Key lawmaker says tax credit elimination is right decision

• It needed to be done

Greg Davids, chairman of the House Tax Committee, addresses an audience Tuesday in Willmar. Tribune photo by Gary Miller

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• Kandiyohi County, Minn., officials say residents to see tax hike

WILLMAR — The elimination of the homestead tax credit on property taxes will mean tax increases for most property owners but should be a more stable funding mechanism for counties and cities.

“It was the right thing to do,” said Greg Davids, chairman of the House Tax Committee, during a presentation Tuesday in Willmar to local elected officials, who’ve been struggling to understand the local consequences of changes made in the state tax bill.

The bill that was approved during a special session in July includes the elimination of the market value homestead credit, which gave a tax break to homestead property owners by lowering their gross taxes.

Under the old plan, the state was supposed to reimburse local governments for the total amount of money or credits that had been granted to property owners.

But during nine of the last 10 years, the state has failed to make good on those payments.

The city of New London, for example, was supposed to get about $35,000 last year from the state but actually got less than $5,000. One northern Minnesota town was supposed to get more than $1 million one year and only got $18, Davids said.

“The state was the most delinquent taxpayer in the state,” he said.

Because the state didn’t make good on its financial obligations, cities and counties have typically cut their budgets or used reserves to make up for the state’s reduced payments.

Now, Davids said, taxpayers won’t get a homestead tax credit but local entities will get all the money they levy from taxpayers.

The property taxes “will be kept local” said Sen. Joe Gimse, in comments after the meeting.

As a trade off to property owners, a portion of homestead property will be excluded from taxation. In essence, property values will be lowered on most homestead properties.

But that will create a reduction in the tax base and will trigger an increase in tax rates, according to information from the state Department of Revenue.

This means that non-homesteads “will pay a higher share of the levy” and a “large share of homesteads could pay more,” according to the revenue department.

Credit for agricultural land was not affected by the new tax bill.

Trudie Guptill, New London city clerk, said she’s concerned the tax rate there could increase as much as 20 percent. Because many New London homes already have a low value, she said businesses could see a big jump in property taxes.

“I don’t know how the taxpayers can handle that burden,” said Guptill.

Based on last year’s tax statements, it’s estimated Kandiyohi County property taxes will increase 6 percent just because of the new tax bill — even if the county’s levy remained unchanged from last year.

County Administrator Larry Kleindl said it’s important that the public receives information about the elimination of the homestead credits and understands why their property taxes will be increasing.

Kleindl said “the initial shock” will be difficult for some to handle when the tax statements arrive in the mail.

Davids said the elimination of the program was proposed by Gov. Mark Dayton, and had been requested by county and city leaders who were frustrated with the process of adjusting budgets because the state failed to provide promised tax credit reimbursements.

He said local governments should consider cutting budgets and using reserve funds to off-set the tax increase.

Local city and county representatives said they’ve been doing for years.

“We ate it,” said Kleindl.

This time, he said, property taxpayers will be affected personally.

Kandiyohi County Commissioner Dennis Peterson said taxpayers are going to see “a heck of an increase” on their county tax statement but it won’t be the county’s fault. “Maybe it’s not your fault either,” said Peterson, with a nod of appreciation to the task lawmakers had this year to balance a tough budget.

“It’s a transition thing,” said Davids. “In the long run it’ll work better.”

Davids said the tax bill includes other provisions that will be beneficial, including keeping local government aid and county program aid in place despite efforts by suburban lawmakers to eliminate it.

He said a reduction in maintenance of effort payments will also help local governments meet funding obligations and starting Sept. 1, townships will no longer be taxed for purchases.

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