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A Balance Between Property Tax Relief and Public Investment

June 19, 2013 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

Minnesota conservatives are complaining about the property tax provisions of the 2013 omnibus tax act, asserting in an e-mail that too much of the property tax aid and credit increase in the act is going to Minnesota counties, cities, towns, and school districts and will not translate into property tax reductions.

Minnesota 2020 debunked some of these idea's in an article last week, explaining that the 2013 tax act is providing the single largest increase in the homeowners’ property tax refund (PTR) in nearly four decades. In addition, significant new tax relief is being distributed to renters through the renters’ PTR program. The tax relief provided through these two refund programs goes directly to taxpayers.

Excluding direct property tax relief provided through the increases in the PTR programs, most of the remaining $411 million increase in property tax aids and credits in the 2013 tax act* will be in the form of increased aid to Minnesota counties, cities, and townships. Of this amount, a significant share will be in the form of increased general purpose aid through programs such as city Local Government aid (LGA) and County Program Aid.

Based on an analysis of historical trends and other data, non-partisan staff at the Minnesota House, Senate, and Department of Revenue (DOR) anticipates that approximately half of these new aid dollars will translate into property tax relief, while the other half will translate into additional funding for local government services and infrastructure. This is referred to as the “50 percent levy-back assumption.”

Conservatives have been referring to this operating assumption used by non-partisan staff as an “admission” from the Dayton administration, as if they had uncovered some stealthily kept secret. In fact, the Dayton administration has been very open about the 50 percent levy-back assumption since the revised assumption was announced by legislative and DOR staff over two years ago.

If the 50 percent levy-back expectation holds true, approximately half of the $131 million increase in county, city, and township general purpose aid will provide increased funding for Minnesota counties, cities, and townships, while the remainder will translate in property tax relief.† In addition to the increase in general purpose aid, there will also be a $31 million increase in local government pension aid; based on discussions with non-partisan legislative and DOR staff, it is reasonable to expect that about half of the pension aid increase will translate into property tax relief.‡ Finally, non-partisan staff also speculated that approximately one-third to one-half of the approximately $91 million increase in K-12 education funding* in the 2013 tax act would translate into property tax relief, with the remainder providing increased school operating revenue.

All things considered, of the $411 million property tax aid and credit increase for FY 2014-15 in the 2013 tax act, it is reasonable to expect that approximately two-thirds will translate into property tax relief either through direct refunds to taxpayers or through reduced local government levies, while approximately one-third will translate into increased funding for local government services and infrastructure.

There is no reason for state policymakers to be timid about the fact that one out of every three dollars in property tax aids and credits will translate into increased funding for local governments. A recent Minnesota 2020 analysis demonstrated that over the last decade, the real per pupil school district revenue in Minnesota had declined by six percent, real per capita county revenue by 11 percent, and real per capita city/town revenue by 16 percent. Furthermore, a 2010 Minnesota 2020 article demonstrated that the per capita spending among Minnesota cities is over five percent below the national city average. The fact that a portion of the 2013 aid increases will enable local governments to partially restore past cuts to public safety, transportation, human services, and K-12 education is good news, except among those who reflexively disdain any increase in public investment.

The largest single general purpose aid increase in the 2013 tax act is the $81 million increase in city LGA. This increase will come nowhere near what is necessary to replace cuts in LGA over the last decade. Furthermore, the $81 million increase in LGA is being distributed under an improved formula that will better direct dollars to the communities that need it the most. The increased LGA funding in the 2013 tax act—which will provide property tax relief for city taxpayers and increased funding for city services—is a public policy success.

It is important to note that the property tax aid and credit increase is not the only source of property tax relief in the 2013 tax act. The act also eliminates the sales tax on local government purchases. This will reduce county and city expenses by over $120 million per year based on DOR estimates, a portion of which will no doubt translate into reduced local government levies. Conservatives tend to ignore this source of property tax relief.

In fact, the entire gist of the e-mail referenced above—chiding Governor Dayton and legislative progressives for not providing enough property relief—is more than a little ironic. For ten years—eight under Governor Pawlenty (2003 to 2010) and two under a GOP controlled House and Senate (2011 and 2012)—conservatives successfully pushed an agenda which involved massive cuts in aid to local governments, reductions in the renters’ PTR, and the elimination of the homestead credit, which in combination were the principal cause of property tax increases over the last decade. After ten years of hacking away at property tax aids and credits, conservative leaders are now complaining that progressives did not do more to reverse their previous policy blunders.


*According to the fiscal tracking spreadsheet from the Office of Senate Counsel, Research, and Fiscal Analysis, the 2013 omnibus tax act will provide a $411 million increase in property tax aids and credits during the FY 2014-15 biennium, including $91 million in K-12 education funding. However, both of these amounts may be revised based on a reinterpretation of education funding provisions in the 2013 tax act.

†The 2013 tax act imposes levy limits on counties and cities for taxes payable in 2014. The presence of these levy limits may compel some local governments to provide greater property tax relief than would be the case in the absence of levy limits. For this reason, the portion of the 2014 general purpose aid increase that is translated into property tax relief could exceed 50 percent.

‡Among non-partisan staff, there was actually a divergence of opinion regarding the portion of pension aid that would translate into property tax relief. Because pension costs are largely fixed, some staff felt that nearly all of the increase in pension aid would translate into property tax relief. Others felt that the reduction in pension levies resulting from the increase in pension aid could be partially offset by increases in other non-pension levies and thus it would be appropriate to apply the 50 percent levy-back assumption to the pension aid increase.

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