Minnesota Property Taxes Explained, Part 1: What are Property Taxes?

It’s budget season in Minneapolis, and the rest of the state. This is a complex process, but the question on everybody’s minds is “how will my property taxes be impacted?” A simple question with a rather complicated answer. Hopefully I can shed a little light on it. In this first part of a planned three-part series, I’ll start off by explaining generally what property taxes are. In the second part I’ll take a deep dive into how exactly property taxes are calculated. Then finally, in the third part I’ll try to explain some of the policy implications of our current property tax system. So let’s start at the beginning.

What are property taxes?

Property tax is a tax based on the value of certain kinds of property. In the case of Minnesota, it’s land, the structures on that land, and for utilities, the equipment on the land as well. This is sometimes known as “real property,” a legal term going back hundreds if not thousands of years. Property tax is not a tax against other kinds of property, like money, or cars, or clothes, or things like that. In Minnesota, local governments like the city, county, school district, and other special service districts are funded with property taxes. For example, my house in Minneapolis is taxed to pay for the City of Minneapolis, Hennepin County, Minneapolis Public Schools, Hennepin County Regional Rail Authority, Metropolitan Council, Metropolitan Mosquito Control District, and the Middle Mississippi Water Maintenance Organization. For many levels of government, however, property taxes are not the sole source of revenue. Minneapolis, for example, only gets about a quarter of its revenue from property tax.

In Minnesota the method of calculating property taxes and how different properties are impacted by property tax is dictated by state law. Local municipalities have no power to tax different types of property differently to accomplish policy objectives; that power lies exclusively with the state, and all property in the state is taxed using the same method.

What is a property tax levy?

The levy is simply the real number of dollars that need to be collected. For her 2017 proposed budget, Mayor Hodges has proposed a 7.6% increase in spending over the 2016 budget, which would require a 5.5% increase in the city’s property tax levy. That doesn’t mean everybody’s taxes go up 5.5%, it just means the city needs to collect 5.5% more dollars in property taxes than last year.

How does the property tax levy turn into my tax bill?

Once a jurisdiction has decided how much money they need to collect in property taxes, they can start to figure out how much to charge each propertyinline-image-taxes

This is where it gets complicated. Minnesota law lays out a method of calculating the something called the tax capacity of each individual property (I’ll explain tax capacity in more detail in part two). Adding up the tax capacity of every single property in a jurisdiction gives that jurisdiction’s total tax capacity. The property tax is levied (or imposed) against this total tax capacity to determine the tax capacity rate. This tax capacity rate is then multiplied by the tax capacity of each property to determine the property tax bill for each property.

As a simple example, let’s say that a jurisdiction needs to collect $250 million in property taxes, and their total tax capacity is $500 million. They would divide the amount of money they need ($250 million) by their total tax capacity ($500 million) to get a tax capacity rate of 50%. Then, each property would have its tax capacity multiplied to 50% to determine the tax bill.

Now a real world example. In 2016 Minneapolis had a tax capacity of $454,641,259 (First line, under column “Adjusted Net Tax Capacity”). In 2016 the tax capacity rate was 62.437% (Again first line under Tax Capacity Rate column). Multiplying these two numbers gets you $283,864,362, which is very close to the 2016 city budget for property tax revenue of $288.3 million (page 26 of the file, listed as page 61 on the page, at the top of the page). The actual number given by the city $297.6 million, but this includes a $9.3 million levy directly against the market value of property in the city rather than against the tax capacity. They also are counting other things in their budget, such as Teacher’s Retirement Funding, which is actually a separate special taxing district with a tax capacity rate of 0.50%. Additionally, they use a slightly different number for tax capacity for the city ($454,776,821, given 2 pages after the revenue in the city document). I point this out to make note of the fact that it is all so confusing that even the different levels of government can’t 100% agree on every single number.

Would you like to know more?

Now that I’ve covered property taxes generally, check back later this week where I’ll take a deep dive into the math, as well as answer exciting questions like “What is tax capacity?” and “What is taxable market value?” And if you have any questions, leave them in the comments and I can try to answer them.

Thanks to Daniel Choma for the graphics for this article.


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4 Responses to Minnesota Property Taxes Explained, Part 1: What are Property Taxes?

  1. Bill Lindeke
    Bill Lindeke October 25, 2016 at 9:29 pm #

    tantalizing and suspenseful!

  2. James Warden
    James Warden October 26, 2016 at 12:47 pm #

    Great series! I couldn’t begin to count the number of times during the housing crisis that I heard someone say, “Why did my taxes go up if my property value went down?” (usually with some comment about big government).

    • Peter Bajurny October 26, 2016 at 2:06 pm #

      I think Minnesota’s complicated property tax system is partially to blame for uninformed simplistic media coverage of property taxes, which results in citizens having uniformed simplistic views on property taxes, but I’ll cover that more next week in Part 3 🙂

      • James Warden
        James Warden October 26, 2016 at 3:30 pm #

        I agree totally. I wonder, though, if that isn’t offset by the downsides of a more-straightforward millage system. A levy system should theoretically be less volatile than a strictly proportionate system, which would allow for better fiscal planning. One could argue that this allows government to continue growing even when the economy slows. But this also discourages unsustainable spikes in spending when the market surges. Those spikes can also lead to political pressure for caps on property tax increases that eventually cause similarly valued homes to pay widely differing amounts. My personal inclination is that the system we have is the least bad option, although I’d much prefer cities have more freedom in choosing what kind of taxes they have. But I wholeheartedly agree that it has a host of complications, not least of which is making it harder for residents to understand their government.