A huge change in state tax policy is expected to increase property taxes across the state, despite efforts by local governments to freeze spending.

Homeowners in the state should expect at least a 3.1 percent increase. Borderland taxing authorities — cities, Koochiching County and school districts — are considering how the change will impact local homeowners.

The change, expected to save the state $56 million, was included in the tax bill approved by the state Legislature and signed by Gov. Mark Dayton as a part of the budget agreement that ended the state government shutdown.

The 2011 omnibus tax act established a new property tax program called the homestead market value exclusion and eliminated the existing market value homestead credit.

To help ease the change for homeowners, the new program takes off the first 40 percent of a homestead’s value for figuring taxes.

The homestead market value exclusion provides a tax reduction to all homesteads valued below $413,800 by shifting a portion of the tax burden that would otherwise fall on the homestead to other types of property.

The repealed market value homestead credit gave homesteads about the same amount of tax relief through a state-paid credit rather than through shifting. Through the exclusion, the cost of providing relief to homeowners is shouldered relatively evenly among all types of property, according to information compiled by the Minnesota House Research.

But that reduction means that local governments will have 40 percent less in taxes to provide local services and will likely cause an increase in tax rates to collect the same amount of money collected last year.

Cynthia Jaksa, International Falls councilor and chair of the city’s Legislative and Finance Committee, said the reduction to homestead properties will mean a shift to the non homesteaded properties in the city.

“Even if we left the levy the same, the commercial property will go up,” she said. She estimated the city lost about $300,000 as a result of the change.

Jaksa said city officials are putting the 2012 budget together in the coming week and have already received requests for funding from department heads.

“We will put the whole thing together and see where we are at,” she said. “But I would expect some sort of property tax increase.”

The change, according to Teresa Jaksa, Koochiching County administration director, means a reduced tax capacity, or tax base, for the county which will result in a higher tax rate and will spread $400,000 of lost county levy value to property taxes.

Jaksa will brief county commissioners on the effect of the changes when they meet Tuesday.

“Homestead properties will see some reduction for homestead credit in a lower tax capacity, but it will be offset by a higher tax rate,” she said. “And this will occur with the cities and school tax rates as well.”

She explained that the state went from a dollar credit amount given to property owners by a reduction in their tax to a reduction in their property value.

Jaksa said taxing authorities will have two choices: Reduce county levies by the lost state aid or certify a gross tax levy as planned for budgets with property owners picking up the cost due to the state ending the homestead credit program.

“If we do nothing, and certify the same gross levy of 2011 in 2012, $400,000 of money paid by the state will be spread over taxes,” she said.

No taxing authorities are likely in a position to absorb the difference, she said, adding that there is no time to even plan for such action.

The change is “a state cost shift to the local property tax, no doubt about it.” she said.

On the plus side, Jaksa said the change means that the state no longer controls local taxing authorities levy revenue.