NEW RELEASE: 50 State Property Tax Comparison Study for Payable 2023

MCFE's latest 50-State Property Tax Comparison Study -- for taxes paid in 2023 -- is now available.   The report, produced in partnership with the Lincoln Institute of Land Policy, documents the wide range of property tax rates in 2023 for more than 100 US cities and helps explain why they vary so widely.

This study provides the most meaningful data available to compare cities’ property taxes by calculating the effective tax rate: the tax bill as a percent of a property’s market value. Data are available for 74 large US cities and a rural municipality in each state, with information on four property types (homestead, commercial, industrial, and apartment), and statistics on both net tax bills (e.g., $3,000) and effective tax rates (e.g., 1.5 percent).   A couple of observations on this year’s findings:

The Basics - Comparing the tax bills on the median value homes in the largest cities in each state, Minnesota/Minneapolis’ $4,255 tax bill in 2023 ranks 19th in the nation (down two spots), $70 above the 50-state average.   The state’s rural median home tax bill of (Glencoe) is 16th (unchanged) in the nation, $360 above the 50-state average.   Minnesota’s nation-leading property tax refund programs, with respect to both generosity and eligibility, are not factored into these rankings.

However, when differences in median values are taken into account, Minneapolis drops to 24th down five spots from 2022 with an effective tax rate of 1.225% on a home valued at $347,300 which is about $17,000 below the average of the largest cities in each state.  Similarly, Glencoe also drops to 24th with an effective tax rate of 1.16% on a home valued at $204,500 about $22,000 above the average for small cities.

In short, Minneapolis' median tax bill rose $258 on a home that increased in value by $28,200 while Glencoe's tax bill rose just $21 on increased median value of $34,700 (a home value increase of over 20%).   

This illustrates the role relative valuation can play in the distribution of property tax burden and in understanding reasons for property tax increases.  Contrary to beliefs we continue to see expressed today, valuation distributes the tax burden; it does not create the tax burden.  Given the interaction of two primary forces influencing homestead property tax bill changes – valuation changes and levy increases --  and the confusion/blame game it can trigger, it would seem the cause of greater transparency would be well served by having local governments create an on-site tool allowing taxpayers to enter information from their tax bill to see how much of their tax change was impacted by levy decisions versus how much by distributional changes.

Commercial rankings rose one spot to 13th in the nation at the $1 million of land and building value level.   Effective tax rates, however are at an 8-year low due to reductions in the state general tax levy for commercial/industrial property over that period.  Industrial rankings (50% personal property) however, fell 8 spots to 37th in the nation.  Minnesota’s avoidance of business personal property taxation still provides a competitive advantage for industrial operations compared to many states.

The study provides additional perspective on how Minnesota property taxation compares to the rest of the nation by examining the relative influence of four primary factors in the derivation and ranking of property tax rates (tax burden divided by value). 

• property tax reliance
• valuation
• local government spending
• differential treatment of property types (called “classification ratio” in this report.)  

For homesteads, compared to national largest city averages, Minnesota’s slightly higher property tax reliance and local government spending levels are more than offset by slightly lower median home values and favorable structural property tax treatment result in a homestead tax rate .02 percentage points lower than if Minneapolis had the 50 state average values on all four factors.  For commercial properties, the state’s differential treatment of commercial property from class rates combined with the influence of the other factors result in a commercial property tax rate .32 percentage points higher than if Minneapolis had the national average values on all four factors.

Classification Bites Back -- Locations with statutory classification in the form of differential class rates, assessment ratios, and/or providing favorable exemptions/credits reached an all time high since the study’s inception 26 years ago of 2.15.   That means nationally in these states, commercial properties were taxed on average 115% percent more than homesteads per dollar of assessed value. 

Looking at all study locations, Minnesota’s 1.844 commercial classification ratio ranks 19th highest in the nation -- an 84.4% effective tax rate higher than homeowners.  That is essentially the national average for all study locations but a significant departure from the mid-nineties when the Minnesota’s ratio was above 4.0.   While some may long for a return to those days when business properties were taking on even more of a disproportionate share of property tax burden than homeowners, it is important to remember that classification is a two-edged sword.  Classification can provide homestead protection in good real estate conditions but can bite back extra hard in bad times.   When commercial valuations decline as is taking place today in many areas, that “leveraged” share of extra tax burden due to classification has to go somewhere.   For homeowners today, “it could be worse” provides little solace.

Before You Make that Big Move to Florida -- The allure of no/lower income tax states is considerable but beware the “welcome neighbor” feature of several state property tax systems.  The latest report again estimates the effect of assessment limits that cap annual growth in the assessed value of individual properties and shows how they create large disparities in effective tax rates for owners of the same valued homes. These limits shift the tax burden away from long-time homeowners and toward owners who recently purchased homes destroying tax equity in the process.

The largest disparity evidenced in the report is in Miami, where someone who just purchased a median-valued home would pay nearly three times more than someone who purchased an identical home 12 years ago—the average length of ownership there—despite both homes having an identical value in 2023. The new homeowner would pay $9,205, compared to $3,104 for the long-time owner. In six other cities a newly purchased median-valued home would face an effective tax rate at least twice as high as the rate for an equivalently valued home owned for the average duration in the city. Thirty large cities in the report have assessment limits, and the policy shifts the tax burden to new homeowners in all of them.

Minnesota’s own “limited market value” program had its moment in the sun, then was smartly phased out when its unpredictable and counterintuitive effects (such as higher tax burdens for homes who had value withheld than if the program did not exist) became evident.   Proposals for its return are almost guaranteed to arise in the future and should be disregarded.