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State Cuts to Drive 2010 Property Tax Increases

December 23, 2009 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

City property taxes are expected to increase by 5.4 percent from 2009 to 2010.  These property tax increases are driven primarily by Governor Pawlenty's decision to unallot (cut) the 2008, 2009, and 2010 in shared revenue (aid and credit) payments to Minnesota cities.

In December of 2008, Pawlenty cut $66 million from the budgets of Minnesota cities using his unallotment authority.  Then in July 2009, Pawlenty cut $64.2 million from cities' 2009 aid and credit payments and $128.3 million from 2010 payments.  In full, the Governor has cut $258.5 million from city budgets through the December 2008 and July 2009 unallotments.

The first opportunity that cities will have to levy back a portion of these aid cuts will be in 2010.  The following analysis will focus on the size of proposed city property tax increases in 2010 relative to the aid cuts imposed on cities through the December 2008 and July 2009 unallotments.  This analysis will focus on Minnesota cities with a population greater than 1,000, since the vast majority of aid and credit cuts (99.6%) were concentrated on these cities.

Cities with the largest state cuts will experience the largest property tax increases in 2010.  For example, among cities that experienced aid and credit cuts in excess of 40 percent of their 2009 levy, the average proposed 2010 property increase in just over 10 percent.  Meanwhile, among cities with aid and credit cuts of less than five percent of their 2009 levy, the average proposed property tax increase is less than two percent (i.e., approximately the rate of inflation).

Based on this evidence, it is clear the unallotments are a primary driver of city property tax increases in 2010.  Further analysis reveals that the relationship between the size of city aid losses and the size of city property tax increases is statistically significant at the 0.01 level.  Translation into English: there can be no doubt that aid cuts are contributing to city property tax increases.

The proposed levy increases for 2010 can still be reduced by cities.  However, with the distinct possibility of even more aid losses as the state struggles to deal with its looming budget deficit, it is unlikely that many cities will choose to significantly reduce their proposed 2010 levies.

Property tax increases are not the only--or even the primary--strategy that cities are using to deal with the one quarter of a billion dollars that have been stripped out of their budgets due to unallotments made within the last year.  Cities are also cutting their budgets.

Among all cities with a population greater than 1,000, an average of about one-third (35.7%) of the total aid and credit loss is being recovered through a property tax increase.  The cities with the largest aid and credit cuts have levied back the smallest portion of their cuts in 2010.  Cities with aid in credit cuts in excess of 20 percent of the 2009 levy are on average levying back slightly less than 25 percent of their lost aid and credit revenue through property tax increases.  The remaining 75 percent of the cut is being dealt with through budget measures, including cuts in city services and infrastructure investments.

This information shows that local elected officials are sensitive to the impact of property tax increases upon their constituents.  The property tax is a regressive tax that falls most heavily on those families with the least ability to pay; cities with the largest cuts are dealing with the largest portion of their revenue loss in a way that does not involve further burdening these low-income households.  Even cities with the smallest losses (i.e., less than five percent of their 2009 levy) are not on average fully restoring their aid and credit cuts through property tax increases.

However, given the magnitude of the revenue losses imposed on cities through recent unallotments combined with the large erosion in real per capita state revenue shared with cities in preceding years, some property tax increases are unavoidable.

Still more bad news is that investment in public safety, streets, parks, and other city services and infrastructure will be cut even further.  The real per capita revenue of Minnesota cities has fallen by over 12 percent during the course of the current decade.  Even before these cuts, the per capita spending of Minnesota cities was below the average for all U.S. cities.  These cuts cannot go on indefinitely without endangering Minnesota's quality of life.

Everyone knows that budget cuts will have to be made by all levels of government in response to the state's recurring budget crisis.  However, there is no reason why a disproportionate share of the sacrifice must continue to be foisted on Minnesota local governments and low-income families.  In addressing the current budget crisis, increases in progressive revenues--such as the income tax--must be on the table.

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