Thursday, September 22, 2011

Analysis: MVHC elimination supported by League of Minnesota Cities marks the end of a recurring shell game

Over the past few weeks, there has been extensive media coverage concerning the State Legislature’s discontinuation of the market value homestead credit (MVHC) program in favor of the new homestead market value exclusion. Moreover, reports about partisan arguments at the state level over who is responsible for the change have tended to overshadow the more important news about why the program was discontinued, and what this change will really mean for cities and for local property taxpayers.

When MVHC was created by the Legislature, the program seemed to provide a win-win situation for both local property taxpayers and for city governments. While property taxpayers did indeed receive a credit, the state consistently failed to make good on its promise to reimburse cities. Some cities have not received any reimbursement for the past several years; others have only received a portion of the amount needed to make them whole. This year, only about 15 percent of the reimbursement scheduled to be paid by the state to cities will actually be paid, meaning that cities are left with a significant budget shortfall if they budgeted to receive their entire reimbursement.

Given this history of unreliability, the League and other local government groups decided enough was enough. In order to stop the recurring shell game, the League took a position to support elimination of the MVHC program. This position was driven by a desire for more transparency and fiscal certainty. Had the state consistently honored its obligation to reimburse local governments dollar for dollar for the credit it gave to homeowners on property bills, this change may not have been necessary.

Under the new homestead market value exclusion law, these local governments will no longer be dependent on the state paying (or, more accurately, not paying) for part of its levy each year. Now local officials will be assured of receiving the amount they levy, and many homeowners will see part of the market value of their home excluded from taxation. The downside for city residents, of course, is that many of them will see increases in their next property tax bill.

While conversion to the new system may cause temporary confusion and shift the property tax burden to some extent, local governments will be better able to make budget and property tax decisions going forward and will be clearly accountable to their taxpayers for those decisions. Ultimately, that’s better for our cities and for local property taxpayers.