMV partially explains why homestead
property taxes declined as a share of total property taxes in these cities.
24 Specifically, “metro high income” cities include Afton, Birchwood, Corcoran, Deephaven, Dellwood, Grant, Greenwood, Independence, Lake Elmo,
Lakeland, Lakeland Shore, Minnetonka Beach, Minnetrista, North Oaks, Orono, Pine Springs, Shorewood, Sunfish Lake, Tonka Bay, and Woodland.

As noted above, statewide homestead property taxes declined A portion of the business
in 2010, both in absolute terms and as a share of statewide tax base will continue to
total property taxes. However, this trend will not necessarily be insulated from local
continue into the future. For example, the trend of declining property tax increases
homestead EMV as a percentage of state total EMV could as a result of the state
reverse itself. In addition, any future growth in homestead property tax levy,
EMV—regardless of what happens to the rest of the tax base— something which is not
will contribute to a decline in the market value homestead true for homesteads.
credit. Furthermore, referendum market value levy growth
could resume, especially if real state aid to school districts continues to decline. Finally, a portion of
the business tax base will continue to be insulated from local property tax increases as a result of the
state property tax levy, something which is not true for homesteads.
VI. Trends in Specific Communities
Appendix A contains information on total per capita county, city, school district, special taxing
district, and state property taxes within all Minnesota cities with a population over 5,000. These
amounts were calculated by summing the total property taxes paid by all types of property by the
population of the city. This appendix shows the per capita property tax in constant 2010 dollars for
each year from 2002 to 2010; in addition, the total percent change from 2002 to 2010 is shown in real
and nominal dollars. Aggregate information for (1) all cities and (2) all cities and towns is shown at
the bottom of the final page of this appendix.
Appendix B contains average residential homestead property tax information for all cities with a
population over 5,000. These amounts were calculated by dividing the estimated total residential
homestead property tax in the city by the number of residential homesteads. The average
homestead property tax in constant 2010 dollars is shown for each year from 2002 to 2010 and
the total percent change over this eight year period is shown in real and nominal dollars. As with
appendix A, aggregate information for (1) all cities and (2) all cities and towns is shown at the
bottom of the final page of appendix B.

The graph below shows the percent change in real per capita property taxes from 2002 to 2010 by
the population of the city or town. For example, real per capita property taxes in Falcon Heights
increased by 21 percent from 2002 to 2010; thus, the 5,762 residents of Falcon Heights are added
to the “20% to 30% increase” bar in the graph. This graph essentially shows the distribution of the
state population by the percent change in per capita property taxes within their community. The
graph also distinguishes between cities and townships. For example, because Falcon Heights is a
city, its population appears within the city portion of the bar. The population of townships appears
within the township portion of the bar.
This graph shows the prevalence of large property tax increases in Minnesota over the last
eight years. Even after adjusting for inflation, more than half of the state’s population resides in
communities in which per capita property taxes increased by more than 20 percent. On a statewide
basis, per capita property taxes increased by 19.2 percent from 2002 to 2010.
Also noteworthy is the prevalence of larger per capita property tax increases among Minnesota
townships. This is due in part to higher growth in property values in townships relative to cities;
as the relative size of the township tax base increases, county and school district taxes are shifted
into townships. Furthermore, while the population of Minnesota cities has increased since 2002,
the population of townships has declined, thereby contributing to higher per capita property tax
growth in townships.

The next graph shows the percent change in the average homestead property tax from 2002 to 2010
by the number of homesteads in the city or town. For example, since the average homestead tax in
Falcon Heights increased by 28 percent, the 1,198 homesteads in Falcon Heights are added to the
“20% to 30% increase” bar. Because Falcon Heights is a city, these homesteads appear within the
city portion of the bar.
Relative to the preceding per capita graph, the taller bars are shifted more to the right in this graph,
indicating the percent increase in average homestead property taxes are generally greater than
the percent increase in per capita property taxes over this period. From 2002 to 2010, the average
homestead property tax statewide increased by 28.6 percent, 9.4 percent greater than the statewide
per capita property tax increase. This is consistent with data presented in the previous section.
As in the preceding graph, the township portion of each bar is skewed to the right side of the graph,
indicating average homestead property tax increases were greater in townships than in cities during
the period from 2002 to 2010.

A different picture emerges if we focus exclusively on the trend over the last year. The graph below
shows the percent change in real per capita property taxes from 2009 to 2010 by the population of
the city or town.
Approximately 83 percent of the state’s population resides in communities that had a per capita
property tax increase of 3 percent of less in 2010. The contrast between city and town per capita
property tax increases from 2009 to 2010 is not as great as it was during the period from 2002 to
2010. On a statewide basis, per capita property taxes increased by 0.6 percent from 2009 to 2010.

The next graph shows the percent change in the average homestead property tax from 2009 to 2010
by the number of homesteads in the city or town.
Two-thirds of Minnesota homesteads are located in communities that experienced a reduction in

average homestead property taxes from 2009 to 2010. In contrast to the period from 2002 to 2010,
homestead property taxes declined more in townships than in cities from 2009 to 2010. The average
homestead property tax in Minnesota townships declined by 4.0 percent in 2010, three times greater
than the decline in cities.
In stark contrast to the period from 2002 to 2010, the average statewide homestead property tax fell
by 1.6 percent from 2009 to 2010, while statewide per capita property taxes increased slightly. As
noted above, the decline in homestead property taxes relative to other property taxes in 2010 was
due to the relative decline in homestead values combined with the subsidence of other forces that
had been pushing homestead property taxes higher in previous years.
One factor that had little to do with the low rate of property tax growth from 2009 to 2010 were the
statutory restrictions on county and city property tax increases known as “levy limits.” A previous
Minnesota 2020 analysis concluded that:
he vast majority of Minnesota counties and cities subject to levy limits in 2010 are not
T
constrained by these limits either because these jurisdictions have not levied the maximum
allowable amount or because they have “special levy” authority that they have not claimed.
“Special levies” are levies that are exempt from levy limits.25
25 “Pawlenty’s Property Tax Caps Don’t Work,” Minnesota 2020, January 10, 2010. (http://tinyurl.com/ykpch5l)

With a struggling economy and high unemployment, Local elected officials realized
local elected officials realized that citizens were averse that citizens were averse to
to more property tax increases and did what they more property tax increases and
could to control property tax growth in 2010. This fact did what they could to control
had more to do with the relatively low rate of property property tax growth in 2010
tax growth in 2010 than did “levy limits.”
VII. Focusing on Cities
It is difficult to isolate the impact of local spending decisions, aid cuts, and tax base changes
upon property tax levels when examining total property taxes within a city because the property
tax levels are dependent upon the actions of multiple local governments, each making separate
spending decisions and subject to differing changes in the level of state funding. In addition, the
boundaries of cities overlap with county and school district boundaries that can extend well beyond
the limits of the city. Thus, total property taxes within a city are affected by tax base changes that
occur outside city boundaries.
For these reasons, it is easier to isolate the impact of spending, aid, and tax base trends if we focus
on a single level of government. The following analysis will focus on the change in city property
taxes, revenues, aid, and EMV, excluding data from all other local governments. Once again, 2002
was chosen as the baseline year for this analysis in order to underscore the impact of aid cuts
imposed since 2002 and to further highlight the impact of legislative changes enacted in 2001.
Cities were chosen for this analysis because a reasonably good proxy for city revenue is available
in the form of “revenue base.” “Revenue base” as defined in state law26 refers to the sum of city
property taxes plus property tax relief aids and credits. While the “revenue base” does not include
all city revenues, it is a commonly used proxy for city spending and is used to apportion aid cuts
and set levy limits. Furthermore, the revenue base includes the portion of city revenues that have
the most direct impact on property tax levels.
The property tax aids within a city’s revenue base for 2010 include Local Government Aid and
taconite aids. Several forms of state aid that were included in the preceding discussion of city
aids—such as police and fire aid—are not part of the city “revenue base” and thus are not included
in the following discussion of state aid. “State aid” as used in this section will refer to city LGA,
taconite aid, and—for 2002 and 2003—a few smaller aid programs that were eliminated or folded
into the LGA program. “State aid” as used below will also include the city share of the market value
homestead credit, since these are property tax relief dollars received by cities that are part of the
“revenue base.”27
26 Minnesota Statutes 2009, 477A.011, subdivision 27.
27 Because the focus here is on the dollars that are available to fund city services, the market value credit amounts used in this analysis will be after the
reductions to the credit made through statutory changes or unallotment.

The graph below shows the statewide percent change in per capita city property taxes, revenue
base, and state aids since 2002. The graph also shows the percent change in the city property tax for
the average homestead.
On a statewide basis, per capita city property taxes increased by 21 percent from 2002 to 2010.
However, this increase in property taxes did not translate into a net increase in city revenue, but
was rather used to replace a large decline in state aid. Real per capita state aid to cities fell by 54
percent over this period. The increase in property taxes was not sufficient to replace the state aid
loss, so the per capita city revenue base declined by nine percent. On a statewide basis, growth in
property taxes was not due to city budget growth, but to a sharp decline in state aid from 2002 to
2010.
During the entire span from 2002 to 2010, the growth in the city portion of the tax on homesteads
grew more rapidly than the per capita city tax. This is not the result of growth in homestead
estimated market values (EMV), since city EMVs as a percent of total EMV declined during this
period, as illustrated below. As is the case throughout this report, the EMVs are listed by tax
payable year, which corresponds to values set during the previous assessment year.

From 2002 to approximately 2006 or 2007, the city portion of the average homestead property tax
increased much more rapidly than per capita city property taxes, despite the fact that homestead
EMV as a percentage of total city EMV was nearly flat. The causes of the higher rate of growth
in homestead taxes were identified above and include the phase-out of the limited market
value program, the lingering effects of class rate compression, the structure of the market value
homestead credit, and the state property tax on commercial/industrial property, which shields
business property from a portion of local levy increases that were driving homestead taxes higher.
After 2007, per capita city property taxes increased more rapidly than the city portion of the average
homestead tax. This was due in part to a drop in the homestead share of total EMV and in part
to a waning of some of the forces noted in the preceding paragraph that had caused accelerated
homestead property tax growth in preceding years.
However, it is important to note that the exceptionally high rate of homestead property tax growth
during the entire period from 2002 to 2010 was not generally the result real per capita city revenue
growth or a rise in homestead EMVs, but rather to decisions made at the state level—specifically,
large state aid reductions combined with structural changes to the property tax system.
In general, the experience of most Minnesota cities resembles the statewide pattern, although there
is significant variation from one city to the next. Minnesota 2020 has prepared real per capita city
property tax, revenue base, and state aid information for all Minnesota cities with a population over
5,000. This data can be found online at: http://bit.ly/mn2020_cityrevenue.

VIII. Conclusion
The low rate of property tax growth and the decline in average homestead property taxes in 2010 is
a welcome respite from the previous seven years, which saw large increases in statewide property
taxes, especially on the share of those taxes borne by homeowners. However, there is little cause for
celebration. Minnesota property tax and government finance system is still in need of reform.
The relatively low rate of property tax growth in 2010 is in part due to the fact that counties, cities,
and towns were unable to levy to replace aid cuts that were made after property tax levies for 2010
had been certified. The unanticipated decline in 2010 revenues will create increased pressure for
property tax increases in 2011.
Of course, restoring of a portion of past state funding cuts could Restoring of a portion
help to forestall property tax increases. However, the outlook of past state funding
based on current law does not inspire confidence. Based on the cuts could help to
2010 end-of-session “Price of Government” from Minnesota forestall property tax
Management & Budget, real (i.e., inflation-adjusted) per pupil increases.
school aid is projected to decline by 1.3 percent from 2010 to 2012
(FY 2011 to FY 2013).
On the bright side, state aid to non-school local governments is projected to increase over the next
two years. However, with the state confronting a nearly $7 billion budget deficit in the upcoming
biennium,28 there is a very real chance that this aid will not materialize. After all, aids to local
governments have been disproportionately cut in the past29 in the face of looming state budget
deficits.
Per pupil current The ability of local governments to absorb continued state aid cuts
expenditures of is limited. A Minnesota 2020 analysis of U.S. Census Bureau data
Minnesota school concluded that the expenditures of Minnesota cities had dropped
districts have also below the per capita spending level of all American cities.30 Per pupil
dropped below the current expenditures of Minnesota school districts have also dropped
national average. below the national average.31
28 “Deficit Projections Should be Based on Reality,” Minnesota 2020 Hindsight, July 6, 2010. (http://www.mn2020hindsight.org/?p=5777)
29 “’No New Tax’ Policy Shifts Public Costs to Property Taxpayers,” Minnesota 2020, October 19, 2009. (http://tinyurl.com/2csygfg)
30 “Minnesota City Spending Falls Further Below U.S. Average,” Minnesota 2020, June 14, 2010. (http://tinyurl.com/2w78rjr)
31 “Minnesota’s School Investment Drops Below National Average,” Minnesota 2020, September 29, 2009. (http://tinyurl.com/ybm4ycp)

From 2002 to 2008, Minnesota state and local governments cut per capita own-source revenue more
than any other state in the nation.32 The resulting revenue shortages have fallen disproportionately
on local governments,33 as state leaders have attempted to solve recurring deficit problems through
large cuts in aid to local governments. If this trend continues, Minnesotans should expect more
property tax increases and more cuts in funding for local services and infrastructure. This trend is
unsustainable. Minnesota’s prosperity depends on continued investments in education and basic
public services. Shifting a disproportionate share of these costs onto homeowners is regressive.
Minnesota needs a more progressive revenue generation system that allows the state to fully fund
education and other priorities.
The relief that homeowners enjoyed from property tax increases in 2010 may be fleeting. Property
tax increases should be expected when the values of one class of property increases more rapidly
than another; that, after all, is the nature of a system in which taxation is based on property value.
However, for several years following the changes enacted in 2002, Minnesota homestead property
taxes increased more rapidly than taxes on other classes of property even though homestead EMV
was declining as a share of total EMV.
The forces that have contributed to rapid homestead tax The forces that have
increases have abated somewhat in 2009 and 2010, but some of contributed to rapid
them could resurface. For example, regardless of what happens homestead tax increases
to the EMV of other classes of property, future growth in have abated somewhat in
homestead EMV will lead to further reductions in the market 2009 and 2010, but some
value homestead credit, which will in turn cause an accelerated of them could resurface.
growth in homestead property taxes, all other things being.
Resumption of growth in school referendum market value levies is also a distinct possibility,
especially given that real per pupil state aids are already projected to decline even before the state
begins tackling the anticipated FY 2012-13 budget deficit. As the share of total property taxes spread
against referendum market value increases, the homestead share of the aggregate property tax
burden will also increase.
Finally, business property will continue to be partially insulated from local property tax increases
through the state property tax levy, which does not increase to keep pace with population growth.
Over time, this will likely contribute to a lower rate of growth in business property taxes relative to
homesteads and other non-business properties.
32 “Minnesota Leads the Nation in Declining Revenue,” Minnesota 2020, July 26, 2010 (http://tinyurl.com/29r4pda). State and local government “own-
source revenue” includes taxes, fees, special assessments and all other general revenue collected by state and local governments except for federal aid.
33 “Locals Tighten Belts Far More than State Government,” Minnesota 2020, August 2, 2010. (http://tinyurl.com/2clpuck)

State policy makers should not sit idly in the hope that property tax growth will not resume. In
all likelihood, it will resume in the absence of decisive reform. These reforms should include the
following components:
• An increase in state revenues so that the state budget problems will not be shifted
disproportionately to local government and property taxpayers as they have been since
2002. With a nearly $7 billion deficit, belt tightening and spending reforms at all levels of
government will continue to be necessary. However, there is no rational reason why equitable
revenue increases cannot also be part of the budget solution.
State policy makers
• Restructuring of the market value homestead credit so that
should not sit idly
the credit does not automatically shrink as taxable market
in the hope that
values grow. Another possibility would be to eliminate the
property tax growth
market value homestead credit entirely in favor of providing
will not resume. In
homestead property tax relief through rearrangement of
all likelihood, it will
property class rates; this second alternative would provide
resume in the absence
more secure homestead property tax relief since it would not
of decisive reform.
be dependent on state appropriations.
• Either fund school operating costs appropriately so that the need for new referendum market
value levies is mitigated or spread all school operating levies against the “tax capacity”
tax base instead of referendum market value. Either alternative would provide homestead
property tax relief relative to the status quo.
• Either (1) eliminate the state commercial/industrial property tax and realign property class
rates so that business property does not enjoy a windfall tax reduction or (2) link growth in
the state business levy to the combined rate of inflation and population growth. One portion
of the tax base should not be isolated from the spending pressures that impact the rest of the
tax base.
A system in which real per capita and average homeowner property taxes increase even as real per
capita local government spending declines is a system that lacks accountability. Yet this is precisely
the system we have in Minnesota. The current budget crisis affords Minnesota policy makers an
opportunity to take the difficult and complex actions needed to fix not only Minnesota’s property
tax system, but the entire system of Minnesota state and local government finance.

Appendix A

Appendix B
Appendix C

Minnesota 2020 is a progressive, non-partisan think tank, focused on what really matters.
.
2324 University Avenue West, Suite 204, .
Saint Paul, MN 55114.
www.mn2020.org

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Table of Contents

II. 2002 Property Tax Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

III. State Aid Reductions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

IV. The Role of Property Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

V. Explaining Homestead Property Tax Growth. . . . . . . . . . . . . . . . . . . . . . . . . . 22

VI. Trends in Specific Communities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

VII. Focusing on Cities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Minnesota 2020 - www.mn2020.org 1

2 Minnesota 2020 Property Tax Report: 2002 - 2010

Minnesota 2020 - www.mn2020.org 3

4 Minnesota 2020 Property Tax Report: 2002 - 2010

• An increase in state revenues so that the state budget A system in which

Minnesota 2020 - www.mn2020.org 5

It is important to adjust for the impact of inflation when

6 Minnesota 2020 Property Tax Report: 2002 - 2010

II. 2002 Property Tax Changes

2) The culmination of over a decade of class rate compression

4) The phase-out of the limited market value program, and

5) Creation of a new “market value homestead credit.”

Minnesota 2020 - www.mn2020.org 7

Class rate compression

8 Minnesota 2020 Property Tax Report: 2002 - 2010

School Tax School

Homestead A $250,000 0.333% $833

District Total $3,000,000 $10,000

School Tax Rate School Prop. Tax

Homestead A $250,000 $2,500 9.091% $227

District Total $3,000,000 $110,000 $10,000

Minnesota 2020 - www.mn2020.org 9

10 Minnesota 2020 Property Tax Report: 2002 - 2010

Minnesota 2020 - www.mn2020.org 11

A new state property tax

In future years, growth in the state property tax was linked to

12 Minnesota 2020 Property Tax Report: 2002 - 2010

Minnesota 2020 - www.mn2020.org 13

14 Minnesota 2020 Property Tax Report: 2002 - 2010

III. State Aid Reductions

Minnesota 2020 - www.mn2020.org 15

16 Minnesota 2020 Property Tax Report: 2002 - 2010

Minnesota 2020 - www.mn2020.org 17

18 Minnesota 2020 Property Tax Report: 2002 - 2010

Minnesota 2020 - www.mn2020.org 19

IV. The Role of Property Valuation

19 Fiscal Focus (Minnesota Taxpayers’ Association publication), May-June 2007.

20 Minnesota 2020 Property Tax Report: 2002 - 2010

Minnesota 2020 - www.mn2020.org 21

• Changes in estimated market value (EMV),

State Total Constant 2010 dollars, in millions

2002 2003 2004 2005 2006 2007 2008 2009 2010

22 Minnesota 2020 Property Tax Report: 2002 - 2010

Minnesota 2020 - www.mn2020.org 23

24 Minnesota 2020 Property Tax Report: 2002 - 2010

Minnesota 2020 - www.mn2020.org 25

• Seven county metropolitan area

26 Minnesota 2020 Property Tax Report: 2002 - 2010

Minnesota 2020 - www.mn2020.org 27

VI. Trends in Specific Communities

28 Minnesota 2020 Property Tax Report: 2002 - 2010

Minnesota 2020 - www.mn2020.org 29

30 Minnesota 2020 Property Tax Report: 2002 - 2010

Minnesota 2020 - www.mn2020.org 31

Two-thirds of Minnesota homesteads are located in communities that experienced a reduction in

32 Minnesota 2020 Property Tax Report: 2002 - 2010

VII. Focusing on Cities