Minnesota Rural Education Association

1. December 2011 Public Hearing on the 2011-12 Budget And Proposed 2012 Property Taxes Information on changes to school property taxes Minnesota Rural Education Association

2. The State Legislature and Administration; have the sole authority to create levy options for school districts. control levy parameters including equalization factors and various tax bases used for levies. establish the overall tax policy for the state including income and sales tax levels, property tax classifications and rates. Who and what impacts levies?

3. School District Officials; by participating in state education programs financed all or in part by levies. control whether or not to ask voters to approve referendums for general operations and major capital projects. Property Values; by increasing over the past five years, but not all classifications are increasing at the same rate. Student Enrollment; equalization factors are a function of district property wealth per pupil. As pupil counts decline a district’s wealth/pupil can increase and therefore reduce equalization aid from the state Who and what impacts levies?

4. The Minnesota Price of Government as a % of personal income has remained relatively constant over the past 10 years. It has varied 8% up or down from a median of 15.6% (data source, MN Department of Management and Budget, 2011) Minnesota price of government

5. Understanding property classifications is a key to unpacking changes in your taxes The Property Tax Classification is listed on the right side of your proposed property tax statement right below the Taxable Market Value Your 2012 classification and market value were sent to you in the spring of 2011. Nothing can change that now. Watch for your 2013 statement THIS SPRING and where you can appeal for pay 2013. Property Tax classifications

6. The state-wide values of property tax classifications have been increasing at different rates (data source: MN Dept of Revenue) Classification: Increase in State-Wide Market Value 2004-2009 Timber 130% Seasonal Rec Residential 100% Farms 67% Commercial and Industrial 49% (Median increase) Residential Homes 37% Apartments 18% Public Utilities 11% State-wide market Value increases

7. The relative differences are set in statute by Legislature and Gov. Property Classifications 2010 Average Property Tax Rate, Timber 0.51% Farm 0.58% Seasonal Rec 0.81% Residential Homestead 1.12% Apartment 1.50% Public Utility 2.73% Commercial-Industrial 3.24% (data source: MN Dept of Revenue) tax rates by Property classifications :

8. The Supreme Court of Minnesota held in 1993 that the Minnesota Constitution creates a fundamental right to a “general and uniform system of education” and requires the state to provide sufficient funding to ensure that each student receives an adequate education. • Since 2001 and Governor Ventura’s “Big Plan” the state has provided for this basic level of funding in two fundamental ways: • Providing 100% of the basic education formula • Using equalization factors for various property tax supported formulas intended to equalize the “tax effort” required of residents to provide for a basic education of the children of their community regardless of the relative wealth of the community which is defined as tax capacity per student. • In principle, this should work, but neither the basic formula nor the equalization factors have kept up with inflation and with increases in the market values of property classifications. Basic formula and equalization factors

9. Important Education Current Funding Formulas Buying Power From ten years ago, Basic Formula: 80%** From five years ago: All Equalization Formulas 67%* From fifteen years ago: Referendum Equalization 33%* From fifteen years ago Debt Service Equalization 30%* From ten years ago: Special Education Aid 55%** *Decreases that lead directly to property tax increases **Decreases that result in decreased educational opportunity or school board requests for referendum increases from school district voters (data source: MN Dept. of Education, Program Finance, 2011) Effects of inflation & market value increases

10. The 2011 Legislature repealed the Homestead Market Value Credit, (the homestead credit), and replaced it with a new Homestead Market Value Exclusion. The last year of the credit is for property taxes paid in 2011 and the exclusion begins for property taxes payable in 2012. The Effect of the 2011 special session What is a credit? A credit is a reduction in the amount of taxes due. What is an exclusion? An exclusion is a reduction in the amount of value subject to tax. The old law with the credit was as simple as: X – Y = Z If your initial tax was X, and your credit was Y, then the tax you had to pay was Z. Under the new law, an exclusion changes the initial tax amount (X), and with the credit gone, the new initial tax becomes the final tax (X = Z). Examples given at: http://taxes.state.mn.us/property/Documents/hmve-taxpayers.pdf

11. FOUR REASONS THE CHANGE FROM A TAX CREDIT TO AN EXCLUSION FOR LOWER VALUED HOMES RESULTS IN PROPERTY TAX INCREASES: 1) State money is no longer reducing total taxes. For 2012, the state was projected to pay approximately $260 million of local taxes through the credit program. With the change, there will be no state paid credit and the entire local property tax levy will be paid by local property taxpayers. 2) The reduction in taxable value increases tax rates. With the total taxable value being reducedby the exclusion, raising the same total levy as the prior year requires a higher rate. 3) The reduction in taxable value shifts the relative burdens of who pays. With homestead values reduced, other property types (and homes with higher values) pay a larger share of the tax. 4) The exclusion provides less benefit in low tax rate areas than the credit. The computation ofthe exclusion and credit amounts are roughly comparable where the tax rate is close to the state average, but in lower tax rate areas the excluded value provides less benefit. High rate areas may see greater benefit (Source: Minnesota Department of Revenue, 2011) The effects of the 2012 tax exclusion

12. Because state-wide, market values are increasing (median increase by classification: 49% over five years). Because equalization factors are not keeping up with market values, more burden is falling on local taxpayers. Because Basic and Special Education formulas are losing buying power, causing school boards to ask local voters for increases and renewals of referendum levies. Because as home values increase at a slower rate than commercial/ industrial and agricultural acreage, there is a shift in tax burden from town to farm in rural school districts. The 2011 legislature added to this trend with the change from a tax credit to shield lower valued homes (inhabited presumably by lower income citizens) from property taxes with an exclusion paid for by tax payers in other property tax classifications (Ag and C/I) and higher valued homes. But the exclusion doesn’t work as well as a shield as the homestead credit did, so even those taxes are increasing. Summary: property taxes are increasing:

13. Let legislators and leaders of all three major Minnesota Political Parties know that all forms of revenue need to “be on the table” to fund quality governmental services at the local level (Schools, Counties, Townships and Cities). Take this message to the political parties’ precinct caucuses and stay in the process to the nominating conventions to hold candidates accountable before their nomination and after their election, regardless of their party. This is truly grassroots democracy. It begins February 7th 2012 at 7:00 pm. Find your precinct caucuses for your party of choice at their web site. What can I do as a taxpayer?

14. Did we pass an operating referendum? Did we pass a bond issue? Did our district utilize the newly created OPEB levy / GASB 45? Did our district’s property wealth per pupil increase this year? Did our enrollment decline? If so, did our district fall below an equalization factor for a levy we use? (Operating Capital, Equity, Debt Service, QComp, etc.) Did something happen for a specific class of property such as public utilities in my district that affected property taxes? See equalization values on charts on next two pages…. What about My District?

15. Equalization Factors for Adjusted Net Tax Capacity Levies

16. Equalization Factors for Referendum Market Value Levies