[Mpls] Property taxes explained across the river
Steven Clift
clift at publicus.net
Fri Jul 8 21:07:35 CDT 2005
Very interesting!
Steven Clift
Ericsson
------- Forwarded message follows -------
From: Bob Spaulding <r_spaulding at yahoo.com>
Date sent: Fri, 8 Jul 2005 21:57:19 -0500
To: St.Paul Issues Forum <stpaul-issues at forums.e-democracy.org>
Subject: [SPIF] Why "No New Taxes" would eventually bankrupt St. Paul: Property Taxes Explained
I've been waiting to talk about this for a while, and at least once
condense major things I've learned in one comprehensive
post/discussion... Feel free to add!
Learn the magic behind why:
- St. Paul's property tax levy has lost about 30% of its purchasing
power since its last increase 12 years ago. - A "no new taxes" pledge
will eventually bankrupt a City, but it wouldn't necessarily bankrupt
the state. - If everyone's property value doubled in value in St.
Paul, your property tax bill would remain the same. - Minneapolis
homeowners pay about 1.6 times as much in property taxes (excluding
St. Paul's new fees), but Minneapolis' property tax levy is somehow 3
times as big as St. Paul's, with a population just 1.3 times as
larger.
Most major state taxes are assigned a specific rate directly by
legislators. The state sales tax RATE is set at 6.5%. The state and
federal income tax is paid at a government-specified rate, in the
case
of federal income taxes, from 15% to about 39%. The TAX RATE of
these
taxes is SET DIRECTLY BY ELECTED OFFICIALS.
But WITH PROPERTY TAXES, ELECTED OFFICIALS DO NOT DIRECTLY SET A
RATE.
Instead of setting a tax rate, the city and the county decide on a
TOTAL AMOUNT OF MONEY they are each going to collect through property
taxes - the levy amount. I believe this is usually done in September
in St. Paul. This has some really important implications for how the
City budgets. It may be easier to see how this plays out in an
imaginary town....
* * * * * * * * * * * * * * * * * *
SAN PABLO: A PRETEND CITY WITH A LAME NAME
* * * * * * * * * * * * * * * * * *
"BASELINE" SCENARIO: The town has only two properties: an office
building valued at $450,000, and a house valued at $50,000. Imagine
the City has set the total tax levy to be collected at $5,000. The
City must collect $5,000 total from the properties. To do so, the
City divides taxes across the properties proportionally: the office
building pays $4,500 and the house pays $500 to bring in the $5,000.
* * * * *
EVERYBODY'S PROPERTY VALUE DOUBLES, BUT THE TAX STAYS THE SAME: If
the
properties double in value, then the office building is worth
$900,000, and the house is worth $100,000. But (as has been the case
in St. Paul for 12 years), the elected officials choose not to change
the TOTAL AMOUNT TO BE LEVIED IN TAXES. It remains at $10,000. So
they all still pay proportionally: the office building still pays
$4,500, and the house pays $500, bringing in the $5,000 in total tax
revenue.
* * * * *
OFFICE BUILDING LOSES VALUE, HOMES GAIN VALUES: Now, let's make the
office building (here representing downtown St. Paul) lose value
while
the house (representing St. Paul neighborhoods) gains value. The
office building is now only worth $400,000, because tax breaks were
given to build another office building nearby, which creates a glut
of
space. Meanwhile, the house increases in value from $50,000 to
$400,000, because its a hot housing market. Now all the property is
worth the same amount. But (as has been the case in St. Paul for 12
years), the City doesn't choose to change the TOTAL AMOUNT TO BE
LEVIED IN TAXES. It remains at $5,000. So now, because both
properties are worth $400,000, each of the properties should split
the
$5,000 tab evenly - paying $2,500 apiece.
* * * The most important point here is THE CITY DOES NOT COLLECT ANY
MORE MONEY FROM PROPERTY TAXES UNTIL THE $5,000 LEVY IS INCREASED.
Property values could explode or plummet, but it is THE MAYOR AND
CITY
COUNCIL DECIDE HOW MUCH MONEY WILL BE COLLECTED IN TOTAL, and do NOT
set a pre-specified rate. When Norm Coleman and Randy Kelly talk
about not increasing property taxes, they mean that the same amount
of
income is coming in from property taxes year after year. In fact,
Kelly and Coleman couldn't increase the levy as easily because the
tax
base - the total value of all properties in the City - hasn't grown.
If the tax base had grown, each homeowner's tax burden would have
shrunk. But if we kept the levy forever flat, as inflation continued
to outpace revenue, we'd go broke (unless someone else bailed us
out).
* * * * * *
ONE PROPERTY GETS A TIF DISTRICT; OTHERS PAY THE PRICE. TIF
Districts
are a tool that is meant to spur new development that wouldn't have
happened without the help. Basically, if your property is in a TIF
district, that means that all new value you add to your property
through improvements will not contribute to the overall tax levy for
a
set period of time, say 20 years. There are arguably legitimate uses
for TIF districts, but they are sometimes hard to differentiate from
illegitimate uses. TIF districts are only warranted when there is NO
chance a property would be SUBSTANTIALLY improved over the period of
life of the TIF (20 years) without government assistance. Otherwise,
the City is forgoing substantial tax revenue.
Our imaginary $400,000 office building makes $200,000 in
improvements,
which would normally bring its taxable value to $600,000. Our house
is still worth $400,000. In this case, the homeowner would only pay
$2,000 in taxes, and the office building owner would pay $3,000. If -
that is - the office building owner doesn't apply for TIF financing.
But the owner of the office building gets smart. They threaten to
move their company out of town unless the city provides tax relief.
Is it a charade? For real? Sometimes hard to tell. Sometimes it
seems pretty obvious. (Do know that in these deals there is likely
an
unspoken understanding going in that if the TIF is granted, the Mayor
will get a nice campaign contribution soon.) Rightly or wrongly, the
City puts the office building in a TIF district.
Now, the taxable value of those office building improvements doesn't
count in property tax calculations for 20 years, because the
building's owners got the building put into a TIF district. So
building will just pay taxes on the $400,000 portion of its property.
So the office building's owners pay $2,500 in taxes, instead of
$3,000. Under the TIF district homeowner, then, will pay $2,500,
instead of $2,000 in taxes. Technically speaking, the average
homeowner gets screwed by the TIF district.
This is why TIF DISTRICTS, WRONGLY APPLIED, CAN INCREASE HOMEOWNER'S
TAXES DIRECTLY AND DRAMATICALLY.
In St. Paul, when Minnesota Mutual Life/Securian built the $90
million
401 Building in downtown St. Paul, they got the City to create a TIF
district, with expected proceeds of around $25 million (through the
year 2026). The City is losing an estimated $25 million on the TIF
district. So, all the property tax improvement represented there are
lost on the City until the TIF district expires. So, Minnesota
Mutual
has the fifth most valuable portfolio in Ramsey County, with a worth
of over $102 million, most of which isn't taxed - the county only got
$30,270 from them last year, about 1/20th of what they would have
paid
without the tax breaks. Oh, and Minnesota Mutual's PAC gave $10,000
to Norm's reelection effort; $5,000 came from Minnesota Mutual's
President; add these contributions to those that came from
contractors
and others, and Norm's Senate campaign benefited from $33,500 in the
project, according to the Star Tribune 11/2/02 "Beneficiaries of
Growth" article.
* * * * *
Okay, okay, if you've read this far, don't read on until you've got
your head fully around what I've written so far, because this will
confuse you otherwise.
ENTER MINNESOTA'S PROPERTY TAX CLASSIFICATION RATES. Kevin IS right -
there are different rates of property taxation set by the state.
These rates are the rates at which different property TYPES are taxed
(residential, commercial, rental residential etc). So even if all
the
property is worth the same amount of money, they will pay different
amounts, depending on what kind of property it is.
Back to where we left off. The office building is worth $400,000;
the
house is also worth $400,000. In Minnesota, we tax commercial
property at a rate or factor of 1.5. Residential owner-occupied
property is taxed at a rate of 1.0.
That means, in reality, the office buildings are taxed AS IF its
value
were not $400,000, but 1.5 times as much, or $600,000. The house is
taxed as if it were worth 1.0 times its value, so it remains taxed as
a $400,000 property. So now, the total value of taxable property is
$1,000,000; the office building represents 60% and the house 40%. So
with our $5,000 levy, the office building will pay $3,000 (or 60%)
and
the house will pay $2,000 (or 40%).
* * * * *
MINNEAPOLIS, ST. PAUL: TWO CITIES, TWO PATHS. Now, let me bring this
back to reality for a moment. Over the last 12 years, Minneapolis
and
St. Paul have chosen very different paths. Minneapolis shows the
results of a high-tax, high-service city, and a lower tax city. St.
Paul's total tax levy isn't $5,000 - it's $63,983,263. But that
pales
in comparison to our neighbors across the river in the Minneapolis,
because their levy is $190,374,830 - almost exactly three times as
much. (see
http://www.ci.stpaul.mn.us/mayor/05budget/packet090804.pdf
for some numbers).
That's right. Minneapolis' population is 1.3 times larger than ours,
the average homeowner pays about 1.6 times more in property taxes
(excluding all our new fees), but they bring in 3 times as much
revenue. What up? Well, their downtown area, in particular, is far
healthier than St. Paul's downtown. They have added properties and
grown their downtown tax base, while ours has shrunk, and been TIFed.
Downtown properties pay a FAR larger percentage of the tax bill in
Minneapolis, and this keeps property taxes far lower than they would
otherwise be.
More on that later... A huge debt to John Mannillo for some great
education on all of this!
Ending my longest post ever,
Bob Spaulding
Downtown St. Paul
Bob Spaulding
Downtown, St Paul
More info:
http://forums.e-democracy.org/stpaul/contacts/robertspaulding
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