HOW NEW DEVELOPMENT AFFECTS PROPERTY TAXES
At the neighborhood meeting that the developers hosted in February, Jake Walesch said the benefit of the development to the city is about $250,000,000 in market value. The implication is that an increase in tax base means more money for the city, and potentially lower taxes for its residents. A few citizens have come out in support of the Hollydale project for the same reason, and many have concluded that the only reason the City Council would approve the project would be to put more money in the City's coffers.
While those conclusions are understandable, at this point in Plymouth's development the "more houses = more money" incentive doesn't provide nearly the benefit it once did. The city's 2018 population was estimated at over 77,000, and we had over 32,600 housing units. Higher densities lead to more congestion - in traffic, at our schools, and in the use of the city's amenities and resources - affecting the character of the area and quality of life. Student population growth stresses schools and educational resources, the costs of which directly affect our tax bills.
Ultimately, the question is, what is the benefit of the increased tax base relative to the cost of the development? This page looks at the tax side of that question.
Approval of Hollydale would add 319 homes into a fifth of a mile space, shoehorned among developments that have been there for over 20 years.
THE MAGNITUDE OF IMPACT
Market Value is the basis upon which property taxes are determined. As this chart shows, the aggregate Estimated Market Value of property in Plymouth is now $12.9 billion.
Market Value growth comes from two sources - new construction and market based value increases. In 2019 there was $219 million of new construction ($174 million of which was residential), and a $638 million increase due to a higher property price level. So in an environment of price inflation, the tax base increase happens on its own, as a function of how the assessor interprets market conditions and their effect on market value. In Plymouth, the assessed value of property was increased by over 5% last year before anyone pounded a single nail.
In 2019 there were over 345 new single family home permits issued, and new developments are still being started. Hence, the city will continue to see market value increases from construction without the Hollydale development.
Were the Hollydale development approved, the resulting $200 million or so contribution to market value would represent less than 1.5% of the total. The larger the market value gets, the less marginal contributions make an impact.
One could even make the case that the city is overbuilt, and a reduction in residential housing supply would raise the price level even more.
IMPACT ON THE PROPERTY TAXES YOU PAY TO THE CITY
While Market Value is the foundation of property tax bills, the impact of residential construction on property taxes is not proportional to its impact on Market Value. This is because all properties are not taxed equally.
The Net Tax Capacity for an individual property is determined by multiplying the property's Taxable Market Value by a Class Rate. Class Rates vary by property type, with commercial and industrial properties having a higher Class Rate than residential properties. For residential properties, the class rate is 1% for value up to $500,000, and 1.25% for all value above that. The Tax Capacity of the city's property is the sum of the Net Tax Capacities of each parcel.
As an illustration, let's say the assessor assigns my home an Estimated Market Value of $500,000. The Homestead Market Value Exemption phases out at $413,800, and I am not eligible for other exclusions, so my Taxable Market Value equals my Estimated Market Value of $500,000. The Class Rate on residential property is 1% up to $500,000, so the Tax Capacity of my individual property is $5,000.
To determine its Tax Rate, the city will first determine its tax levy, and then divide that number by the sum of the Net Tax Capacities of the individual parcels. [*] For taxes payable in 2020, the actual Net Tax Capacity for the local levy is about $138 million. So if the levy is $35 million, and the Net Tax Capacity of the city is $138 million, the tax rate is 35/138 or 25.36%. That rate is applied to each property's Tax Capacity to determine the city taxes due.
What would the tax rate be if there had been an additional 258 houses at $800,000 each? Applying the Class Rates, the Net Tax Capacity of each property would be $8,750. Two hundred fifty eight of those would contribute $2,257,500 in Net Tax Capacity to the city, reducing the tax rate in this scenario by .4082%.
That's $20 per year on a $500,000 house. Practically, the impact would be less because the increase in the tax base wouldn't apply until the houses are built and sold, at which time the city's total market value would be hundreds of millions of dollars higher than it is now due to several more years of building and price inflation. The bigger the market value base, the smaller the impact of incremental construction.
[*] This statement is true, but an oversimplification. In the determination of the city's Net Tax Capacity, there are various adjustments to the sum of the individual parcel values that apply. Actual adjustments can be found here.
IMPACT ON THE PROPERTY TAXES YOU PAY TO THE SCHOOL DISTRICT
At the school district taxing level the same concept applies, although the specifics are different. Relative to the city, the Wayzata school district has more than twice the budget, $1.9 billion more in Estimated Market Value, and its levies total $76 million versus about $35 million from the city. In addition, almost half the property tax is based off of Referendum Market Value (which for most residential property is Estimated Market Value), instead of Tax Capacity.
More important for the consideration of the impact of housing development is that the school district's budget varies with student population. Every 23 or so elementary students require a classroom, a teacher, furniture, supplies, transportation, infrastructure and related support staff. Class sizes increase as students get older.
An elementary school costs about $30 million to build. In the last ten years the district has built two new elementary schools, made a $60 million addition to the high school, made additions or renovations to all three middle schools, added on to Oakwood and Greenwood and made safety related improvements to all buildings. Facilities' windows, roofs, parking lots, HVAC systems etc. need to be maintained, increasing permanent long term cost.
In 2017 the voters approved an increase in the operating levy to $2,000 per student. So as enrollment increases, the levy increases. Also approved at the time was $70 million in bonds for the 9th elementary school and other building improvements.
Wayzata Schools strives to maximize the use of space and operate as efficiently as possible. Its status as an award winning district certainly contributes to property values. Yet incremental student population contributes incrementally to cost, and if building capacities are exceeded new facilities must be built. Some of the new expenses are absorbed by new housing and some are not.
Because development of Hollydale was not part of the city's plans, it has not been part of the school district's plans. Whether or not the Wayzata School District requires a new elementary school and/or a new middle school will depend upon the speed of development. Let's not let Hollydale tip that scale.
Student growth at Wayzata Schools has necessitated relatively higher levies for buildings and operating costs. This chart shows a 21.6% increase in students, and a 73.7% increase in levies.
WILL THE CITY COUNCIL APPROVE DEVELOPMENT JUST TO EARN THE TAX REVENUE?
The council members to whom we have asked that question have said absolutely not - additional tax revenue is not the motivating factor for approving development. And looking at the numbers one can see that it's certainly not necessary to do so.
The pie chart above shows that less than 35% of Plymouth's budget comes from property taxes. Of that, only 61% comes from residential property, meaning that only about one fifth of the budget is reliant on residential tax revenue.
Plymouth's property taxes are already relatively low. Among its peer group, the city has the lowest tax rate and the lowest levy per capita. Additionally, the city has a AAA bond rating and about $350 million in debt capacity.
At this point in Plymouth's evolution, quality of life enhancements provide more value to residents than tax revenue. Destroying a long term amenity, and the open space that creates it, detracts from Plymouth's desirability and quality of life. The cost of that permanent loss far exceeds the benefit that incremental tax revenue could provide.