While the bill includes new provisions that could benefit cities, the class-rate reduction is still concerning because it results in a property tax shift to homes and businesses.
Current law classifies 4d units in a two-tiered system, where a portion of the valuation of a qualifying unit has a class rate of 0.75%, and any valuation that exceeds the first tier, which is $100,000 per unit for assessment years 2022 and 2023, has a class rate of 0.25%.
By eliminating the first-tier class rate, the bill would create a more favorable property tax reduction for property owners that rent the units at or below 60% average median income in qualifying buildings.
Concerns about resulting tax shift
The primary concern the League has with the bill is that the class-rate reduction results in a property tax shift onto the existing property tax base, which is severe in certain local taxing jurisdictions.
That shift could be further exacerbated by property owners seeking to certify units not previously designated as 4d in order to take advantage of the more favorable class-rate reduction.
City approval process
In addition to the class-rate reduction proposal, which has been advanced over the past two legislative sessions, the updated bill includes two provisions that could benefit cities.
In an attempt to alleviate League concerns on new 4d units exacerbating the property tax shift, Section 1 of the bill establishes a local approval process. It requires a property owner seeking to certify units as 4d for the first time to get city approval prior to receiving the benefit.
While the League appreciates the inclusion of this provision, as raised in League testimony to the subcommittee, the approval requirement would not apply in all cases.
Another new provision in the bill would provide transition aid in 2024 and 2025 for cities in which the net tax capacity of 4d property exceeds 2% of the city’s total net tax capacity. These cities would receive a payment from the Department of Revenue in an attempt to offset the shifting property taxes due to the change.
However, the transition aid provision only lasts for two years, and the payment amounts do not cover the entirety of the shift’s impact.
City official express concerns
In addition to League testimony raising concerns with the bill, St. Peter City Administrator Todd Prafke discussed the unique challenges that this proposal would have on a city like St. Peter. He pointed out the need to balance the benefits of the program for promoting affordable housing with the cost to the existing property tax base.
Columbia Heights Community Development Director Aaron Chirpich also testified, providing a metro city perspective. Chirpich discussed specific issues with the bill, including how the change would negatively impact tax increment financing districts containing 4d units, which could reduce the amount of increment that a district would generate.
Support for the bill
Testifiers in support of the bill included the 4d Alliance, which includes a combination of nonprofit and private developers who state that the change is necessary due to increasing property taxes, construction, property management, and rehabilitation costs that make it harder to hold onto affordable units.
The League will continue to work with the bill author to address our concerns.