FAIRMONT - Minnesota state government typically has nothing to do with property taxes - that's left to cities, counties and school districts.
But in 2001, the Minnesota Legislature decided homeowners deserved a break on their taxes, and lawmakers came up with the Homestead Market Value Credit.
How it worked was the cities, counties and schools would levy whatever they needed for the year and the homestead credit would come out of those levies. The state was then supposed to reimburse each local government. It worked until 2010, when the state couldn't afford the reimbursements.
In 2011, Martin County lost $172,000 from its levy because of the homestead credit, and Fairmont got stuck with $280,000. Fairmont Area Schools will not be impacted by the market value credit until the 2012-13 school year, according to Sue Nelson, business manager.
Altogether, the credit was set to save Minnesota homeowners about $260 million next year, which was a sizeable chunk of change for a state facing a $5 billion deficit. In May, when the Legislature was trying to reach a budget agreement, lawmakers proposed cutting the market value credit, a move Gov. Mark Dayton opposed.
Then came the state government shutdown, and a deal that included the elimination of the homestead credit. In its place is the "homestead market value exclusion."
Dan Whitman, Martin County Assessor, was reluctant to comment on how the change will impact local taxpayers: "It is so complex that nobody knows how it's going to turn out. ... There is so much involved in the changes they've made, there's no accurate way to say how it's going to affect any of us other than to say property taxes are going to go up."
The homestead credit was available for homesteads valued at less than $400,000, which is pretty much everyone in this area. But under the new system the Legislature devised, homeowners will be insulated somewhat from the credit elimination, according to Gary Carlson with the League of Minnesota Cities.
"To prevent home taxes from rising directly, taxes on other properties are going to rise," he said, such as businesses, commercial and industrial properties and landlords.
"It will affect those types of properties," he said. "Even homes will not be entirely exempt from the tax increases, because keep in mind, the state is taking out $260 million from the system."
Like everyone else, Bob Wallace, director of Fairmont Area Chamber of Commerce, isn't clear on how the change with the homestead credit will impact local businesses, but he is frustrated.
"The state always looks to business to pick up the tax burden, and what it does is it makes the state less competitive," he said. "Our tax climate is kind of skewed."
So what happens in rural areas without many businesses, like many of the cities in this area? It seems small-town residents could have to make up the difference.
"If there's no other property to effectively shift the tax to, those homeowners will pay dollar for dollar for the loss of the homestead credit," Carlson said. "... And the same thing happens with the county tax and the school district tax."
Thus even if every city, school and county in the state froze their spending, taxes will still go up, a reality that has local leaders like Jim Zarling frustrated.
"It's going to look like a tax increase from the city when in fact what it is is the state quit giving the credit," said Zarling, Fairmont's city administrator.
In the past, when homeowners got their tax statements, included was a small note letting people know how much money the state saved for them with the homestead credit. Last year when the state couldn't afford to reimburse local levies for the credit, that note disappeared. Zarling wants to know if the state will take the blame for increased taxes because of the elimination of the credit when the 2012 statements are issued.
"It's going to be ugly this year," he said.
How ugly no one knows yet.
"I think we're going to really see what this means sometime around mid-November, because the state will be sending taxpayers notices about proposed taxes through the process known as truth in taxation," Carlson said. "When those notices go out, that will be the first real analyses of what all these changes mean."
Adding into the murky equation is the uncertainty brought about by the state withdrawing local government aid for 2011 and permanently reducing its contributions to local entities as of 2012.
"These are kind of compounding factors," Carlson said. "It's going to make the decisions of cities and counties and school districts very, very difficult. We will see property taxes going up without a doubt, and in some cases, the increases unfortunately are just to fund what you were already doing."