The Difference Between the Tax Levy and Taxes Levied, and Why Wellstone Was Right

Minneapolis city budget negotiations this year sparked a public conversation about city finances and the details of budgeting. There was one piece missing, however, from the public conversation. It is the difference between the tax levy and the taxes levied. The former is the targeted budget set by the city. The latter is the method to reach that target. The difference between the two does make all the difference.

First, the levy. Each year the city sets a budget. The city decides how many new firefighters the city will hire and the number of bike lanes built. The city adds up all the services and infrastructure improvements to arrive at a grand total, the budget. The city then must raise the funds for that budget. Some of it comes from state and federal dollars and the largest share being from user fees (like garbage and recycling).  Another major source of funding is property taxes. That’s called the tax levy. It is the total amount of money set to be raised by the city through property taxes in a year. It is one big number; in 2014 it was $281.7 million. (See this interactive graphic for information about the 2014 total budget and its funding sources). The tax levy does not tell us about how and from whom the funds will be raised. It is simply the total amount to be raised by taxing the value of all properties in Minneapolis. Ok, that’s the tax levy.

Next, the taxes levied. Once the budget is decided and the tax levy set (the total budget), taxes are levied. The taxes levied on an individual property do not rise at the same rate as the tax levy; this is true for a couple of reasons*. First, new properties can be built in the city which increases the value of the total property in the city. This in turn lowers the taxes levied on each building, new and old. The second reason, the relative value of individual properties can change within the city. The effect of each on taxes levied will be explored in turn.

Property tax distribution 2015The construction boom in 2014 can help explain the first case. Throughout the city thousands of buildings were built. New single family homes, office buildings and apartment towers were built, totaling $2 billion dollars in value. This is a 2.4% increase in value of property in the city from the year before. This means there is that much more total property value which can share the cost of the tax levy. It is part of why 56.7% of property owners who have not made improvements to their home will see a decrease in the taxes levied on their property. The same thing can also be explained with a couple bags of M&Ms.

Imagine you have 4 friends; 3 friends each have a one bag of M&Ms and the 4th with no bag. Your friend without a bag of candy could use some cheering up, so you offer him 20 M&Ms, 5 each from you and your 3 friends. Along comes another friend, Felicia, who has a bag of candy too. She offers to also donate some M&Ms. Now with 5 friends, each person only needs to give 4 pieces. Sharing becomes easier with more friends.

Back to cities and not candy. When new buildings are built there is new value added to the city. This reduces the proportional contribution of property taxes by already existing properties. This means that when the whole city does better, we all do better.

Not all properties will see a reduction in taxes levied, however, because the amount of taxes levied also depends on the distribution of property values. Let’s return to the M&Ms. In the above example all the friends had the same sized bag of candy. Suppose instead one friend had a king sized bag as large as the other bags combined. That friend could have donated half the needed M&Ms. Property taxes are similar. The relative contribution of the value of a property to the city’s total also influences the taxes levied. Suppose the tax levy stays flat; from year to year the city needs to collect the same amount of money on properties in the city. A change in the relative value of a property will change the taxes levied on that property. If the value of a property grows slower than the city average, its relative value goes down and its taxes levied would go down. If the value of a property grows faster than the city average, its relative value goes up and its taxes levied would go up. This shows that sharing prosperity means we can share in the support of the city.

It is the interaction between these factors that show the wisdom of Wellstone’s old adage that “We all do better when we all do better”. We all live better when we expand opportunities so more neighbors can share our sidewalks. New neighbors and new homes spread the cost of the city to more people. We all live better when inequality is reduced because we can all contribute to the city we love. Our city does better when we all do better.

*There are many reasons, but these often only cover a small number of properties and are not part of the larger trends.

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4 Responses to The Difference Between the Tax Levy and Taxes Levied, and Why Wellstone Was Right

  1. Matt Steele February 24, 2015 at 11:57 am #

    Thanks for writing this. As for me, I usually refer to “property tax incidence” or “average property tax incidence.” Thus it becomes clear, yet accurate, to say that while the city property tax levy was increased for next year, the “average property tax incidence” will decrease in Minneapolis. Granted, that still doesn’t clear it up for many people. But once we note that property tax incidence is the actual dollar amount paid by a property owner, things become much more clear.

    “You mean you can raise taxes, yet all else equal everyone’s taxes can go down?” Property taxes are a funny thing. Thanks for helping to clear up some misconceptions.

    • Alex Schieferdecker
      Alex Schieferdecker February 24, 2015 at 1:14 pm #

      I’d side with Elliot in the terminology here. Simpler is better in this case.

  2. Linea Palmisano February 25, 2015 at 11:00 am #

    Thanks Elliot, for an easily consumable explanation of city taxes. I will be referencing this article the next time I am asked to explain it as you did a great job!

  3. Thomas Mercier February 25, 2015 at 11:36 am #

    I’m always amazed at folks’ (journalists, elected officials, etc.) fascination with the average homeowner’s increase in taxes. There are so many factors in play that this isn’t a good representation and with everyone’s experience differing from the publicized average I suspect it might contribute to a general distrust of government taxation.
    And this doesn’t even really touch on the fact that commercial properties often bear the largest burden in property taxes and how that often soften’s the blow on residential taxes vs the tax levy.

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