The City hosted a continuing education session last night for City elected officials, advisory commission members and staff. The session was led by Eric Willette from the Minnesota Department of Revenue. Eric gave us a comprehensive overview of the Minnesota property tax system.
The first thing we learned was the five principles of a model tax system:
1. The system should be understandable. Taxpayers should be able to understand the tax system and how it works.
2. The system should be fair. It should treat similarly situated taxpayers similarly.
3. The system should be competitive. The tax system should not put our state at a competitive disadvantage to other states or countries.
4. The system should be reliable. The outcomes of the systems should be stable, sufficient and predictable for all concerned – both taxpayers and the government.
5. The system should be efficient. How much does it cost to actually collect $1.00 of tax? The lower this cost, the more efficient the tax.
So how does the Minnesota property tax stack up to these five principles? According to Mr. Willette, here’s how:
1. Our property tax system is old. It predates statehood. The legislature tinkers with it occasionally. Overhauls it every generation or so. But it’s an old tax.
2. The property tax is the most unpopular of all taxes, according to data collected by the Minnesota Department of Revenue. There are many theories as to why, but one of the more common criticisms heard from taxpayers is that the tax doesn’t treat similarly situated taxpayers similarly. The property tax was developed as “wealth tax” back (see above) when wealth was tightly connected to property ownership. That connection is not nearly as correlated today.
3. Minnesota’s property tax system is competitive with other states for residential property. We’re near the middle of the pack when you compare the property taxes of homes in Minnesota to homes in other states. Not so on the business side though. According to the Minnesota Taxpayers Association, Minnesota currently ranks #13 in the country for commercial property taxes and #20 for industrial property taxes. While that #13 rank is still kind of high, it’s down from the 1998 rank of #3.
4. The property tax system is reliable — in terms of it being a stable, sufficient and predictable source of revenue for local governments in Minnesota. In Eden Prairie we typically collect 99% of the property taxes that we expect to collect. Right now, we’re collecting over 100% of the property tax revenue we expected to collect this year as real estate investors are buying foreclosed properties and paying off the back taxes. For taxpayers, however, the property tax is not reliable or predictable. Property taxes were sliced by 30% in 2002 by then Governor Ventura’s “Big Plan”. By 2009, property taxes for most taxpayers have risen steadily since then to the point where they are almost back to where they were in 2000 and 2001.
5. Finally, our property tax system is not very efficient. It costs a lot to collect property taxes. Think of all the property assessors, county employees and tax court employees involved in the process of determining the value of property, sending out property tax bills, considering taxpayer challenges, collecting payments and distributing the proceeds to local governments. There’s a lot of people and government process involved. And it’s not inexpensive, especially compared to what it costs to collect the income and sales taxes.
The important question about how much money the government should consume out of the private economy was not answered last night. That question is not answerable by a guy from the Minnesota Department of Revenue, or by a city manager, for that matter. That question must be answered by our fellow citizens who we elect to make that very important judgment. That question, and many more almost as difficult, will be answered by the our City Council as we begin the process of putting together our 2010-2011 City Budget starting next week.
Stay tuned.
