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Property taxes and property valuesHow are property values and property taxes related?With the recent public hearing on the tax levy and budget, property owners in Bloomington may have questions such as: 
This page explores the relationship between property values and property taxes, both within a community and when comparing communities.
Relationship between property values and property taxesMinnesota's property tax system is rather complex – see this Minnesota Property Tax System chart (286KB PDF) for a graphical overview of the system. Fundamental to understanding Minnesota's property tax system is that a property's value does not directly determine the amount of taxes that its owner will pay. Rather, the property value represents that property's proportional share of the jurisdictional levy of which it is a part. Imagine that the the property values in a Minnesota jurisdiction were to all double or all fall by half at the same time. In either case (with the levy remaining the same), the number of dollars each owner pays in property tax would remain unchanged, because each owner's share of the overall taxes would be unchanged. Methods for comparing property taxes in various communitiesVarious methods for comparing property tax rates have been used. Bloomington published one such chart that was distributed to property owners with Hennepin County's property tax statements. What is the best way to compare property tax levels in different communities?A variety of methods are used. Here are three common approaches:A. Property tax/tax capacity ratesIn this approach, the same property value is used to compare tax rates across several communities. The use of the League of Minnesota Cities’ (LMC's) Property Tax Calculator is an application of this approach. But, as noted in the previous section, a particular property’s taxes are a function of its value as a relative share of the taxing jurisdiction's tax base. This makes comparisons of property tax rates for properties in different jurisdictions of questionable value, because (1) similar homes in different communities may have different values, as noted below; and (2) various property tax aids have different effects in different communities. A closer look at cross-community comparisons When it comes to using the same property value to compare tax rates across several communities using the LMC data, it could be assumed that one property would have the same value in each of the communities that are being compared. We can test the validity of this approach by comparing two nearly identical houses, one in Edina and the other in Bloomington.
Though the properties are very similar, they show a significant difference of $194,800 for 2010 market value, with the Edina property valued about 88% higher than the Bloomington property. Likewise, the property taxes show a big difference, with the Edina home's 2011 property tax about 78% higher than the Bloomington property's. On the flip side, looking at two homes valued at approximately $221,000 in each community, there is a marked difference in what you get for your investment in each home. The League of Minnesota Cities' website is designed to allow a calculation of local city taxes based on any property value that is entered and then it allows a calculation of local taxes for several cities for multiple years. While this website allows you to calculate local taxes, it does not make the comparisons valid to determine total city property tax-related costs across communities or years. The following information was provided by Gary Carlson, League of Minnesota Cities. The League of Minnesota Cities’ Property Tax Calculator provides an accurate property tax calculation for the city portion of the tax bill for a specific property valuation based on each year’s actual city tax rate. The overall tax calculation (for the combined city, county, school and special district levies) for a property may reflect weighted school and county tax burdens if the city is covered by more than one school district, more than one county or more than one special district. The League’s Property Tax Calculator may be of limited use if the goal of the user is to directly compare city budgets or to measure the city’s efficiency or effectiveness relative to a group of cities. This is due to several important factors:
B. Per capita expendituresAnother approach is to compare per capita expenditures from one community to the next. While this may be somewhat relevant if both communities are all single-family residential, this approach fails to take into account differences that enter in when communities have a very significant commercial-industrial base. Nor does it reflect that the majority of property tax costs of city services are a function of a house being on the property and not the number of people that live there. Commercial-industrial uses result in additional costs to provide services, but they do not add to the population used to allocate the additional costs. A community with a significant commercial-industrial base (such as Bloomington) may actually have lower single-family residential costs than a community without such commercial-industrial activity – although this would not be apparent in a per capita comparison. C. Cost of City servicesThe most accurate approach to compare property taxes and related aids is to determine the cost of city services that the typical single-family property taxpayer pays in each of the communities being compared. In the next section, five different comparisons illustrate this approach. Determining the tax burden for the typical taxpayerTthe City's cost to deliver services to a single-family home in the community is based on a single lot with a house on it, regardless of the house's value.
If city property taxes were based on this cost approach, the taxes would be the same for all single-family properties in the community. That they are proportional to property value is a function of the Minnesota Property Tax System for a variety of reasons, and is therefore the basis for the League of Minnesota Cities property tax calculator. The Measurement of Central Tendency can have diferent meanings including mean and median:
Given the complexity of the Minnesota Tax system, the City uses several methods of central tendency, not to confuse but rather to determine if there is one that differs from the others. Given that all five of these community comparisons correlate well with each other, attest to their greater comparative validity across communities. Here, then, are five ways to compare property taxes and related aids to determine the cost of City services that the typical single-family property taxpayer pays in each of the communities being compared. 1. Cost of property tax to an average household for city-related servicesThe following chart, included in the informational insert that came with your 2011 Property Tax Notification, is based on the average household city property tax cost (which includes both single- and multiple-housing units). This tax cost is adjusted to take into account not only property tax costs but property tax-related aids such as Local Government Aid, Market Value Credit and Fiscal Disparities. Without those aids the cost would be all property tax as shown in the graph.
2. Cost of property tax to a median value home for city-related servicesTo provide a valid comparison that approximates the property tax cost of service delivery, the following graph compares the median value, single-family home in each community. The median value home is taken as representative for the comparable burden across the community. Like the first graph, this graph has been adjusted for property tax aids including fiscal disparities.
3. City tax on median value home – NOT adjusted for property tax aidsThe two comparisons above (average household and median, single-family household) were adjusted for property tax aids. The following five-year comparison shows the results when not adjusted for such aids.
4. Average single-family city tax share comparisonWhile one can explore the various ways to compare on a value basis across the community, perhaps the clearest way to determine the city tax burden on the single-family homes in a community versus the tax burden in another community is to:
This yields the average amount of taxes paid by each of those homes, which equates to the individual cost in terms of property taxes for each of those homes. (Homes of greater value than the average home pay more and those with less value pay less – a function of state law, not of the property tax cost for serving each of those houses.)
The above five-year chart shows that the total derived from this method yields a higher average amount than for the median single-family home. This is a function of the home value distribution in the various communities. Nevertheless, it yields a similar comparative result to the median value approach. While not adjusted for property tax aids and including only single-family homes, the method also yields a ranking similar to the result shown on the chart that came with the Hennepin County tax statements. Why does a comparison using a single dollar value across multiple communities for several years yield a different result from the above comparisons? This is because such an approach does not account for the following factors:
Summary: Finding a valid measure of tax burdenThe five different comparisons shown above are:
All five of these community comparisons correlate well with each other, attesting to their greater comparative validity across communities. If property taxes were apportioned on the basis of the average single-family city tax share, spread equally across all single-family properties in each community, then all single-family properties in Bloomington – regardless of value – would have lower city property taxes than every other single-family home of the same value in any of the communities except Plymouth and Brooklyn Park between 2005 and 2007. (Both of these cities are newer communities and their infrastructure is just now beginning its renewal; as the cost of maintaining their infrastructure rises, it is reasonable to expect that their tax levels will also rise.) As such, the comparisons offered here accurately reflect the average city property tax burden within each community. If Fiscal Disparities did not exist, Bloomington’s would be 15% lower than the average city tax shown. Frequently Asked Questions
Further information
For more information, contact:
Lori Economy-Scholler, Chief Financial Officer
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