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

October 14, 2009 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis
Part 2 of 4 

Yesterday's installment demonstrated how the state's "no new tax" policies have left Minnesota cities with no option other than to cut budgets and increase property taxes.  Sadly for Minnesota property taxpayers, counties are in the same boat.  The pursuit of the "no new tax" agenda has helped to avoid the need for state revenue increases by shifting public costs on to regressive local property taxes.

This installment is the second in a four part series that examines county, city, and school district property taxes, state aid, and total revenue during the era of "no new taxes" based on data from the most recent "Price of Government" report.  This report reflects the impact of recent executive unallotments and line item vetoes; data after CY 2006 are estimates.  Today's article will examine counties.  The analysis will extend from CY 2002/FY 2003 (the last year under a budget set during the Ventura administration) through the end of the current biennium (CY 2010/FY 2011).  All amounts in today's analysis will be expressed in constant CY 2009 dollars.*

Real (i.e., inflation-adjusted) per capita county property taxes are projected to increase by 16.3 percent from 2002 to 2010.  However, the growth in county property taxes did not translate into a growth in county revenue, as illustrated below.

Real per capita county revenue is projected to drop by 6.2 percent from 2002 to 2010.  The growth in county property taxes over this eight year period was not sufficient to offset a 29.1 percent decline in state aid** to counties, consequently leading to a significant drop in county revenue.  The graph below compares the projected decline in state aid to Minnesota counties to the growth in county property taxes from 2002 to 2010.

From 2002 to 2010, total state revenue to Minnesota counties is estimated to decline by $114 per capita.  Meanwhile, the increase in county property taxes is $66 per capita, which is sufficient to replace 58 percent of the aid cut.  Consequently, the total revenue that counties derive from the combination of state aid and property taxes declined by $47 per capita over this eight year period.  Net real per capita revenue from all other sources (e.g., federal aid, charges for services, etc.) declined over this period and thus was unable to offset any of the decline resulting from the state aid cuts.

State revenue to counties was reduced during the first three years of this eight year period as part of a partial state takeover of court administration costs.  The amounts presented above contain an approximate adjustment for the aid loss associated with the court administration takeover so as not to overstate the magnitude of the state aid and total county revenue reduction.  Without this adjustment, the decline in real per capita state aid and total county revenue from 2002 to 2010 would have been approximately 32 percent and 7 percent respectively.

At the same time that real per capita state aid and total county revenue was declining, the state was shifting additional costs on to county governments.  For example, during this period the state shifted responsibility for incarcerating short-term felony offenders to counties and mandated that counties pay ten percent of the medical assistance costs for nursing homes stays in excess of 90 days for people under age 65.

The Governor's line item veto of funding for General Assistance Medical Care (GAMC) will also have an impact on county budgets.  The elimination of GAMC funding for the second half of the current biennium will shift expenses previously borne by the state on to counties and local property taxpayers through increased uncompensated care costs as individuals without medical coverage seek treatment in county-funded hospitals charged with providing charity care.  The GAMC cut will also result in increased mental health and chemical dependency costs for counties as people formerly covered under GAMC seek treatment through county-funded programs.

At the same time that the state is cutting the dollars that it shares with counties, it has also been shifting costs on to counties.  This leaves counties with no option other than to increase property taxes at the same time that they are cutting budgets.  All of this is the result of a policy whereby the problems arising from the state budget deficit are shifted on to local governments, thereby avoiding the need for state tax increases by effectively dumping more public costs on to local property taxes.  To add insult to injury, state policymakers complain about growth in local spending, even though local governments have been more frugal than state government.

Friday's installment will examine the impact of the "no new tax" policy on Minnesota school districts.  While the financial situation of school districts differs from that of counties and cities in some regards, there are significant parallels.

*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.

**"State aid" includes all forms of state transfers to counties, including general purpose aids (such as County Program Aid), categorical aids to fund state mandates, and property tax credits.  All of these are referred to collectively as "state aid" in the "Price of Government" report.

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