By Jon Klockziem

As local government officials, you work hard to manage the services your constituents rely on while keeping an eye on the budget. Here at the Minnesota Department of Revenue, we know the relationship between the budget, the levy, your jurisdiction’s tax base, and the tax bill residents receive can be complicated for many property owners to understand. Helping them better understand the process is time well spent.

In Minnesota, the Constitution’s uniformity clause allows different types of property to be taxed at different rates. This is done by assigning classifications to properties based on how they are used by the owner. What makes Minnesota different from many other states is that the property classifications have a corresponding class rate percentage, such as 1%, 1.25%, or 2%, which is applied to the property’s taxable market value (TMV). This is the amount of value used to calculate property taxes, and it can differ from estimated market value (EMV), which accounts for any exclusions or deferrals. While many different classifications will have the same classification rate, others will not. That rate is a driving factor in determining a property’s share of the tax base and its associated tax bill.

What makes up the tax base

The classification or use of the property and its taxable value are the two components used to calculate a property’s tax capacity. That is why properties with the same value but different uses can have very different tax bills.

The tax capacities of all the properties in a jurisdiction make up the tax base. It is not simply the sum of all the property values within the jurisdiction. That is the first big takeaway when talking to property owners about property taxes in Minnesota.

For a residential homestead, the classification rate is 1% for the first $500,000 of value and 1.25% for value over $500,000. For commercial property, the rate is 1.5% for the first $150,000 of value and 2% for value above $150,000. These class rates — 1%, 1.5%, or 2% — play a big role in determining a property’s share of the tax base because the percentages are used to determine the property’s tax capacity.

For example, let’s say the county assessor reviews two properties and determines each has a taxable market value of $100,000. One is a house and one is a coffee shop. For the house, that value would be multiplied by the 1% classification rate for a residential homestead, creating a tax capacity of $1,000. For the coffee shop, that value would be multiplied by 1.5%, creating a net tax capacity of $1,500.

If the tax base consisted of just these two properties, the total tax base would be $2,500 in tax capacity. The levy would be spread across this amount to determine the tax rate for properties in the jurisdiction. Although they have the same market value, the home accounts for 40% of the tax base while the commercial property accounts for 60%. When considering the amount levied on that tax base, the homeowner would owe 40% of the taxes due and the coffee shop would owe 60%.

When property values change

Let’s use the same example, but assume both properties are residential homesteads. In that case, each would have the same $1,000 tax capacity. Since they are both valued and classified the same, each would have an equal share of the tax base and, ultimately, the tax liability.

The next year, each home’s taxable market value increases to $110,000. Each now has a tax capacity of $1,100. Most people think their taxes will automatically increase because the property increased in value. But their share of the tax base has not changed, even though their value and tax capacity increased. Each still represents 50% of the tax capacity of the jurisdiction.

If every taxing authority held its levy flat, the total property tax revenue collected would remain the same the following year, even though property values increased. Ultimately, if the tax base increases while the levy stays constant, individual tax bills will shift based on relative property values, but the overall tax burden collected from the community remains unchanged.

Helping constituents understand their tax bills

The work you do on your budget is only one part of the ultimate tax bill your constituents will pay. The budgets of all taxing authorities in your area impact your residents. But as local government officials, you are often the closest part of government to the people you serve. Because of this, you will most likely be the one getting the call.

Explaining the relationship between levies and the classification system used in Minnesota is a great first step toward a broader understanding of the property tax system. It can go a long way toward making that call more productive and educational.

Jon Klockziem is the Property Tax Division director at the Minnesota Department of Revenue.