Recently there has been some attention paid to the omnibus tax bill that was signed into law by Gov. Dayton. Included in the bill were changes to revamp the current Market Value Homestead Credit (MVHC) program with a new Homestead Market Value Exclusion (HMVE) program.
There has been discussion that this change will result in automatic property tax increases. I disagree with this claim and would like to explain the rationale behind the change, as well as clear up any misconceptions you may have heard about the change.
The main reason for this change was that our state’s budget simply could not afford the current broken system any longer. In fact, the state had only fully reimbursed local governments in one out of 10 years the credit has been in existence. This lack of full funding caused a great deal of uncertainty for local governments. With the change, the prior underfunded credit will now be replaced by the Homestead Market Value Exclusion (HMVE). This new system is structured to give homeowners a similar benefit compared to the old credit, with the benefit going directly to the taxpayers.
The new program (HMVE) begins in 2012 and is modeled after the method used in most other states that provide a homestead benefit.
The HMVE provides for a portion of each home’s market value to be excluded from its value for property tax calculations. The amount of value excluded is directly proportional to the amount of credit the home received under the old Market Value Homestead Credit (MVHC).
The new system allows for the elimination of the MVHC without a significant increase in homeowner property taxes by having all types of property share the burden of providing the tax relief to homeowners. Effectively, the cost of the formerly state paid credit is now shifted relatively evenly among all property taxes (including homesteads).
The change received strong support from a large group of local government associations during the legislative session. The League of Minnesota Cities, the Association of Minnesota Counties, the Minnesota Township Association and the Minnesota Inter-County Association all testified in support of this reform during public testimony on the omnibus tax bill.
The reason I disagree with the claim that the change will result in automatic property tax increases is because I believe it is up to local government officials to decide how much spending is needed to balance their budgets. Property taxes are local and during these extremely difficult economic times, our local officials have been reexamining spending priorities. This is no different than what the Legislature did to close a multibillion-dollar budget deficit, and very comparable to what families and businesses have been doing throughout Minnesota.
With this change, the state achieved budget savings of $365 million for the current 2012-13 biennium and $538 million for the 2014-15 biennium. Additionally, we will see more spending accountability and transparency at local levels, direct relief to taxpayers and homeowners, and more certainty during the budgeting process.
Since the new homestead exclusion is calculated on the front end — when tax rates are set — there is no reimbursement to local governments. The local governments will receive the full amount that they levy and there is no possibility of a shortfall in levy receipts due to the state not reimbursing local government for the homestead credit.
An additional reform-based provision included within the omnibus tax bill was the $30 million expansion of the homeowner property tax refund program, which provides direct relief to homeowners whose property taxes are high relative to their incomes. Low- and middle-income taxpayers will now be able to capture more property tax relief through this program directly instead of through local government aid programs.
I hope this is helpful in explaining the changes that were made to the homestead market value credit.