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How Changes to MVHC Program Will Affect Cities

The Legislature repealed the market value homestead credit program, effective in 2012, and created a new market value exclusion for qualifying homes.
(Published Jul 27, 2011)

The recently enacted special session omnibus tax bill includes a number of changes to property tax aid and credit programs, but perhaps the one change that has generated the most questions from city officials is the repeal of the existing market value homestead credit (MVHC) system beginning in 2012 and the new market value exclusion for qualifying homes.

2011 Cuts
Before the MVHC program is eliminated for taxes payable in 2012, MVHC reimbursements due to be paid this year for cities and counties will be reduced. Essentially, the 2011 cuts in the reimbursement are an extension of the 2010 MVHC cuts. The language now signed into law states that “the reimbursement paid to each city and county . . . may not exceed the reimbursement payment received by the city or county for taxes payable in 2010.”

Unlike programs such as local government aid (LGA), where the state notifies each city of the precise amount it will receive (or is supposed to receive) each year, the MVHC credit/reimbursement allocation to each city, county, and school district is more complicated. Initially, the MVHC credit to the homeowner is computed as a reduction in the overall total property tax bill. However, that credit amount is ultimately allocated as a proportional reduction in the city, county, and school district taxes computed for that homeowner.

For example, if the city’s taxes for that homeowner are 30 percent of the homeowner’s tax bill, the taxes paid by that homeowner to the city will be reduced by 30 percent of the total MVHC credit. The state is then supposed to reimburse the city for that homeowner’s reduced tax bill through the MVHC reimbursement payments.

The allocation of the MVHC reimbursements among the local taxing entities cannot be computed until the property tax statements are processed each year and, therefore, the reduction in the city’s levy for the credit is not known until well after the levies have been certified in December. In fact, even though tax statements for 2011 have been distributed and the first half of property taxes have been collected, the state still does not have complete information from each county on the allocation of the 2011 MVHC reimbursement to each city, county, and school district. That final information is expected to be available from the Department of Revenue in the next couple of weeks.

Keep in mind that under the language in the new law, a city cannot receive more MVHC reimbursement in 2011 than it received in 2010. That is true regardless of whether the original computed reimbursement for 2011 increases or decreases. The table below illustrates how the computed cut can change from 2010 to 2011, depending on whether the city’s allocation of MVHC reimbursement increases or decreases.

In 2010, the example city experiences a $70,000 cut in its MVHC reimbursement under the state-imposed cut. If that city’s reimbursement increases in 2011, the reimbursement remains the same ($30,000) and therefore the cut increases to $80,000. However, if that city’s MVHC reimbursement decreases to $90,000, the cut would be reduced to $60,000.

For cities, this reduction for 2011 is estimated to total $48 million statewide while reimbursements to counties will be cut by $56.1 million.

Access estimates of the MVHC and LGA reductions from the Department of Revenue website

Please note that the MVHC reduction was applied to all cities that are still receiving MVHC, and that even cities under 1,000 in population, which were largely unaffected by the reductions in LGA, will experience MVHC reductions in 2011. The $48 million cut is in addition to a permanent $25 million MVHC cut that was enacted for more than 127 cities when Gov. Pawlenty’s unallotments were ratified by the 2010 Legislature. In summary, after the $48 million cut in the special session tax bill and the permanent $25 million cut to some cities enacted last year, for the 2011 tax year, only about $12 million, or 15 percent, of the actual reimbursement due to cities will be paid by the state.

As a result of the ongoing cuts to the MVHC program and confusion created when cities did not receive the amount of levy originally certified for collection, the League and other local government organizations supported the elimination of the program.

2012 and beyond
As indicated above, the entire MVHC credit and reimbursement program will be eliminated beginning with taxes payable in 2012. In place of the current MVHC program, homeowners will receive an exclusion of a portion of the market value of their house from property taxes. The exclusion is computed in a manner similar to the current market value homestead credit. However, the impact of the repeal of the existing MVHC program and the new exclusion will vary from community to community, depending on a number of factors, including tax base of the community and the local tax rate.

For cities and other local units of government, the elimination of the MVHC program will to a degree simplify and clarify the property tax process. No longer will a city’s (or a county’s or a school district’s) certified property tax levy be reduced by the allocation of the MVHC credit with a “promised” reimbursement by the state for the loss of property tax receipts. In addition, the elimination of the program will also provide cities and counties with a small cash flow advantage. Currently, the first one-half of the MVHC reimbursement is not paid until Oct. 31 each year. Under the new system with no MVHC credit and reimbursement, each city will receive those revenues as property tax payments that will occur with the normal property tax distribution process, which will accelerate the first half of the payment by as much as three or four months.

For homes valued at less than $76,000, the exclusion is equal to 40 percent of the home’s market value. For homes valued between $76,000 and $413,800, the exclusion is $30,400 minus 9 percent of the value over $76,000. The table below illustrates how the new market value exclusion compares to the existing MVHC program.

The new market value exclusion for homes will mean that beginning in 2012, each city’s tax base will be reduced and the city’s tax rate will rise to obtain the same property tax levy. Although the homestead exclusion is computed in a mathematically similar manner to the repealed MVHC, the new system will shift taxes among properties within each community, especially to commercial, industrial, apartment, and other properties that will not receive the benefit of the homestead market value exclusion. Keep in mind that the current MVHC program, if it was fully funded, would provide $261 million per year in state-paid homeowner tax reductions. That $261 million is being eliminated to balance the state’s deficit, and the tax relief provided to homeowners under the new market value exclusion is in part due to shifts in property taxes that will occur.

If you have questions on the conversion of the MVHC program to a market value exclusion, please contact LMC staff members Gary Carlson, Rachel Walker, or Lena Gould using the contact information at right.

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