Calculating Your Property Taxes

From Taxes: Where Does the Money Go? by Scott Loveridge, Liz Templin, Carole  Yoho, and Nancy Lenhart

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This section reviews how property taxes are calculated in Minnesota, and provides information on steps you may take to reduce your property taxes.

Minnesota's Complex Property Tax System

Minnesota's property tax is probably the most complex of any in the nation. It treats different types of property and different types of property taxpayers differently through a complicated classification scheme. Many officials and levels of government are involved in its administration, and each parcel of property is taxed by multiple jurisdictions. No wonder it is confusing to most taxpayers!

Why is the Minnesota's property tax system so complex? The complexity is a result of attempts to make the way we tax property more fair. A death in the family, divorce, retirement, inflation, job loss, or other circumstances can create situations where value of a person's property does not provide a good indication of his or her ability to pay taxes. On the other hand, cabins and other personal residences used primarily for recreation are taxed higher than year-round homes because people who can afford these are thought to have a higher ability to pay. Property use also affects the amount of money needed to provide services to that property. For instance, services to residential property cost more than services for agricultural land, because residential property requires schools, a highly developed road system, and more police and fire protection than does agricultural land. Most people agree that it is fair to tax residential property at a higher rate to pay for these extra services. Our complex tax structure tries to make the system more fair by establishing use categories and allowing adjustments for people's circumstances.

Steps for Calculating Your Property Tax

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To determine the tax on an individual piece of property, follow these steps:

Step 1: Assess the Property

The assessor establishes a value for the property. This is the assessor's estimate of the property's selling price. Each spring, property owners receive a "notice of valuation" in the mail for each piece of property they own.

Example: House and lot with an estimated market value of $86,000 (as of January 2, 1993).

Step 2: Classify the Property

The use of ownership of the property determines its "property tax classification." Each class of property (i.e., home, apartment, cabin, farm, or business) is taxed at a different percentage of its value. This percentage—or "class rate"—is set by state law. (See Payable Class Rates for 1994.) The estimated market value is multiplied by the appropriate percentage (class rate) to determine the home's "tax capacity."

Example: An $86,000 house has a property tax classification of "residential homestead." For taxes payable for 1994, the class rates used to compute this house's tax capacity would be:

first $72,000 over $72,000

= =

1% 2%

Calculate tax capacity as follows:

Value x Class Rate $72,000 x .01 + (86,000 – 72,000) x .02 Tax Capacity

= = = =

Tax Capacity $720 $280 $1,000

Step 3: Prepare a Local Budget

During the first half of the year, local officials prepare a budget for the coming year. As part of the budget process, local elected officials estimate the cost of services they intend to provide. The proposed tax levy (total dollars to be raised with property taxes) is computed by subtracting estimates of state aid and revenue from other sources (i.e., building permits, user fees, interest income, fines, etc.) from estimated budget needs. The net tax rate for a local unit is computed by dividing the tax levy by the total net tax capacity of all properties in the jurisdiction. Each individual's tax bill is equal to the property's tax capacity times the tax capacity rate. The local tax rate is the percentage charged to the property owner and will reflect the combined tax levies of all jurisdictions governing each piece of property.

As an illustration of step 3, consider Anywhere City and property owner A. Anywhere City's council determines that to provide the services they want at the desired level, they will spend $100,000. State aid and other revenue (fines, user fees, interest income, etc.) for their city totals $25,000, leaving them with $75,000 to raise through local property taxes (tax levy):

Budget State Aids and Other Revenues Tax Levy

$100,000 –$25,000 $75,000

In Anywhere City, the total tax capacity for all the properties in the city is $250,000. The tax rate is then calculated by dividing the tax levy by the tax capacity to obtain a percentage.

Calculate tax rate as follows:

Tax Levy/City's Tax Capacity 75,000/250,000

= =

Tax Rate .30 (a tax rate of 30%)

Once the tax rate is calculated, each property in the city is taxed at that percentage of its tax capacity. So, for our example house, the property tax for Anywhere City would be calculated by multiplying the house's tax capacity times the tax rate.

Calculate property tax as follows:

Property Owner A's Tax Capacity ($1,000) x Tax Rate (.30) $1,000 x .30

= =

Property Tax $300

So the property owner pays the city an effective tax rate of $300/$86,000, or 0.34%. But this is only a portion of the total property tax bill for property owner A.

Step 4: Overlapping Governments

All levels of local government (i.e., county, school district, mosquito control districts, etc.) also determine their tax levies and tax rates; these amount to additional taxes for each property owner.

So, in our example, if the county has a 25 percent tax rate, the school district 55 percent, and special taxing districts 5 percent, the total property tax rate will be 115 percent. This total tax rate, multiplied by the taxable value, determines the final tax bill. For taxes payable in 1991 in Minnesota the statewide average tax rate was 106.7 percent of tax capacity, while in 1992 it rose to 115.⁷ Tax rates as a percentage of tax capacity vary considerably between localities.

Effective for taxes payable in 1993, non-school voter-approved levies are generally to be levied on the market value of all taxable property, not on net tax capacity. School referendums for operating purposes will also be levied on market value. Homeowners will pay a higher proportion of levies on market value than they pay on levies made on net tax capacity. However, school bond levies for capital expenditures are still levied on net tax capacity.

Who Receives Property Tax Dollars?

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In Minnesota, counties collect property taxes and distribute them to the appropriate local governments. Figure 5 shows the average breakdown of $1 of property tax in Minnesota. Note: This does vary from community to community.

Figure 5. Allocation of Minnesota Property Tax Dollar Levies
Payable in 1991

State Role in Property Taxes

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Partially because of declining intergovernmental aids, total property tax collections have declined only twice in the past 25 years. (After adjusting for inflation, total tax collections have gone down more often.) The major reductions followed increased levels of citizen outcry about property taxes in 1967 and 1971. The state legislature responded to these citizen concerns by enacting legislation to deemphasize property taxes. However, individuals' property tax bills may not have followed these trends due to a variety of reasons outlined below.

Property taxes are affected through four major policy levers. The state can:

1. Specify changes in the levels of some services to be provided by local government. These changes could require higher or lower levels of services, and are frequently called mandated programs. Often these changes increase local government taxes, but not always; it depends on who pays for the changes. For example, the state mandates certain court services and general assistance (welfare) payments to individuals but also provides the funding for these services.
   
   
2. Limit the total dollar amount local governments can raise from property taxes (levy limits). Overall levy limits on cities, counties, and townships were lifted for taxes payable in 1993 and after. Limits for special purpose levies on local units may still remain in effect.
   
   
3. Provide direct aid to local governments.For example, increases in local government aid (LGA) may decrease property taxes; decreases may do the opposite, depending on how local officials use their LGA. In addition, the state can and does adjust aid formulas to local units of government. An example is the school aid formula. The frequent changes in the school aid formula affect local property taxes.
   
   
4. Choose to reduce the property tax bill of one class of property by shifting to others through:

   a.	Changing the property classification system. Changes in the classification system provide a means for redistributing the tax burden among property taxpayers. For example, changes in the classification system may add to the tax burden of businesses to relieve tax burdens for homeowners or vice versa.
   b.	Providing direct aids to taxpayers. This can occur through a variety of methods. Many homeowners are familiar with targeted relief programs to property owners, based on the ratio of property tax to income or on the increases in the percent of property tax paid over the previous year. A less obvious direct aid is the deduction taxpayers can take on their state and federal income tax returns for property taxes paid (which reduces taxpayer income for tax reporting purposes).
   c.	Limiting the amount of year-to-year increases on market value of certain kinds of property. This results in increasing the taxes on properties not limited.

Why Do My Property Taxes Go Up?

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Many taxpayers assume that if their property taxes go up, it must be due to growing local government budgets and more dollars spent. This may be the case, but there are other reasons including:

• Increased assessed value. If your property increased in value, but other properties did not increase (or increase as much), your property tax bill will increase. Since property is not reassessed each year, when the new assessment occurs, the value could be substantially higher. (Alternatively, your property value could remain stable, while nearby properties decline in value.) The state requires reassessment at least once every four years.
  
• Changed Class Rate. Your property tax increase could be more than expected if your property changed its class rate. Take a $72,000 house where the owner has built an addition worth $14,000. If the increase in value were still calculated under the same class rate as the $72,000 house (1 percent), city taxes would be $258. Since the class rate on anything over $72,000 is 2 percent, city taxes on the house are $300. The change in class rates for this example increased the home's property tax by 16 percent.
  
• Property changed classification. This can occur due to a change in use of the property. For example, homestead (owner-occupied) property classification rates vary from 1 to 2 percent, depending upon the value of the property. However, nonhomesteaded residential houses are classified at 2.3 percent, no matter what the value.
  
• Decrease in intergovernmental aids to local government. Recall from Figure 3 that intergovernmental aids to local government account for 30 to 60 percent of revenue for local governments.
  
• Change in classification system. The state changed the property tax classification system and class rates, shifting some of the total tax burden to or from your property.
  

How Can I Be Sure My Property Taxes Are Fair and Correct?

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1.	First ensure that you are being charged the correct amount for your property tax:
	a.	Is the property correctly assessed? You can check with your assessor to see how your valuation compares with how your neighbors' property is valued, and with your estimate of market value. You may also want to have the property valued by a private appraisal company.
	b.	Is the property correctly classified? Check with your assessor.
	c.	Does your principal residence qualify for homestead classification? If so, are you certifying it for homestead classification with your assessor?
	d.	Do any special provisions of the 1993 tax law apply to your property? For example, the limited market value clause restricts the amount the assessed value of your property can increase from year to year. The 1993 law also provides for a ten-year deferral of increases in assessed value due to improvements in homesteaded property that is over 35 years old. Check with your assessor if you think you qualify.

2.

Know the appeal procedures available to you. These are outlined in a Minnesota Department of Revenue brochure, What You Should Know About Appealing the Value of Your Property. Appeal options include: (1) Informal discussion or correspondence with your county assessor's office, (2) A direct appeal to the Minnesota Tax Court, and (3) A one-to-three-step appeal that begins with a local Board of Review, proceeds to the County Board of Equalization, and may wind up with the Minnesota Tax Court. Some Minnesota Tax Court decisions may be appealed; others may not. You may wish to consult a lawyer before going to the Minnesota Tax Court.

3.

Apply for "circuit breaker" refund and/or "targeted property tax relief" if applicable. To keep property taxes consistent with the taxing principle of "ability to pay," the state legislature has provided the "circuit breaker," which provides partial property tax refunds to persons with high property tax compared to their incomes (which, in 1993, must be below $60,000 per year). If your property tax on your homestead increased by more than 12 percent in one year, you may be eligible for a special refund through the Targeted Relief Program. For more information on either of these programs, pick up the Minnesota Property Tax Refund: Forms and Instructions booklet at your post office.

4.	Get information about how your property tax dollar is spent by attending the "truth in taxation" hearings held in November or December for your city, county, and school district. Know where your tax dollars are going.

5.	Make your preferences known to elected officials.

Summary

• The Minnesota property tax system is complex. This complexity is a result of attempts to make the tax system more fair.
  
• Property taxes are calculated from the property's assessed market value, its classification rate, and the local tax rate. The tax rate is determined by dividing the total dollars to be raised with property taxes (tax levy) by the tax capacity. School districts get the largest share of property dollars.
  
• Taxpayers can ensure that they are paying the correct amount by checking the property assessment, classification, and homestead records for accuracy. Some taxpayers are eligible for circuit breakers and targeted property tax relief programs.
  
• Property taxes paid locally may increase due to seven factors. Five of the factors are controlled by the state. These are: changes in required levels of local services, changes in levy limitations, a decrease in intergovernmental aids, a change in the property classification system or a change in the property class rate. Other factors are an increase in the property's assessed value or an increase in the local government's budget.
  

Definitions

ad valorem tax. Under this system, taxes are determined with reference to property values.

assessment year. The year preceding the year in which taxes are payable. Market value is determined as of January 2 of the assessment year.

budget year. Same as payable year except for school districts. School districts budget using a fiscal year that begins July 1. The tax levied by a school district in 1993 for taxes payable in 1994 is for the 1994/95 school year.

class rate. The percentage by which a property's market value is multiplied to arrive at its "tax capacity" or taxable value, subject to the local tax rate. Classification, with its set of class rates, redefines the tax base and results in a redistribution of taxes among different kinds of properties.

classification (system). Under this system, a property's value for tax purposes is a varying percentage (set by law) of its market value. Criteria influencing a property's classification include ownership, use, method of financing, size, period of the year it is occupied or used, and income of the residents.

effective tax rate (ETR). Dollar amount of property taxes to be collected expressed as a percentage of market value. Often used for comparison purposes.

estimated market value (EMV). The assessor's valuation of a property. All properties must be physically inspected in person at least once every four years.

fiscal disparities program. In Minnesota, this is officially known as the Charles R. Weaver Metropolitan Revenue Distribution Act, and provides for sharing a portion of the growth in the commercial and industrial tax base among taxing districts in the seven-county metropolitan area. This law, first implemented in 1975, stipulates that 40 percent of the increase in commercial-industrial valuation from 1971 shall be contributed to an area-wide tax base. A distribution index is calculated using population and real property market value per capita. The distribution index is used to determine the portion of the area-wide tax base each taxing district receives. See Minnesota Statutes 1992 , Chapter 473F for a more detailed explanation.

HACA (homestead and agricultural credit aid). This is an example of an indirect aid to local governments. See (a) under property tax relief programs. It replaced, starting payable 1990, the previous programs of homestead credits and agricultural credits aimed at individual properties.

home improvement valuation exclusion. This 1993 law exempts from taxation some or all of the increased estimated market value based on improvements to homestead property made between January 2, 1993 and January 2, 2003. In order to qualify, the home must be at least 35 years old before the improvement. The maximum amount of value that can qualify for exclusion is $25,000 for a house between 35 and 70 years old and $50,000 for a house more than 70 years old; only 50 percent of the total qualifying value can be excluded if the house is between 35 and 70 years old. Only improvements to the house or garage qualify for exclusion. In the case of owner-occupied duplexes and triplexes, the improvement is eligible for exclusion regardless of which part of the property was improved. A building permit must be issued for the improvement or if the local government does not issue permits, the improvement must add at least $1,000 in value. Local governments are to notify the assessor of the possibility of this exclusion when building permits are issued for homesteaded property. The assessor may require an application process and documentation of age of the structure. The qualifying value of each improvement is noted on the property's record by the assessor, and the sum of these amounts must then be subtracted from the value of the property in each subsequent assessment year for ten years after the improvement was made. After 10 years, 20 percent of the qualifying value must be added back in each of the five subsequent assessment years. The value exclusion is terminated when (1) the property is sold or (2) the property is reclassified to a class that does not qualify for the exclusion.

homestead. Residential property owned and occupied by the taxpayer on January 2. If you moved into your home after January 2, you may be eligible for a partial homestead. Check with your assessor.

intergovernmental revenue. Amounts received from other governments in the form of shared revenues and grants-in-aid, as reimbursements for performance of general government functions and specific services provided by the paying government, or as payments in lieu of taxes. Excludes amounts received from other governments for sale of property, commodities, and utility services.

levy. Amount in dollars each local government wants to collect. (They do not set a tax rate.)

levy limits. State-imposed limits on the dollar amounts that can be levied by counties and larger cities and townships. In general, levy limits were removed for 1993 and later years. Separate limitation applies to school districts. Some limitations may still exist on the tax rates that local units can impose for specific purposes. levy year. Same year as the assessment year. Local governments determine what amount of tax they need to levy in December of the year preceding the year taxes are collected (payable).

levying units. In Minnesota, property taxes are levied by counties, cities and townships, school districts, and special districts, which include metro government agencies, hospital boards, watershed districts, transit authorities, park boards, and housing and redevelopment authorities, etc.

limited market value. This 1993 law provides that the amount of increase in the current assessment of a parcel is limited to the greater of: (1) Ten percent of the value of the preceding assessment; or (2) One-third of the difference between the current assessment and the preceding assessment. The limited market value provision is in effect for assessment years 1993 through 1998. The provision applies only to agricultural, residential, and noncommercial seasonal-recreational residential property classes. It does not apply to increases in value due to improvements.

market value. The price a willing buyer would pay a willing seller in an arms-length transaction.

mill. One one-thousandth, 1/10 of 1 percent, or $1 per $1,000 of taxable valuation. Prior to 1988, property tax rates were expressed in mills.

net property tax. As opposed to "gross property tax"—property tax after accounting for state aids and tax credits.

payable year. Year in which tax statements are issued and taxes become payable—on May 15 and October 15 for real estate.

property tax relief programs. Minnesota has three general types:

(a)	aids to local governments, which may be in the form of "direct" aid (paid to a specific level of government for a specific function) or "indirect" aid (paid to local governments without regard to a specific function).
(b)	reimbursements to local governments for credits against property taxes that individual property owners receive. Examples are agricultural reserve credit, powerline credit, etc.
(c)	property tax relief paid directly to individuals. Examples are the renters credit program and the targeted assistance program under which the state pays for a percentage of any tax increase in excess of some threshold percentage.

special assessments. Benefit taxes imposed to help finance public improvements that are likely to increase property values.

tax base. Total value of taxable property within the community.

tax capacity. The same as taxable value; property taxes are now expressed as a percent of tax capacity.

tax increment. Portion of tax used to finance economic development or renewal project bonds based on increased tax capacity.

tax payable. The total tax rate times the taxable value of each property. tax rate. The percent of the total taxable value of property needed to achieve the dollar amounts levied by the respective local units. LEVY ÷ TAX BASE = TAX RATE

total tax rate. The rate arrived at by summing the tax rates of all the units in the area authorized to levy taxes on a particular parcel of property.

truth-in-taxation. State law providing for notices of taxes to taxpayers and for public budget hearings.

⁷ Property Taxes Levied in Minnesota, 1991 Assessment Taxes Payable in 1992, Property Tax Bulletin No. 21, Dept. of Revenue, St. Paul, MN, table 1, p. 26. Back

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