Tuesday, December 20, 2011

Legislators take note: State’s failure to honor its obligation prompted League support for MVHC elimination
By Jim Miller, Executive Director, League of Minnesota Cities

When State Representative Steve Drazkowski recently offered his perspective on cities’ responses to the Legislature’s action eliminating the market value homestead credit (MVHC) program in favor of the market value homestead exclusion system (Winona Daily News, December 8th) he conveniently glossed over the fiscal impact this change—approved by the Legislature, not city officials—had on local government budgets. He did further injustice to local officials by saying it’s “cowardly” for local officials to blame the state for property tax increases resulting from this change. Telling the truth is different than casting blame.

Under the MVHC program, many homeowners received a credit on their property taxes, ostensibly paid on your behalf by the State. If, for example, you were eligible for the credit and your total tax bill was $1,500, you might only have to pay $1,300 to your city, county and school district. In theory, the State then paid the $200 difference to those local governments; you received a credit thereby reducing what you paid, and the local governments collected every dollar they levied, most from you and some from the State.

Unfortunately, the program functioned that way only twice in its 10-year history. The State consistently failed in its commitment to reimburse local governments. While taxpayers continued to receive a reduction in their tax bills, local governments received only part—or in some cases, none—of the amount equal to the credit. In 2011, for example, out of every $1 of credit against the city portion of their tax bills that homeowners received, cities only received 14 cents from the state. The other 86 cents had to be absorbed by all city property tax payers—residents and business owners alike.

Had the Legislature honored its obligation by funding, dollar for dollar, the amount of the credit it gave homeowners, the League of Minnesota Cities would have supported keeping the old system. To their credit, legislators realized the program was broken and abolished it in favor of the new market value homestead exclusion program. Indeed, the League supported this change only as a way to ensure more certainty in the city budgeting process.

The conversion to a market value homestead exclusion system is more than merely a semantic change; it has significant, but not unpredicted, consequences for both taxpayers and local governments. In effect, while most homeowners who previously qualified for the credit will see a reduction in the taxable value of their homes to generally offset the loss of the credit, the state will no longer pay a portion of homeowner taxes. Beginning in 2012, the city’s entire levy now will be paid by all of its taxpayers.

Representative Drazkowski would have you believe resulting property tax increases in 2012 are caused solely by local officials. But, it is disingenuous, if not misleading, to assert the state’s action to take $261 million in property tax relief out of the system was not a major factor in property taxes increases for the coming year. City officials are not blaming the state and they certainly are not acting in a cowardly manner. They are simply recognizing the reality this change has had on their budgets, and they are now trying to educate their constituents on how these changes affect local taxes. Representative Drazkowski and other legislators should do likewise.