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"No New Tax" Policy Shifts Public Costs to Property Taxpayers

September 20, 2010 By Jeff Van Wychen
By Jeff Van Wychen
Minnesota 2020 Fellow
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Part 4 of 4 - Click here to read part 3.

As demonstrated in previous installments in this series, city, county, and school property taxes have all increased significantly during the "no new tax" era.  Collectively, responsibility for these tax increases do not rest with local officials, since total real per capita and per pupil local spending has declined over this period.  Rather, the growth in property taxes is the result of a deliberate state policy to shift more public costs on to local property taxes.

The final installment in this series will examine the combined property taxes, state aid, and total revenue of all Minnesota local governments since calendar year (CY) 2002 / fiscal year (FY) 2003.  As with previous articles in this series, this analysis is based on data from the most recent "Price of Government" report prepared by Minnesota Management & Budget.  ("Price of Government" data after CY 2006/FY 2007 are not final.)  All amounts in this analysis are expressed in constant CY 2009/FY 2010 dollars.*

Townships and special taxing districts, which were not examined separately in the first three parts of this series, are included in this analysis.  The graph below shows the distribution of total local revenue among the various levels of local government based on "Price of Government" data for CY 2010/FY 2011.  Total estimated revenue of all levels of Minnesota local government in CY 2010/FY 2011 is $26.4 billion.

Total real (i.e., inflation-adjusted) per capita property taxes of all Minnesota local governments are estimated to increase by about 30.1 percent from CY 2002 to CY 2010 (FY 2003 to FY 2011).  However, the increase in local property taxes did not translate into an increase in revenue.  Total real per capita revenue of all Minnesota local governments is projected to be 6.8 percent less in CY 2010/FY 2011 than in CY 2002/FY 2003.  Despite large growth in property taxes, total local revenue declined because the property tax increases were insufficient to replace state aid cuts.  Total real per capita state aid to all levels of local government declined by 25.2 percent over this eight year period.

Total state aid to local governments declined by $593 per capita over this eight year period, while local property taxes increased by $321 per capita, leaving local governments with a net revenue loss of $272 per capita.

Net revenue derived from all other sources excluding property taxes and state aid also declined during this period, so this $272 per capita revenue loss with not recouped through increases in revenue from other sources.

The analysis presented above is based on per capita data.  This was done in order to adjust for growth in demand for public services caused by population growth.  However, it could be argued that it is inappropriate to adjust school revenue based on total population growth, since schools provide services only to K-12 age students, not to the entire state population.  While the total state population is estimated to grow by approximately six percent from 2002 to 2010, total school enrollment is projected to decline by 0.6 percent over the corresponding period.**

However, even if we completely ignore all change in state population and school enrollment, the decline in total state aid to local governments from CY 2002 to 2010 (FY 2003 to 2011) still exceeds the growth in local property taxes by over $400 million.  Thus, even if all population growth is ignored, the growth in local property taxes is insufficient to replace the decline in state aid.  In short, state aid cuts have caused both property tax increases and reductions in local revenue regardless of whether or not population growth is factored in.

Taxpayers are upset with the rapid growth in property taxes.  Opportunistic anti-tax state lawmakers are quick to play upon this agitation by blaming local governments for failing to curtail spending growth.  Such accusations are hypocritical; local governments have been more frugal than state government throughout recent history.  The growth in property taxes during the "no new tax" era is the result of a deliberate state policy to shift public costs on to the property tax through cuts in state aid so that state leaders can claim that they did not increase state taxes.

Property taxes have skyrocketed in Minnesota not because of local government spendthrifts, but because state leaders have dumped the state's financial mess into the laps of local governments and local property taxpayers.  The only way to stop this trend is a drastic change in policy at the state Capitol.

*All inflation adjustments in this analysis are based on the implicit price deflator (IPD) for state and local government purchases, which is the appropriate measure of inflation for state and local governments.  School finances are adjusted using the state and local IPD corresponding to the fiscal year, while all other local governments are adjusted using the state and local IPD corresponding to the calendar year.

**Based on the most recent estimates from the Minnesota Department of Education, total statewide "average daily membership" in public schools was 829,220 in FY 2003 and will be 824,472 in FY 2011.

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