Property taxes have increased significantly for next year and many taxpayers are upset about it. This is certainly the case in St. Paul, where a combination of factors unique to the city itself, Ramsey County, and St. Paul Public Schools are contributing to higher bills.
A community computer usage network in the relatively affluent higher-ed neighborhood where I live lit up with angry posts as new issues came out. Some comments were harsh criticism of the school system, a rarity in a politically liberal part of town. So what is going on? The answer is many different things, but to understand them it’s best to go over the basics.
Historically, since colonial times, local government was financed by property taxes. This included not only real estate (land and buildings) but also personal and business assets. Minnesota eliminated the personal property tax half a century ago, so “property taxes” and “property taxes” are pretty much the same thing. But if you want to know how many sows and bed frames your great-grandparents had in 1913, look in your county tax records.
“Local government” generally means counties; cities, towns, and rural municipalities within counties and school districts. Those are the big three. There are other minor units of government, often related to water in Minnesota. So we have lake improvement, soil and water drainage and other districts. And there may be councils that link the myriad municipalities in some metropolitan areas, like the once-pioneering Metropolitan Council for the Twin Cities. These may have a lower tax power.
The basic process is centuries old. The value of the taxable property is determined and the totals are tabulated. The local government decides how much money it needs. The money needed divided by the total value of the property is the “thousand rate,” the percentage of each property’s value that must be paid in taxes.
Note that in this system, the total taxes paid depended on the amount that local governments decided to “levy.” Taxes owed did not increase as median property values increased unless there was an increase in the lien. That is still true, but greatly misunderstood.
That simple model is still the underlying process, but there are many complications. There are different classes of property: owner-occupied “estates” vs. rental housing, residential vs. commercial vs. industrial vs. agricultural. Property owned by churches and other non-profit entities, such as universities, is exempt, as is government property. Some properties are affected by “tax increment financing.” There are rules for the fair and uniform assessment of the value of individual buildings or land. Public notices, hearings, equalization proceedings, protests and appeals are all listed.
Furthermore, there were inequities in the simple system. A school district that included an iron ore mine or a 600-megawatt power plant might have fancy schools with low taxes on homes and small businesses, while a nearby district without large commercial properties would have much higher rates for most the most modest people and schools.
This was true across the country. But Minnesota led the way by trying to make the system fairer. Now the tax dollars that flow into the state are redistributed to school districts and to cities and counties according to formulas that redistribute revenues from property-rich to poorer areas. There is agreement that, for education in particular, the services available to children and citizens in general should not vary with the location of a packing plant or oil refinery one mile to the east or west.
All very well, but the contemporary system is very complex. This is also often misunderstood. Few would guess that only 22% of St. Paul School’s revenue comes from newly increased property taxes. 47% comes from state aid and another 21% from the federal government. Grants, fees and other miscellaneous sources provide the rest.
The proportions would look quite different for Minneapolis, since it has far fewer government buildings and universities than its neighbor to the east. And it has proportionally more large office towers. The inner and outer ring suburbs, such as Roseville or Maple Grove, would still be different from the two former hub cities.
The formulas for state aid to local governments are as complicated as the train schedule for the German army in 1914, which is said to have put many brilliant people in madhouses. And inherently there are consequences that seem perverse for property owners.
For example, if home values were to rise in St. Paul, the mil rate could fall. He wouldn’t pay more taxes on his house even if its market value skyrocketed. But if property values rose faster in St. Paul than in other places, we wouldn’t be such a poor district and Minnesota state aid would decrease. So local taxpayers would have to chip in more.
Such differences in property value changes also have effects within local government units. In recent years, house prices have risen almost everywhere, but not equally. The increase was much higher in desirable St. Paul neighborhoods such as Mac-Groveland, Highland and St. Anthony Park. The increase was much smaller in Frogtown or Payne-Phalen. So even if the total amount of tax dollars collected in the district as a whole does not change, property values in highly desirable neighborhoods will constitute a higher fraction of the total. The taxes paid by these neighborhood owners will increase.
There are also many misunderstandings about the differential effects of inflation. There is a popular belief that “the cost of living,” as determined by the prices households pay for goods and services, should be applied in some way to churches, condominiums, universities, and schools or other units of local government. . But the set of purchases that these institutions must make differs widely from that of consumers.
Natural gas prices have skyrocketed, largely due to the war in Ukraine. Gasoline spending for the St. Paul School District more than doubled in the last fiscal year compared to the previous two. Electricity costs, which now depend in part on the price of gas, increased by almost 40%. Combined, the increases added $4 million to 2022 outlays compared to the previous two years. And they will probably be higher in fiscal year 2023.
Concerned citizens should refer to some of the available information. The “Truth in Tax Hearing: Pay23 Lien Information” for SPPS is excellent. The “government price” tabulations published by the state also teach many people things they didn’t know. These reports and others are readily available on the Internet.
St. Paul economist and writer Edward Lotterman can be reached at [email protected]