Retooling Property Taxes

Jim Mulder, former Executive Director of the Association of Minnesota Counties, submitted an op-ed to Minnesota media outlets that suggested several potential reforms the Minnesota property tax system.  Mulder was the Independence Party candidate for Lieutenant Governor in 2010 under Tom Horner’s ticket.  And, he dealt with property tax issues for years as the head of the AMC.  Mulder notes that the property tax system in Minnesota ranks among the most complicated in the nation.  The first step in reform, Mulder asserts, is that we clarify the services that property taxes should support.   Mulder asserts the following five principles.

**First, the state should maintain its commitment to fund K-12 education to at least 80 percent. By reducing the districts’ need to pass referendum levies, this commitment could help property taxes be cut by nearly $400 million.

** Second, the requirement that cities and counties pay sales taxes should be repealed. Cities and counties are said to pay about $150 million in sales taxes. That’s money raised from the property tax, money that in turn is used by the state to send property tax relief to cities and counties. Let’s cut out the middle man.

** Third. county social services that are paid for with property tax dollars should be funded by the state. Using state revenues ensures that these services will be uniform across the state.

** Fourth, repeal the state-imposed property tax on commercial and seasonal-recreational properties. The property tax should be reserved for local governments and not used by the state.

** Fifth, rethink the use of Local Government Aid to cities and County Program Aid to counties. Instead, use those resources for income-sensitive programs that are tied to the incomes of the people who actually pay property taxes.

Those are all great suggestions.  Clearly defining state versus local responsibilities is the first step to true reform.

Two-Rate Tax

I also suggest exploring a reform that is bit more radical, but probably long overdue in Minnesota and across the country.  One suggestion in its infancy across the country is to increase land assessment while decreasing assessments on the buildings that sit upon the land.  Some call this a “two-rate tax.”  A fantastic description of the advantages of the system can be found in a 2010 article by Walter Ryback in PM Magazine.

The current property assessment methodology emphasizes building value while largely (and artificially) limiting the value on land.  In developing areas, this induces negative incentives in which property owners and developers must pay substantially more in taxes for improving their buildings.  Similarly, we reward buildings that fall into disrepair with lower valuations.  A two-tier formula that taxes land at higher rates than buildings can serve several goals. It can encourage economic development in distressed areas by encouraging building improvements. It can also encourage sustainable communities by creating disincentives to sprawl developments that underutilize residential and commercial property.  A two-tier tax can simplify property tax rates.  Yes, there are still two tiers.  But, that is better than multiple tiers with multiple credits and exemptions at the state and local levels.  And, most importantly, a two-tier tax can generate more revenue by encouraging development.

No system is perfect.  There are downsides.  Real estate developers would pay more in taxes on speculative land.  And, surface parking lot owners would cry foul on high taxes for relatively unproductive land.  But, that is the point.  Productive land uses should be rewarded, not punished.

There are relatively few case studies for this type of system, but they do exist as noted in the Ryback article.  I would be fascinated to learn how such an approach could be studied in Minnesota.  If we are serious about reform, we must not be afraid to think big.  As always, I’d love to hear your thoughts.