Property tax burden shifts toward Duluth businesses

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• Breakdown of property taxes for Duluth homeowners

Duluth landlords, merchants and other owners of commercial property expressed dismay last week at the jump in their projected property tax bills.

At the same time, many homeowners are seeing proposed tax bills on par with 2012.

The difference, according to local officials, is because of the rising value of some commercial property and the dropping value of many homes.

Residents of St. Louis County recently received mailed notices of the likely size of their 2013 property tax bills. Actual tax rates have not yet been finalized, but the proposed tax notices set the maximum level.

Joe Kleiman of Kleiman Realty said he owns a 5,000-square-foot office building on London Road that already costs him about $27,000 a year in property taxes, and next year he has been advised that tax bill will go up another $2,000.

“We all have to pay taxes, and we all should pay our fair share,” he said. “But commercial taxes are hugely out of whack, and at some point there’s going to be a breaking point.”

Falling property values will cushion many homeowners from the impact of higher tax rates, said City Assessor Gregg Swartwoudt. Some homeowners actually will see smaller tax bills in the coming year.

For the owner of a $150,000 homesteaded residence in Duluth, net property taxes are projected to increase by $105 from this year to next, rising from $1,813 in 2012 to $1,918 in 2013, according to St. Louis County Auditor Don Dicklich. That’s an increase of 5.8 percent.

But in Duluth, most residential properties worth $400,000 or less had their valuations reduced by 4 percent, Swartwoudt said.

The tax burden doesn’t go away, Dicklich said — it simply shifts.

“If you’re seeing a reduction in your property taxes, someone else is paying more,” he said.

Unlike residential properties, Swartwoudt said the values of commercial properties have generally held stable.

Looking at seven to eight properties his firm manages in Duluth, Sandy Hoff, president of F.I. Salter Co. Inc., said their assessed values have remained steady, but his tax bill has increased by about 5 percent across the board.

“That creates a challenge for us as property managers,” he said, explaining that it’s difficult to pass on those expenses to tenants who are already struggling.

“I’m not against the park and library referendum; I think they will do nice things for our community,” Hoff said. “But we need to be very mindful when we have 5 percent increases like this. They can’t continue. We need to reel in the cost of government so it’s in line with inflation.”

He noted that next year’s property taxes look likely to grow at about double the rate of inflation.

The challenge is especially great for owners of commercial property that has markedly appreciated in value, said Dave Holappa of Holappa Commercial Real Estate. He pointed to London Road, the Miller Trunk Highway corridor and Grand Avenue as a few areas where commercial property values have recently taken a leap.

“The city has been very aggressive about increasing property valuations even during this downturn,” he said. “Landlords don’t have any way to recoup these kinds of taxes.”

Jerry Kortesmaki, the owner of London Road Rental and Party Express, said taxes on the properties that house his businesses are poised to climb more than 34 percent next year — a $4,702 hike to the $13,600 in property taxes he paid this year.

Kortesmaki recently looked at refinancing his operations and noted that the city’s assessed valuation of his property is greater than his bank told him it was worth.

“We’re really getting gouged on commercial property,” he said.

Despite some frustrations, Swartwoudt said his office hasn’t received as many complaints and questions as last year, when the state of Minnesota did away with its homestead credit, replacing it with a homestead exclusion.

The state stopped paying down property taxes for qualifying residents and instead ordered local governments to exclude a portion of a home’s value from taxation. The exclusion program can lower — for taxation purposes only — a property’s value by as much as $30,400 for a $76,000 residence. The more a home is worth, the smaller a break it receives. The exclusion disappears altogether for houses worth $413,800 or more.

The switch to an exclusion program reduced local tax bases, leading to double-digit tax rate increases last year in St. Louis County and around the state.

Dicklich said the homestead changes had an especially large impact in St. Louis County, where relatively few residences are expensive enough to be ineligible for an exclusion.

“We’re certainly not Edina,” he observed.

As home valuations have been adjusted downward to reflect a softened housing market, Brandon Larson, tax division manager for St. Louis County, said the local tax base has continued to shrink.

“A lot of times, with the home values going down, people are getting more of an exclusion, and more of the burden is going to shift to businesses,” he said.

St. Louis County has scheduled a public meeting to receive comments on its proposed 2013 tax levy and operating budget at 7 p.m. Thursday in the County Boardroom on the second floor of the county courthouse in Duluth.

Tags: city council, city of duluth, st louis county, minnesota legislature, news, business, politics