Shifting Property Taxes: A Case Study of Minnesota s Limited Market Value Presentation to Federation of Tax Administrators Revenue Estimated Conference Tax Research Division Minnesota Department of Revenue September 18, 2007 paul.wilson@state.mn.us Presentation Outline What is Limited Market Value? Limited Value by Property Type and Region Tax Impact by Property Type Tax Impact on Individual Home and Cabin Owners (parcel level analysis) Tax impact variation by home value 2 1 1
What is Limited Market Value? Ramsey County 2003 Property Tax Statement Property Tax and Revenue 2003 Value Notice Information 16 Assessment Date, January 2, 2001, January 2, 2002, January 2, 2003, Taxes payable year payable 2002 payable 2003 payable 2004 17 Estimated Market Value $129,000 $139,600 $161,000 18 Limited Market Value $113,600 $125,000 $140,000 Taxable Value reduced about 15%, so my taxes are down about 15% too. 3 2 Preview: Three Surprises Surprise #1: Homeowners as a group are net losers in 2007! (They pay more tax.) Surprise #2: One-third of homeowners whose value is limited are still losers! Surprise #3: Taxable value rose faster than market value in 2007 (because of LMV). Will LMV be allowed to expire for taxes payable in 2010? 4 2
What is Limited Market Value? A limit on annual growth in the dollar value subject to property taxation. LMV applies only to preferred classes : Residential homestead and non-homestead; Agricultural homestead and non-homestead; Seasonal recreational residential (cabins); and Timberland (added in 2001). 5 2 Limited Market Value Does not apply to an increase in value due to improvements. Not owner-specific. LMV applies to the parcel, so carries over to a new owner. Value limit restricts neither the property tax rate nor the property tax levy. If the property tax levy is fixed, then LMV shifts tax burden to other properties. 6 3 3
For assessment year 2006 (taxes payable 2007), the increase in taxable value cannot exceed the larger of: 15% of previous year s TMV; or 25% of the difference between new EMV and previous year s TMV. where TMV = Taxable Market Value EMV = Estimated Market Value (full market value, assessed annually) 7 4 Limited Market Value (LMV) Example 1 Impact of Limited Market Value for Pay 2007 Taxes Home with TMV = EMV = $200,000 for Pay 2006 Taxes $500 $400 TMV +1 TMV +15% TMV +2 TMV +25% ($ Thousands) $300 $200 $100 $150 $120 $30 $20 $30 $40 $50 $200 $200 $200 $200 $0 1 3 8 10 Increase in EMV for Pay 2007 2005 TMV Increase in TMV Untaxed Value 8 5 4
Limited Market Value (LMV) Value limit is temporary: The amount of untaxed value automatically falls when property value increases slow down. Example: Home s EMV rises by 3 per year for two years, then 6% per year for next three years. 9 6 Limited Market Value (LMV) Example 2 Impact of Limited Market Value If EMV Rises by 3, 3, 6%, 6%, and 6% (Assuming 2007 parameters) $500 $400 TMV +15% TMV +15% TMV +15% TMV +15% TMV +14% $30 $300 $75 $56 $30 ($ Thousands) $200 $100 $200 $230 $265 $304 $350 $400 $0 Year 0 Year 1 (+3) Year 2 (+3) Year 3 (+6%) Increase in EMV Year 4 (+6%) Year 5 (+6%) Taxable Market Value Untaxed Value 10 5
History of Limited Market Value 16% Annual Increases in Market Value and Taxable Value (Homesteads, Taxes Payable 1994-2007) 14% 12% 1 8% 6% 4% 2% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Market Value Taxable Value 11 8 History of Limited Market Value 15% 1 5% 4% Relationship Between Home Value Increases and Limited Value for Homesteads 1% 6% 5% 6% 5% 1% 1% 1% 1% 7% 7% 1% 2% 11% 4% 13% 14% 8% 11% 1 1 9% 94 95 96 97 98 99 00 01 02 03 04 05 06 07 6% 9% 5% 9% 3% Increase in Average Home Value LMV Untaxed Value as of Total Home Value 12 6
History of Limited Market Value Payable Year(s) Maximum increase in taxable market value is larger of: Increase Above Previous Year's TMV or of Difference Between EMV and Previous Year's TMV 1973-74 5% - 1975-79 1 25% 1980 1 5 NO LMV 1981-1992 1993-96 1 33% 1997-02 1 15% 2003 12% 2 2004 15% 2 2005-07 15% 25% 2008 15% 33% 2009 15% 5 NO LMV 2010 AND AFTER Preferred Classes Residential, agriculture, and cabins. All Property Residential, agriculture, and cabins (plus timber starting 2001). 13 10 History of Limited Market Value ($ Billions) $40 $35 $30 $25 $20 $15 $10 $5 $0 Total Nontaxable Market Value due to LMV (all property types combined) Highest in 2004, but very little decline. $1.0 $1.6 $2.0 $2.5 $3.4 $5.6 $10.6 $21.0 $30.9 $34.9 $33.1 $32.5 $33.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 14 11 7
History of Limited Market Value 3 Statewide Limitation as a of Estimated Market Value (Before Limitation) 25% 2 15% 1 5% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Farms Seasonal Rec. Resid. Total Residential Total Statewide 15 12 Limited Value by Property Type Statewide Market Value Limitation by Type of Property (2007) Seasonal Rec. 16.6% Homestead 29.9% Timber 2.2% Farms 40.1% Non-homestead 11.3% 16 13 8
Shares of Statewide Limited Market Value by Property Type (2000-2007) of Statewide Limited Value 10 75% 5 25% Timber Farm Seasonal Recreation Non-Homestead Residential 2000 2001 2002 2003 2004 2005 2006 2007 Homestead 17 27 Limited Value by Region Change in Market Value Limitation by Region ($ Billions) 18 14 9
of Statewide Limited Value 10 75% 5 25% Shares of Limited Value by Region (Taxes Payable 2000-2007) Non-Metro Metro 2000 2001 2002 2003 2004 2005 2006 2007 19 27 Impact on Tax Liability Modeling LMV s Impact (taxes payable 2007) Study assumes that LMV does not change local levies. It shifts tax burdens, but does not reduce them. The tax-shift effects of LMV occur locally (at the parcel level). Patterns may vary by taxing jurisdiction depending on relative market value changes and the mix of property. 20 15 10
Impact on Tax Liability Study Methodology Parcel-level data for assessment year 2006. Calculates tax impact for taxes payable 2007: Add untaxed value (due to LMV) back to tax base. Recalculate local tax rates (levies unchanged). Compute no LMV tax amounts for each homestead and cabin parcel. Compute no LMV aggregate tax amounts for other classes (not parcel-level). 21 16 Impact on Tax Liability by Property Class Change 16% 12% 8% 4% -4% -8% -12% -16% -2-24% Average Change in Property Tax Due to LMV, By Class of Property Taxes Payable 2007 (Statewide) -23.3% -8.3% -10.7% -5.5% 1.3% 2.2% 3.8% 4.1% Metro 13.2% Timberland Farms Cabins Non-Hmstd. Hmstd. C/I Pub. Utilities Apart. Seasonal Comm. 22 17 11
Impact on Tax Liability Homes Tax Effects on Residential Homesteads Taxes Payable 2007 (1.43 Million Parcels) 227,000 (16%) homeowners paid $64 million less tax. 1,203,000 (84%) homeowners paid $110 million more tax. One-third of homes with limited value actually paid more in tax (one-half for non-metro). $46 million net loss to homeowners was shifted on to homes from other classes. 23 18 Count of Properties in Thousands 600 500 400 300 200 100 Impact on Tax Liability Homes 0 Limited Market Value Impacts on Residential Homesteads (Payable 2007) 227,000 homeowners pay, on average, $282 less tax. Total Tax Decrease $64 Million -5,000-3,000-2,000-1,000-500 -300-200 -100-50 0 50 100 1,203,000 homeowners pay, on average, $92 more tax. Estimated Homeowner Tax Change in Dollars Total Tax Increase $110 Million 200 300 500 1,000 2,000 3,000 5,000 24 19 12
5 4 3 2 1 LMV Variation by Home Market Value with Limitation (Overall 25%) and who Gain (Overall 16%) Statewide (Pay 2007) 26% 25% 25% 14% 16% 17% Under $100 $100 to $150 $150 to 200 21% 22% 25% 14% 14% 16% $200 to $250 $250 to $300 Market Value of Home ($1000s) $300 to $400 33% 23% Over $400 w ith Value Limited Gainers 3 of homes < $150,000. 18% over $300,000 (and 8% over $400,000). 25 5 4 3 2 1 25% 13% Under $100 with Limitation (Overall 24%) and who Gain (Overall 12%) Non-Metro (Pay 2007) 18% 18% 1 9% $100 to $150 $150 to 200 23% 11% $200 to $250 3 14% $250 to $300 45% 25% Over $300 w ith Value Limited Gainers Market Value of Home ($1000s) 57% of non-metro homes < $150,000. Only 8% over $300,000. 26 13
5 4 3 2 1 39% 34% Under $150 with Limitation (Overall 26%) and who Gain (Overall 19%) Metro (Pay 2007) 3 23% $150 to 200 2 2 21% 15% 14% 14% $200 to $250 $250 to $300 $300 to $400 29% 21% Over $400 w ith Value Limited Gainers Market Value of Home ($1000s) Only 7% of metro homes < $150,000. 28% over $300,000 (and 13% over $400,000). 27 $ Thousands 120 100 80 60 40 20 12% $7 Average Limitation for Homes with Limitation Statewide 11% Average ($1000s) Ave. % of Value $14 11% $19 1 1 1 $23 $28 $36 13% $80 14% 12% 1 8% 6% 4% 2% 0 Under $100 $100 to $150 $150 to 200 $200 to $250 $250 to $300 $300 to $400 Over $400 Market Value ($1000s) 28 14
Impact on Tax Liability Cabins LMV s Effect on Cabins Taxes Payable 2007 (203,000 Parcels) 140,000 (69%) parcels paid $25 million less tax. 63,000 (31%) parcels paid $7 million more tax. $17.2 million net gain was shifted to other classes, and off of cabins. 29 20 Impact on Tax Liability Cabins Limited Market Value Impacts on Seasonal Recreational Residential Property (Payable 2007) 60 Count of Properties in Thousands 50 40 30 20 10 0 140,000 seasonal recreational residential properties pay, on average, $179 less tax. Total Tax Decrease $25 Million -5,000-3,000-2,000-1,000-500 -300-200 -100-50 0 50 63,000 seasonal recreational residential properties pay, on average, $110 more tax. Total Tax Increase $7 Million 100 200 300 500 1,000 2,000 3,000 5,000 Estimated Seasonal Recreational Residential Tax Change in Dollars* *Includes state tax. State tax rate adjusted to hold state tax amount constant. 30 21 15
LMV illustrates the distributional impacts of shifts in property tax burdens. Conclusions Fiscal illusion many who think they benefit really do not. Many who think they are unaffected are really losers. Benefits shift to type of property that is rising most rapidly (farms and cabins). 31 22 Prospects for Completion of Phase-Out? Impact much different in metro than non-metro. Typical impact varies by home value but not in extreme way. Always some uneasiness with cutting taxes for those whose home values are rising faster at the expense of those whose home values are stagnant. Better understood by policymakers, and many seem to prefer expanding targeted relief (circuit breaker). 32 23 16
4 Annual Increases in Taxable Value and Net Tax (Homesteads, 1996-2007) 3 2 1-1 -2 76 79 82 85 88 91 94 97 00 03 06 Taxable Value Net Tax 33 24 Annual Increases in Market Value and Taxable Value (Homesteads, 1996-2007) 4 35% 3 25% 2 15% 1 5% 76 79 82 85 88 91 94 97 00 03 06 Market Value Taxable Value 34 25 17
4 Limitation as a age of Estimated Market Value (Before Limitation) Metro Area 35% 3 25% 2 15% 1 5% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Farms Seasonal Rec. Resid. Total Residential Total Metro 35 26 4 Limitation as a age of Estimated Market Value (Before Limitation) Non-Metro Area 35% 3 25% 2 15% 1 5% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Farms Seasonal Rec. Resid. Total Residential Total Non-Metro 36 27 18