Tax bite deepens as home values fall

11/25/2007

Minnesota is phasing out a program that shielded many homeowners from big property tax increases during the housing boom.


By Pat Doyle, Anthony Lonetree and Steve Brandt,
Star Tribune
November 25, 2007


Many Minnesota homeowners are learning that their property taxes are expected to rise even as the housing market slumps, a reflection of rising city costs, lagging assessments and a changing system that gave a break on taxes in previous years and is producing a burden now.

The system, called the limited market value program, was created by the Legislature in 1993 in an effort to protect property owners from the tax impacts of sharp increases in property values.

The program was supposed to end after 2001, but the Legislature feared that doing so in a hot housing market would sting homeowners with sharply increased property taxes.

Instead, it began phasing out limited market value with the goal of ending it in the 2009 assessment year.

But the phaseout, combined with a sharply slumping housing market, is creating especially jarring variations in proposed taxes this year.

"You're going to have people on the same block, some of whom will have a big increase in taxes and others who will have little increase or a decline," said Matt Smith, an authority on taxes for the city of St. Paul.

Many of those expected to be hit with steep tax increases are feeling the impact of the phaseout of limited market value. The system slowed the growth in the taxable value of properties when home prices were skyrocketing. Now that previously unrecognized value is showing up on tax notices, along with higher taxes.

The phaseout means that a home's taxable value can rise each year to equal an ever greater portion of its actual market price -- a process that will continue until the two are identical. By 2009, all properties must be at their full market value for tax purposes in 2010.

Combined with the swoon in the housing market, the result in some cases is that a home's taxable value can continue climbing while its market value falls, particularly among homes that jumped most in value in earlier years.

In Minneapolis, the owner of a typical medium-priced home whose market value rose during the housing boom but flattened over the past two years could see a 12 percent increase in city property taxes. Meanwhile, the owner of a less expensive home that increased less in price before leveling off might see a 1 percent decline.

In St. Paul, most homes can expect to see increases of between 10 percent and 20 percent. But single-digit increases are expected in about a third of the city's planning districts, and median-valued homes in the St. Anthony Park neighborhood are likely to see a 4 percent tax decrease.

'It seems odd'

Such disparities and confusion over the taxation process have frustrated some homeowners who recently received estimates of their 2008 taxes in the mail and found increases that surprised them.

"When you have your taxes not performing what the market is doing, or what your house is worth, it seems rather unreasonable," said Brent Nelson, 33, of Minneapolis.

Nelson bought his home for $235,900 in 2005, near the peak of the housing boom. But in the past two years the home's market value has remained at $242,000. Meanwhile, its value for tax purposes rose from $191,400 to $220,100, still making up for limits placed on it during the boom years.

Nelson is looking at a 16 percent city property tax increase at a time when some of his Whittier neighbors are dropping prices on homes they're trying to sell.

"It seems odd that it's going up that quickly," he said.

Another problem is that taxes payable in 2008 are often based on property values as of 2006. So some bigger-than-expected tax bills don't reflect the continued slowdown in the housing market through 2007.

'Crazy' in the suburbs

Suburbs aren't immune to the confusing effects of the phaseout of limits on taxable values. Woodbury even devoted part of a recent newsletter to warning homeowners that some will experience "sizable jumps in their taxes as more of their property's value gets taxed each year."

The city cited one home where the market value declined from $217,200 to $209,000, but the taxable value jumped from $189,300 to $209,000.

"Even though the value of the property went down, their taxes are going up," said Julie Lehr, a spokeswoman for the city. "Crazy."

Lehr predicts that phasing out the limitations on valuations will prompt calls to city officials. "This is going to be the question: 'My property value is going down, why are my taxes going up,'" she said.

But many Woodbury residents won't be affected by the phaseout because their taxable values over the years kept pace with their market values. City property taxes on the average-valued home -- $304,000 -- are expected to rise just $6, due in part to growth in the overall tax base.

In Minnetonka, about 70 percent of homeowners will see a decrease despite a slight increase in market values of the average residence. Rising commercial values also have shouldered a greater portion of the city's tax burden.

Of the homeowners who will see an increase, few will be greater than 6 percent.

In most such cases, said Merrill King, city finance director, "You either have a home that has a pent-up limited market value that's catching up, or you've got this lakeshore property that's going to increase in value regardless."

Even properties in particularly distressed areas didn't necessarily escape increases.

"I was thinking, 'How could my taxes go up when the value of my property has gone down?'" said Randy Williams, 51.

The market value of his north Minneapolis home dropped from $113,500 to $109,500 -- a decline he feels still lags the real fall in neighborhood prices. But the value for tax purposes rose from $91,000 to $104,600. As a result, his city property taxes are expected to rise by 19 percent.

The market value of Williams' property might more closely track the recent housing downturn when 2008 assessment notices are sent out early next year. Minneapolis officials say the notices will likely show values sagging in the foreclosure-battered North Side, while growing 3 percent to 4 percent near the city's lakes and waters.

"It's a flatter market than we've seen in years," said city assessor Patrick Todd.

Property taxes are just one slice of a local government's revenue pie, so a change in an individual homeowner's taxes often doesn't match with government budgets. The budget recommended by Minneapolis Mayor R.T. Rybak is up 2 percent, and its property tax levy, which includes money from commercial, industrial and apartment buildings, is up 8 percent.

Like St. Paul, Minneapolis can generally expect to see heftier increases in tax bills than suburban areas next year, Hennepin County Assessor Tom May said, because the cities saw some of the sharpest increases in home prices in recent years and now those values will be reflected in tax bills.

Estimates show taxes dropping or staying the same in about half the households in Arden Hills, Little Canada, Mounds View and North Oaks. Bloomington would have seen a slight drop, but because of a voter-approved school levy, taxes on its median-valued home are expected to rise 1.2 percent.