Minnesota property tax bills are set to spike

• Chart of projected tax increases

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• ‘Modest’ St. Louis County tax levy hike looks likely

Lost in the tumult of the Legislature’s July special session was a huge change in state tax policy that will send property taxes climbing in 2012 across the state, even if local governments freeze their spending.

For homeowners across St. Louis County, expect taxes to jump about 6 percent on average — 5.7 percent in Duluth, 4.2 percent in Iron Range cities and 3.1 percent statewide — after the state eliminated the longstanding homestead tax credit.

Under the homestead tax credit, the state paid local governments a portion of the property taxes on a primary residence declared a homestead.

“No matter what we do, just to stay where we are, this change by the state is going to push property taxes up,’’ said Gary Eckenberg, deputy St. Louis County administrator. “We think this is kind of the untold story from the special session that really got lost in the (state government) shutdown.”

State, county, city, school district and other officials still are trying to sort out the change in the tax bill approved by state lawmakers and signed by Gov. Mark Dayton as part of the budget agreement.

The elimination of the homestead credit is part of an ongoing philosophical shift away from using state income and sales taxes to help reduce local property taxes — a shift that has contributed to escalating property taxes in recent years even as state officials have left income taxes untouched.

To help cushion the blow for homeowners, the state replaced the homestead tax credit with something called the Homestead Market Value Exclusion. The new system essentially shaves off the first 40 percent of a homestead’s value for figuring the taxes.

But with 40 percent less of your property value to tax, local governments will have to raise tax rates just to get the same amount of money they did last year. The impact probably will mean higher taxes for all types of property statewide, state experts say.

“The reduction in the tax base for homesteads means non-homesteads will pay a higher share of the levy, and even a large share of homesteads could pay more,’’ the Department of Revenue warned in a memo to the Property Tax Working Group.

It appears the change will hit harder in counties with lower property values and lower-valued homes, said John Ongaro, St. Louis County’s director of intergovernmental affairs, because the old credit was most beneficial for people with less-expensive homes. It gave the highest credit to homes valued at $76,000 or less, and was gradually phased out for homes worth more than $414,000; the new exclusion also stops at that home value.

The state will pocket the money saved by killing the homestead credit, about $261 million annually, to help pay for its own budget problems. But the change will hit St. Louis County for about $6 million, county officials say. That’s nearly 6 percent of the county’s total levy.

“Here’s a clear example of the state directly raising people’s property taxes. The county and other local governments had nothing to do with this,’’ Ongaro said. “And that doesn’t include any of the other cuts the state made to local governments.”

Duluth city officials say the change will remove the uncertainty of whether the state will refund all or just part of the homestead credit amount each year. Last year the state’s payment to the city to cover the homestead credit fell more than $1 million short, for example.

“There are positives now because we weren’t always getting the money from the state to repay us for the full credit… so now we know exactly how much we will get directly from the levy,” said Adele Hartwick, the city’s chief financial officer. “The bad news is that, not just homesteads, but nearly every property class is going to be paying more to make up for that lost value in the new exclusion.”

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