City Representatives Discuss Homestead Exclusion with Department of Revenue

Fire state aid will not be impacted by the homestead market value exclusion, but levy limits and debt limits will be reduced.
(Published Jun 27, 2012)

Minnesota Department of Revenue (DOR) officials met with representatives of several local government associations and individual local units of government on June 22 to talk about the homestead market value exclusion program. Unfortunately, the two sides were unable to come to an agreement on how to interpret certain aspects of the program.

Specifically, they discussed the impacts of the failure of the 2012 Legislature and governor to enact the homestead exclusion technical bill, HF 2072/SF 1831, authored by Taxes committee chairs, Rep. Greg Davids (R-Preston) and Sen. Julianne Ortman (R-Chanhassen).

Purpose of the technical bill
The original bill was introduced on behalf of the League of Minnesota Cities and the Minnesota Inter-County Association in order to clarify the interaction of the new homestead market value exclusion with various statutes that govern certain function-specific levy limits, debt limits, and several state aid programs. The bill was drafted last fall after DOR officials indicated that their interpretation of the relevant statutes would result in a loss of aid, levy and debt authority for some cities, especially those with a large proportion of lower-valued homes.

For example, statutory levy limits for housing and redevelopment authorities, economic development authorities, and port authorities are computed under state law as a defined percentage of “taxable market value.” The DOR’s interpretation of what is “taxable market value” reduces values by the amount of the homestead market exclusion. This in turn reduces the revenue-generating capacity of these entities. In addition, fire state aid is partially distributed on a jurisdiction’s market value and, with the new homestead exclusion, some jurisdictions with a large proportion of lower-valued homes will experience a reduction in fire state aid.

The language to clarify the impact of the homestead exclusion was ultimately merged with other tax provisions to form Chapter 296, the final 2012 omnibus tax bill, but Gov. Dayton vetoed that bill due to concerns about the impact of tax reductions on the long-term state budget deficit. In his veto message, the governor did not express any concerns about the homestead exclusion clarifications.

Agreement on some aspects, but not others
During the June 22 conversation, DOR staff acknowledged that fire state aid would be computed without regard to the lower market values after the homestead exclusion. The League argued that the statutory language that governs the distribution of fire state aid under Minnesota Statutes, section 69.021 suggests that the Legislature intended the market value portion of the fire state aid distribution to reflect the relative value of all property in a fire district, including tax-exempt value.

In other words, this expansive definition of market value is a measure of the fire service base of a district and, therefore, value excluded under the new homestead exclusion should be considered in the distribution. DOR officials agreed with this.

However, the two sides could not reach agreement about how to compute levy limits and debt limits. DOR officials continue to interpret the statutes governing levy limits and debt limits to be computed on market value reduced by the new homestead exclusion. The League believes that the DOR’s interpretation is contrary to the plain reading of Minnesota Statutes, section 273.032 that generally defines the terms “market value,” “taxable market value,” and “market valuation,” for the purposes of debt and levy limits.

This statute very precisely defines taxable market value to mean “the total taxable market value of property within the local unit of government before any adjustments for tax increment, fiscal disparity, powerline credit, or wind energy values,” but after the limited market adjustments under the now expired program known as “limited market value” and after the market value exclusions of certain improvements to homestead property under the program known as “this old house.”

As indicated, the statute very specifically refers to exclusions under “limited market value” and “this old house,” but nowhere does it provide for an adjustment to reflect the new homestead market value exclusion under Minnesota Statutes, section 273.13, subdivision 35. The League believes that the existence of very explicit statutory exclusions, combined with the absence of any reference to the new “market value exclusion,” makes it clear that the Legislature did not intend the new homestead market value exclusion to have an impact on debt and levy limits.

The League is reviewing options to address the impact of the DOR’s interpretation on levy limits and debt limits.

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