Some homeowners face sticker shock as cities and counties come out with property taxes

[MUSIC PLAYING] NINA MOINI: Well, I hope you're having a good Tuesday. This is the time of year where cities and counties around the state are deciding their budgets and property tax increases for the next year. Homeowners are seeing sticker shock, though. Anoka County approved a 17% property tax increase for the average homeowner.

Today, Minneapolis will vote on a proposed 7% increase, and St. Paul will do the same tomorrow. At a St. Paul City Council meeting last week, residents voiced frustrations over the city's proposed increase.

HOMEOWNER: I just moved back to St. Paul. And when I got my property tax thing, I was flabbergasted. I already pay intensely high taxes.

NINA MOINI: So joining us today to talk about this process is Andrew Babula, director of the Real Estate Program at the University of St. Thomas. He's also a licensed real estate broker in Minnesota and Iowa. Andrew, thanks for joining us on Minnesota Now.

ANDREW BABULA: Thank you, Nina. I'm happy to be here.

NINA MOINI: Well, for our listeners, could you give us a sense for what exactly property taxes pay for and why it comes up like this every year?

ANDREW BABULA: Sure. Property taxes are the primary way that cities and, actually, counties and school districts as well, raise revenue for their services. And those services include everything from public safety, such as the police force, to maintaining and repairing roads, and pretty much all the labor costs behind running city government.

NINA MOINI: And from your perspective, as both someone on the ground, probably dealing with clients and with your real estate program through the university, what is your sense for these sticker shock moments for folks? Is it surprising to you? Does it feel like it's extreme compared to prior years?

ANDREW BABULA: Well, it's definitely extreme compared to prior years. I think the Minneapolis and St. Paul budget increases, which were originally about 8%, were the highest in a couple of decades. And other cities are seeing similar increases. So it's a tough pill to swallow for people when they're already feeling, over the last several years, that prices across the board have gone up, and now they're seeing their property taxes go up. So it can be difficult.

NINA MOINI: And part of the contributing factors that I'm reading about are just inflation, funding throughout the COVID-19 pandemic relief funding that dried up. And now cities are perhaps left with different expenses. What are you hearing through the grapevine on what some of these contributing factors are?

ANDREW BABULA: Right. I mean, those are exactly correct. And the biggest factor in the individual property taxes is the expenses or the expenses for that city or county or school district. So those expenses are going up in some cases. In many cases, it's because the cost of goods and services are increasing. In some cases, there are additional services that cities are trying to implement that add to their budget.

So it's a combination of factors. As you mentioned, there were a lot of COVID relief dollars that had been able to help prop up city budgets for a few years, and those have dried up. And so the only way for cities to make up that lost revenue is through property taxes.

NINA MOINI: Yeah, and for a while, it looked like home values were really creeping up. And I'm gathering that that has sort of leveled off. So it's sort of a double whammy for folks that there's this increase, and then their homes maybe aren't increasing in value like they had in recent years. Are you seeing any of that?

ANDREW BABULA: Right. I mean, property values tend to increase pretty consistently. It's actually still gone up about 4% over the last couple of years. So they are increasing. I think what sometimes confuses people or is a bit misleading is that even if property tax value, even if property values don't go up, if they remain flat, the property taxes can increase.

Again, part of that is because of the budget. But a lot of that is also because it's not just the value of the individual property. It's the value of the individual property relative to the values of all the other properties in the city or the county. So if they're all going up, your proportion will remain the same. If they're all staying flat, your proportion remains the same.

NINA MOINI: Mm-hmm. I'm curious if you find that this idea of property taxes and the conversation around it factors into people's decisions when choosing to buy a home or where to buy a home.

ANDREW BABULA: In terms of where, I think it does. Certain cities, certain school districts, counties, obviously, have different tax rates. And so some people may make decisions based on that location, although there's trade-offs as well. In some cases, if you have higher taxes, you tend to have more services. It's not always a direct link there. But so there's that trade-off there.

I think that people have felt the pain in terms of buying a home regardless, because over the last year or two, interest rates have gone up, so the cost of buying a home has gone up because of that. But then on top of that, if the taxes that they pay also are increasing, to your point earlier, it is, in some cases, a double whammy. And it makes housing affordability that much more challenging.

NINA MOINI: Yeah, and like we heard at the top of this segment, residents come to these meetings, and they're upset, or they're fired up. And they feel like they're almost, in a way, being priced out of their homes. I'm curious, from your perspective, who is mostly impacted in a meaningful way by this? Is it older folks who've been in their home a long time? Is it people on a fixed income? What do you think?

ANDREW BABULA: Yeah, I mean, on the one hand, everybody is impacted equally because if their property values, if their taxes go up, it goes up across the board. And even renters, their rent will increase even if they're not paying those taxes directly. So on the one hand, it all goes up evenly-- or not necessarily evenly, but consistently across the board.

But I think the people who, at least on an emotional level, in some cases, more, actually, true financial level, are those who are on a fixed income, those who maybe are considered house-rich, but cash poor. So they have properties that have high value, but they may not have the cash on hand to be absorbing a 5%, 10%, 15% increase in property taxes every year.

NINA MOINI: Yeah, and we also hear it can be frustrating for folks who say, OK, well, I'm paying into this for city services, but then sometimes those city services don't feel like they're up to where they need to be, or the city is facing understaffing. So that can be a difficult thing to reconcile. I'm curious from your perspective, what do you think needs to improve or change to make, I guess, cities, counties, rely less on this idea of the property tax increase?

ANDREW BABULA: [CHUCKLES] Well, that's a hefty question.

NINA MOINI: That's a semester long. [LAUGHS]

ANDREW BABULA: Right, you could have a whole course on it.

NINA MOINI: Yeah.

ANDREW BABULA: It's tight. I mean, it's a very political question as well. I mean, that's the eternal debate between trying to provide services in a cost-effective way. And, I mean, property taxes are the primary way that cities and counties and school districts raise their revenue. There are other ways to raise revenue.

But for instance, through income taxes or through sales tax, those aren't as prevalent in Minnesota. They tend to be a little more prevalent in other states, in some cases. But taxes ultimately is the way so far that we have to pay for those services. And so I'm not going to opine on the best way to do that. But there's definitely challenges, both from a taxpayer and those who make the decisions about the budgets and taxes.

NINA MOINI: Yeah, many city leaders saying the alternative is a budget cuts and cuts to services. So that's a difficult balance to strike. Well, Andrew, I really appreciate you coming on and helping us break this down.

ANDREW BABULA: Well, thank you for having me. I appreciate it.

NINA MOINI: That was Andrew Babula, director of the Real Estate Program at the University of St. Thomas.