Property Tax Aids and Credits: Program Changes Since 2003

The state has always played a pivotal role in local property taxes. Whether by issuing direct payments to homeowners, creating credits to reduce property tax statements or sending aid to local governments, the state has used its resources to reduce the burden on local property taxes.

Since 2003 the budget for Property Tax Aids and Credits has decreased 12%, or $195 million in non-inflation adjusted dollars. In fiscal year 2011, homeowner and rental property tax refunds, Local Government Aid (LGA), County Program Aid (CPA), and Homestead Market Value Credit (HMVCs) programs made up 87% of the Aids and Credit budget. Despite an overall decrease in the budget, not all programs within Property Tax Aids and Credits have seen a decrease. The Chart below shows the percentage change since fiscal year 2003 for the biggest programs funded in the Aids and Credits Budget.

As the chart shows, the Homeowner Property Tax Refund program, commonly known as the “Circuit Breaker,” has seen a tremendous amount of growth since 2003. The program has grown from $87 million in 2003 to $305 million in FY 2011. The program’s growth has been fueled by rapidly increasing homeowner property taxes, which have increased by $1.3 billion since 2003, and state action that increased eligibility and refund amounts.

The Renter’s Property Tax Refund, also known as the “Renter’s Rebate” is the only other large program in the Property Tax Aids and Credits budget to see an increase in funding since FY 2003. In 2010 the program had actually increased 33% from FY 2003, but in FY 2011 the credit was reduced due a change in the assumption that 15% of rent goes to property taxes instead of the previous 19%. This reduction reduced the size of the “Renter’s Rebate” by $41 million.

While payments made directly to homeowners have increased, aids to local governments have decreased. LGA, which goes to cities, has decreased 25% or $138 million compared to FY 2003 not adjusted for inflation.Prior to 2005 when County Program Aid was first funded, counties received the bulk of the Homestead Agricultural Credit Aid HACA that also went to townships. The current CPA is funded 20% lower than the 2003 HACA.

The largest reduction in program funding has occurred in the Homestead Market Value Credits programs. There are two programs, one for residential homesteads and one for agricultural homesteads, which reduce a homeowner’s property tax based on the value of their home with a credit that is deducted on their property tax statement. Both programs were first funded in FY 2003. The programs’ funding in FY 2011 were 48% lower than their year of origin. Interesting, despite the drop in funding, homeowners have not seen a drop in their credit. Instead local governments which are supposed to be reimbursed for the credit have not received their full payment from the state.

The rise of the “Circuit Breaker” is not surprising given the demise of aids to local governments. Reductions in aids to local governments and the failure of the state to reimburse credits on homeowner’s to local governments have put greater pressure on residential property taxes. Many communities have needed to cut services and raise property taxes which in turn have increased the state issued refunds under the Homeowner’s Property Tax Refund Program.

Circuit Breaker Growth Since 2003

Click to enlarge.

Click to enlarge.

House Property Tax Division Report

The House Property Tax Division unveiled its Division Report on Saturday. The report contains funding levels and formula changes for programs in the Property Tax Aids and Credit budget along with local option sales taxes. The report spends $2.6 billion, a reduction of $887 million from current law and governor Dayton’s funding recommendations.

Under the division report, Local Government Aid (LGA) is greatly reduced; however, not all areas of the state have the same reductions. Greater Minnesota cities, with the exception of Duluth, will receive their full 2011 certified LGA. In 2012 (all years in this article are calendar years), greater Minnesota cities will receive the lesser of their 2010 LGA or their certified 2011, the same reduction as in HF 130 vetoed by the governor earlier this year. Metro suburbs will have their 2011 certified LGA cut by 50% and their LGA fully eliminated in 2012. Minneapolis, St. Paul and Duluth will have their LGA reduced by 25% in 2011, 50% in 2012, 75% in 2013 and fully eliminated by 2014.

The report also imposes strict levy limits on some cities for 2012. A city that is scheduled to receive LGA in 2012 will have a levy limit equal to their 2010 levy plus 2% or their 2011 levy (whichever is higher). There are several exceptions for new construction, disasters and annexation among others. A city may choose to not accept their LGA to be exempt from the levy limit.

Under the report, cities, both metro and greater Minnesota, will see a reduction in their Market Value Credit reimbursement by a state total of $48 million in 2011, before the credit is transformed to a reduction of tax capacity instead of overall property taxes. The report also reduces Disparity Reduction Aid by 50%.

The CGMC believes that the LGA program is and has been an important program for the entire state. We do not believe changing the program strictly based on geography is in the best interest of the state or the LGA program. The LGA program should be funded at its 2011 certified amount for all cities and not reduced in 2012 or after.