Higher property taxes could put squeeze on area homeowners

I bought my little three-bedroom Uptown starter home in 1994 for $70,000. After a really bad case of buyer’s remorse, nearly a decade of elbow grease and about 20 gallons of paint, a mortgage company appraised the little cracker box at $285,000, a figure that was laughed at by a real estate broker friend of mine. (He thinks I could get more than $300,000.) While the value of my home has more than quadrupled, my property taxes have only doubled. “Only!” Sadly, protection from runaway property taxes like that which I and other Uptown residents have enjoyed is about to disappear.

After my leap into the lucrative world of homeownership, I leapt into marriage, and my wife and I found ourselves knee deep in diapers (a girl and a boy). My wife decided to stay home with the kids, and my income has varied significantly year to year since then. The mechanism that held our property taxes from exploding along with our home value has been a godsend. That mechanism is called Limited Market Value (LMV), and in less than five years it will totally evaporate.

In 1993, the state legislature must have hired a psychic, and her crystal ball must have revealed that housing prices were going to explode. It came up with LMV legislation and limited the annual increase of property tax on farms, residential and seasonal recreational residential property (cabins) to increases of 10 percent annually until 1998. The 1997 legislature wisely extended the property tax cap until 2001. During its lifetime, the LMV percentage has been changed up and then down again. Other provisions were added on. It was amended and then augmented, but the cap was there holding property taxes in check ever since 1993. The 2001 legislature introduced a plan to “phase out” LMV by 2006, and, surprisingly, there really hasn’t been too much fuss about it in the media or from the public at large.

As soon as the property tax bills start climbing, however, people will get hit in the wallet and then there might be one heck of a fuss. People who have lived for years in metro areas now deemed desirable may find themselves tax poor. For many it will simply be one more significant item to budget for, but for some, it will mean getting taxed out of their homes. It hasn’t been unheard of for a home in Minneapolis to triple in value without any improvements at all.

Take Jeff Forester, for example. They say that there are three considerations when buying real estate: location, location, location. Forester’s house has all three of these. He lives in Uptown less than two blocks from Calhoun Square. I came to know him by walking the sidewalk in front of his house every day to work. He lives with his wife and two young girls in a modest, early 1900s house sandwiched between two apartment buildings. His wife is a grade school teacher. He is a writer, among other things that actually make money.

The property tax Forester paid on his house this year was about $1,200. He estimates that without LMV and considering the state and federal budget cuts to local governments, he would have paid twice as much. He says that property taxes (as opposed to income taxes) are the most regressive way a community can tax its citizenry. Most folks of moderate and low income have their net worth tied up in their homes, he says, and property tax without limits can take a disproportionate bite out of moderate and low incomes.

“Minnesota’s property taxes will become confiscatory.” Forester says. “Another way to look at it is that because banks hold mortgages on homes, most residential property taxes are levied against property the taxpayer doesn’t really own.”

But that’s less than half of Forester’s story. In addition to his home in Uptown, he belongs to another group that will be some of the hardest hit property tax payers. He owns lakeshore property. Forester’s father bought a several-hundred acre island in a lake near the Boundary Waters back when people were considered crazy for buying such land. The island was desolate. No roads, no sewer, no shoe stores. The island was passed to Forester and his siblings. Even with the LMV protection, his parents had to sell it to the kids largely because they couldn’t afford the taxes.

Forester is about as green as they come. He talks with a gleam in his eye about the bears, the moose and the deer on the island, and he waxes sentimental, vowing that he will keep the land pristine as long as he has anything to say about it. But the gleam disappears when he talks about the wolf den that was once on the island.

“It was on a part of the land that we had to sell,” he says. “We couldn’t afford the taxes. The people we sold to developed that part of the island, and she [the wolf] split.”

Forester says that because of the LMV phase-out, his total yearly property tax bill (Uptown and his lakeshore property) could rise to just under $10,000. His lakeshore property puts little or no demand on local or state government infrastructure. No city has to plow any of the roads on his land, there is no garbage collection, no need for police there, and his children aren’t using the schools there. He reckons he’ll have to sell off significant portions of the land, and he‘s quite sure that there will be manicured lawns where there is now pristine wildlife habitat. This is the fate of much of Minnesota’s privately-held, undeveloped lakeshore, according to Forester. He has become an activist on behalf of this little trumpeted environmental issue because of his experience. He now heads the Minnesota Seasonal Recreation Property Owners Coalition.

After talking to Forester, I started thinking about the old lady that lives across the street from my Uptown house. She’s owned her home for decades. The value of her house has grown exponentially. And I started thinking about the single woman who lives down the street. She works at a bank and supports three kids. There’s a retired couple living four doors to the north. A lot of the homeowners in South Minneapolis are like these people, many more in North Minneapolis. You can bet that many of them will be taxed out of the neighborhoods they’ve known as home for decades.

After musing about all the people I know that would be affected by the LMV phase out, I started getting a little bit angry about this phase-out business, so I did what just about all angry people in Minneapolis do. I called R. T. Rybak. I got ahold of one of his staff people and tried to find out what the head of the city thinks of all this. She e-mailed the mayor’s spin on the issue.

It turns out, according to the mayor’s office, that the LMV phase-out is just the beginning of why property taxes in Minneapolis are rising and going to rise a lot more. The state reduced the portion of business property taxes that go to local governments and has also reduced tax rates for businesses over the past few years, shifting “the tax burden onto homeowners, particularly those with lower valued homes.” Many of the residents of Minneapolis neighborhoods bought their homes when the city was not considered a good place to live. In effect, we will be taxing out “the very people who built these neighborhoods.”

So many a property tax bill is likely to mushroom the next few years. Limited Market Value protection is being phased out, the tax burden has begun to shift to homeowners from businesses (some simply because of a flat retail space market), and residential property values have skyrocketed.

I called several state senators, trying to find someone to defend the LMV phase-out. I got ahold of State Senator Dick Cohen and was about to give him a piece of my mind when he told me that not only did he want the property tax cap to be permanent, he’s been trying for years to set the protection at 5 percent limited property tax hike annually.

“Increases in market value create great difficulty for fixed and low income people,” Cohen said. “Ultimately, it will also discourage home ownership in the Twin Cities, too.” (I never even thought about that!)

I called a handful of other senators, but none returned my call. I did get ahold of a Minnesota Department of Revenue employee who was sympathetic with the phase-out and also requested anonymity. Not surprisingly, anonymity seems to go hand in hand with advocating LMV phase-out. She did, however, make some valid points in favor of the phase-out:

First, the properties sheltered under the property tax cap cost state and local governments 10.4 percent ($30 billion) in property tax revenue. That’s $30 billion that could be used during very tight budget times. Second, with the phase-out of the Limited Market Value protection, the tax base will increase significantly, lowering the tax rate. That means that property taxes will actually go down for some people. Fourth, there is a senior citizen deferral option and a “Circuit Breaker” option that provides relief for fixed income, low income and anyone whose property tax increases more than 12 percent annually.

The protection for seniors, however, is merely a deferment. As soon as the senior sells their property or they die, the state collects the deferred taxes from the transfer of property to a new owner. And to get the Circuit Breaker tax refund (the protection for “low income homeowners“), a very confusing form has to be filled out and filled out every year. Many low income people will never hear about this form, and many would not know how to fill it out. I know. I tried it.

I downloaded a Minnesota Property Tax Refund Form and Instruction Booklet (there appeared to be 24 pages) from the Minnesota Department of Revenue Web site. On page 11 I found Schedule One, which referred me to Form M1PR of which line 7 refers to page 9, instructing me to find the “subtraction amount.” I was then directed to lines 8 and 13 and to check pages 17-22 of the instructions to fill out line 14. That’s about as far as I got before I gave up. (And I have a college degree from Minnesota’s great land-grant intellectual beacon.) I can’t imagine too many seniors and low income people flocking in to get these forms, much less filling them out.
What little I was able to find out about the “Circuit Breaker” protection for low income people is that the maximum circuit breaker refund for 2000 was $510, and the average for 1999 was $319. I’m still waiting for return correspondence from several governmental employees to help me figure out the Circuit Breaker. (Don’t quote any of this material. I’m not sure of any of it.)

Truth be told, my wife and I cashed out, rented out our Uptown property and have since moved out of Minneapolis. We’re doing quite well, thank you. Limited Market Protection or full-market-value property taxes, it makes no difference to us. The neighbors we left behind, however—the single mother of three who still lives three doors down from our Uptown house, the old lady who still owns the little home across the street, Jeff Forester—these people could be in big trouble in the next couple of years.

Part of the property tax future of the Twin Cities has to do with trickle down tax cuts. The federal government cut aid to state governments. The state government has cut aid to cities, counties and townships. Property tax increases and infrastructure cuts will have to make up the difference. All of this while stock dividend taxes and income taxes for the wealthy are being cut.

I have a friend who just bought a home worth well over $1 million. If, as the 2001 legislature intended, the Limited Market Value property tax cap is phased out, the property tax rate will go down. That means my friend will get a tax break. But it also means that the old woman who lives across the street from my Uptown home will have an exponential rise in her property tax bill. I certainly want my friend to have a tax break, but I don’t want his tax break at the expense of the old woman across the street and others like her. The Limited Market Value phase-out is regressive, it will hurt many of our most vulnerable neighbors and it’s just plain wrong.