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City Property Taxes Up in the "No New Taxes" Era

October 13, 2009 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis
Part 1 of 4

With property tax payments due this week, Minnesotans are painfully aware that property taxes -- including city property taxes -- have increased tremendously during the era of "no new taxes," which officially began with the ascension of Governor Pawlenty and his conservative allies in 2003.  What may come as a surprise is the fact that despite property tax increases, real per capita city, county, and school district revenue has fallen.

Today we kick off the first installment of a four part series that will examine trends in local property taxes, state revenue sharing, and total revenue during the "no new tax" era.  This analysis is based on data from the most recent "Price of Government" report prepared by Minnesota Management & Budget and will extend from the last year under a budget set during the Ventura administration (CY 2002/FY 2003) through the last year of the current biennium (CY 2010/FY 2011).  ("Price of Government" data after FY 2007 are not final.)  All amounts in this analysis will be expressed in constant current year dollars.*  Today we address cities; subsequent installments will deal with counties, school districts, local governments collectively.

Real (i.e., inflation-adjusted) per capita city property taxes have increased by 13.3 percent from 2002 to 2009 with another 6.9 percent growth projected for 2010.  In total, city property taxes are projected to be 21.1 percent higher in 2010 than in 2002.

However, the increase in city property taxes has not translated into an increase in city revenue.  Real per capita city revenue in 2010 is expected to be 10.9 percent less than it was in 2002.  Despite substantial growth in property taxes, total city revenue fell because the property tax increases were not sufficient to replace state aid cuts.  After the unallotments announced by the Governor in July, real per capita state aid to cities in 2010 will be 44 percent less than in 2002.

From 2002 to 2010, total state revenue directed to Minnesota cities is projected to decline by $156 per capita.  The increase in city property taxes will be sufficient to replace about 55 percent of this revenue loss.  Consequently, total city revenue from property taxes and state aid is expected to decline by $70 per capita from 2002 to 2010.

Of course, cities receive funds from sources other than state money and property taxes.  Among the other sources of city revenue included in the "Price of Government" report are charges for licenses, fees, special assessments, enterprise revenues, and federal dollars.  However, collectively these revenue sources have also declined since 2002.  Consequently, none of the $70 per capita decline in revenue from property taxes and state money was recouped through a net increase in other revenues.

The situation with cities illustrates the practical impact of the so-called "no new tax" policies pursued at the state level.  The State of Minnesota has experienced a decline in real per capita revenue since 2002.  The state has been unable to balance its budget through cuts in state spending or through fee increases alone and, with few exceptions, state tax increases have been off the table.  Consequently, the state has balanced its budget by shifting a disproportionate share of the problem on to cities and other local governments.

In the face of a massive loss of state aid, cities have had two options: increase property taxes and cut budgets.  They have done both.  In fact, cities have cut their budgets far more than the state government has done since 2002.

This is the legacy of the "no new tax" agenda in Minnesota.  The state's budget problems are shifted to cities, thereby compelling city officials to do what state leaders do not have the fortitude to do: increase taxes.  At the same time, the state's chief executive complains about growth in city spending even though Minnesota cities have been more frugal than state government.

The experience of other levels of local government in Minnesota parallels that of cities.  Tomorrow, we will examine the impact of the "no new tax" policy on county budgets and county property taxes.

Click here to read part 2.


*All inflation adjustments in this analysis are based on the implicit price deflator for state and local government purchases, which is the appropriate measure of inflation for state and local governments.

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