Minnesota Property Tax – A Primer

Why Minnesota Property Taxes Go Up or Down

At the most basic level, property taxes are levied by Local Government Units, (LGUs) against the assessed value of the property in that district to pay for local services. The costs of government are tallied up and then spread against the dollar value of all of the properties in that district. In a perfect world, even if the value of property in the district increases but the costs of services remain constant, property tax bills would not increase.

But this is not a perfect world, and over time the system has changed from the days when the value of a person’s real property was linked to both to the amount of services they used and their ability to pay the tax.

Today local services are funded by an an incredibly complex mix of local property taxes and state aid to local governments for specific services like education, and credits to specific classes of property. If state aid decreases or local costs rise, property taxes will rise.

An individuals property tax bill can also increase if there is a shift in taxes within a taxing district. For instance if one class of property increases in value more than other property classes, the tax burden within that district will shift onto the properties with the faster rising assessed values. Also, Districts with a high property tax base, for instance areas with a lot of Commercial Real Estate could fund services like schools much more easily than districts with a low property tax base, for instance rural areas with a lot of public land within their district.

The Minnesota Miracle to Increase Fairness and Lower Property Tax Burden on Local Governments

In the early 1970s, faced with rising property tax rates in the state, the Minnesota lawmakers created a new way to equalize property taxes by sharing state dollars across districts. The Minnesota miracle was a lifeline to rural communities and ensured the Minnesota’s school children received a good education no if they lived in the city or a small town. When the Minnesota Miracle was enacted, the state paid supplied about half of the funding for a town like Bemidji. In 2003 these Local Government Aid payments were tightened in order to meet a budget deficit without increasing other forms of tax. Today a town like Bemidji receives about 35% of its funding in state aid.

In the years since 2003, the cuts to Local Government Aid have continued. Local governments have responded by by tightening budgets, cutting services and, raising property taxes. But as baby boomers retire, and their demand for services increases, many rural communities will be unable to continue funding the services citizens need.

Solutions to Rising Property Taxes

After 50 years of declining revenues, most communities have little that they can cut. But many communities, particularly in lake rich areas of the state that have a tourism economy, the Legislature can allow local governments to enact local sales and lodging taxes, a power that many communities have already received.

The Minnesota Legislature can decrease property tax pressure by increasing Local Government Aid:

If the Minnesota Legislature increases the state’s investment in schools, for instance, local governments can lower their levy and property taxes go down, even if the assessed value of their property has increased.

The Minnesota Legislature can decrease property taxes by lowering the Class Rate or Providing a Market Value Exclusion:

The Minnesota Legislature sets different property tax rates for different types of property. Generally, personal property has a lower property rate than income producing property. 

Over the years Legislators have targeted Market Value Exclusions towards farmers, veterans, lower valued homes, blind/disabled property owners, senior citizens, and owners of “open lands” threatened by development pressure.

Homesteads, for example, receive a “market value exclusion” on the first $413,800 of value. Other market value exclusions include the “Green Acres” for farm land and the “Disabled Veteran’s Exclusion”. 

Property Tax Relief for Lake Home and Cabin Owners –
Some Background

Undeveloped lake shore property and cabins receive no direct market value exclusion. Escalating property taxes on shoreland is not only a fairness issue, it is also a water quality issue as property owners are forced to sell or subdivide sensitive shoreland lots due to rising property tax pressure.

Starting in 1993 MLR worked to depress the tax rate on cabins until today it is the same as a homestead, 1%.

MLR also worked with partners to create the Managed Forest Class for undeveloped lakeshore property that meets the requirements of the program, but this is only available to properties over 20 acres.

For some years we have been advocating for a Sustainable Lakeshore Incentive Act that would provide a benefit for natural or restored shoreline. Property tax pressure is forcing shoreline property owners to sell or subdivide sensitive shoreland lots. Minnesota spends over $250 million a year trying to protect and improve water quality while at the same time property tax policies ensure that those efforts will fail. In 2000 the average size of a seasonal lot was 78 acres. After the real estate boom of 2007, and the subsequent rise in property taxes, the average size was less than 40.

In 2017, Minnesota Lakes and Rivers Advocates published the MLR Lake Home and Cabin Ownership Study.

  1. Lake home and cabin property owners in Minnesota are aging. We can expect a dramatic change in ownership in these properties in the coming decade.  Minnesota lake home and cabin owners have an average age of 68 years. In 2005 the average age was 62 years. In 1999, the average Minnesota property owner age was 58.
  2. 98% of seasonal properties have homes, cabins or trailers on their property. 29% are not winterized nor inhabited during the winter months. Some properties have a home and a summer cabin, or multiple cabins, or a home and multiple cabins for rental income.
  3. Average length of seasonal property ownership is 34.6 years. Of respondents, the longest ownership of a cabin or lake property in one family was 104 years. The shortest time was two years. These places are heirlooms, not assets.
  4. 72% purchase their seasonal property for recreational and retirement use while 20% of seasonal property owners inherited their property or purchased it from a family member. 8% of respondents purchased their property as an investment. 2% sell their property to make a profit.
  5. 11% of the property owners are considering selling their property or an additional cabin on their property over the next three years because it is no longer affordable for them to keep their property citing upkeep, taxes and maintenance. 
  6. 56% of Minnesota lake home and cabin property owners occupy/utilize their properties, on average, only 91.3 days per year.

In 2022 Minnesota has an estimated $9.2 billion surplus and $1.9 billion of unspent American Rescue Funds from the federal government. The state is forecasting another $6.3 billion surplus in the 2024-2025 biennium. Both the MN House and the MN Senate have released their proposed Omnibus Tax Bills. The Minnesota House Omnibus Tax bill provides $3 billion in targeted income tax relief and significant investments in infrastructure, programs and funding for local services.

The Republican controlled Senate chooses instead to make sweeping investments in income tax relief. For instance the MN House reduces income tax on Social Security by $114.2 million while the Senate Bill eradicates them altogether.

In the next month they will meet in conference committee to combine these two bills into one conference committee report and go to Governor Walz for his signature or veto.

The House and Senate proposals are very far apart. For instance the Minnesota Senate invests $30 million in new education funding and the Minnesota House invests $1.2 billion. The Senate Tax Bill reduces the first tier income tax rate from 5.35% to 2.8%.

Proposed Legislative Actions

MLR is calling on the MN Legislature to take one of the following actions, or a combination, to reduce the pandemic induced property tax increases:

  1. Increase funding for Property Tax Refunds, Aids & Credits. MLR supports the House proposal to provide $1.2 billion for education. This funding will significantly reduce the pressure on levies to fund local schools.
  2. Cap Market Value Increases for property at 8%.
  3. Provide short term property tax refunds for properties that have market value increases over 8%.