Property tax system needs reform, not quick 'fixes'

A decade ago, Minnesota legislators and business interests struck a grand bargain around property taxes.

It turned out to be something like this: Business property owners would pay a lot less, and homeowners would eventually pay more.

That's not the way it was sold, of course. The bill was hailed as the most meaningful property tax reform in 30 years, and one that would magically have everyone paying less.

Initially, it produced meaningful tax savings for commercial landlords and owners of more expensive houses. But plunging home values and sharply curtailed state aid to cities have only highlighted how utterly codependent local and state governments have become on a system that remains fundamentally messed up.

Raise your hand if your home values have gone down but your taxes have gone up, or if your city has closed neighborhood gyms and curtailed library hours -- but raised your taxes, too.

Raise your other hand if you can explain, in two sentences, why this is happening.

Cities and counties rely on property taxes more heavily than they ever have, in part because the state of Minnesota has cut back so sharply on local government aid. This matters because property taxes are also among the most regressive. What you owe is based on what the city or county thinks your property is worth, and the amount of money they need to raise -- not your income or ability to pay.

Lost your job? Not their problem.

Economists and tax experts say that one of the good things about cutting state aid to cities is that taxpayers get a clearer picture of the cost of government.

I'd endorse that thesis if it didn't depend on a system whose workings are so inscrutable.

For example, Minnesota has 55 or 56 different property classifications. Our closest pursuer, South Dakota, has 14. More than half the states have five or fewer classifications, and 11 have only one. Then there are the exemptions: The state statute identifying those more than doubled in the decade after reform.

Perhaps the best recent indicator of this complexity was that it took several months before homeowners and even some elected officials understood the implications of the Legislature's and the governor's decision to eliminate a credit that provided about $540 million in property tax relief each year.

That's the thing about complicated tax systems. They are inefficient and costly to administer. They obscure accountability and, worse, invite the kind of incremental changes designed to serve the interests of one group at the expense of another.

A bill introduced last week by some Republican legislators is the perfect example of the kind of piecemeal approach that leaves Minnesota's property tax system in worse shape, not better.

The measure would eliminate a statewide levy on commercial property that was an integral part of the 2001 property tax reform legislation that slashed the tax rate for commercial and industrial property in Minnesota.

By and large, this was a good thing. Minnesota's tax rates on apartment buildings and commercial and industrial property were among the highest in the nation. It discouraged expansion and investment, and it meant that business property owners were deeply subsidizing homeowners, insulating them from the true cost of government.

To help pay for those cuts, Republican legislative leaders advocated establishing a new, statewide levy. The tax even had the support of groups like the Minnesota Business Partnership. The nonpartisan Minnesota Taxpayers Association supported the proposal, said executive director Mark Haveman, because "we felt the reforms addressed some significant issues in Minnesota's property tax system," including accountability and competitiveness.

Eliminating the measure would cost the state $800 million in revenue. Republicans propose paying for it by reducing a property tax rebate for renters.

No doubt, repealing this decade-old levy would improve Minnesota's standings in those rankings of states by property tax rates, but even the Taxpayers Association is skeptical that it would do much to create jobs.

Minnesota's property tax system doesn't need to provide relief for one particular group. It needs real reform, and our best hope for that may come from a working group of legislators, local elected officials, and business and homeowners. The committee is chaired by Kathleen Gaylord, a Dakota County commissioner, and it's been meeting for a year, trying to figure out ways to simplify the property tax system and make it more understandable. Its recommendations are due a year from now.

Until then, let's resist the urge to bolt on any more "fixes."

ericw@startribune.com • 612-673-1736