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Governor's Pawlenty's Plan: Higher Property Taxes, Shorting Local Services

May 28, 2009 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

As noted yesterday, Governor Pawlenty got his way during the 2009 legislative session and the result will be significant property tax increases.  However, that's not the end of the story.  Money for local community services will also be significantly cut.

By refusing to compromise with the legislature on a balanced approach to the state's budget deficit, the governor can cut state aid using his unallotment authority.  The governor has not yet disclosed how much he will cut.  At this point, the only hint of the local government funding cuts that the governor will impose comes from his budget proposal to the legislature during the 2009 session.

The non-partisan Research Department of the Minnesota House of Representatives has simulated the impact of the governor's budget proposal using a set of assumptions agreed to by legislative and Revenue Department staff.  Based on this simulation, the governor's proposed $443 million aid and credit cut (which would be subtracted from 2009 and 2010 current law levels) would translate into a $230 million increase in county, city, and township property taxes1 and a $213 million cut in funding for local services relative to current law.  The $213 million funding cut would have to come from county, city, and township budgets during the remainder of the 2009 and the 2010 budget years.  The $230 million property tax increase would occur in 2010 and represents the growth above what taxes would have been in 2010 without the aid and credit cuts.

The amount of the county, city, and town aid and credit cut and the estimated portion of the cut made up for through (1) property tax increases and (2) budget cuts (as projected in the House Research simulations) are shown in the following table. 

The distribution of the proposed aid cuts between property tax increases in local budget reductions are based on projections, the accuracy of which cannot be guaranteed.  However, it should be noted that to the extent that property tax increases are overestimated, local budget cuts will be underestimated.  Conversely, to the extent that property tax increases are underestimated, budget cuts will be overestimated.

The cuts to local government funding proposed by the governor should be considered in the context of the aid cuts that have already occurred during the previous six years of the Pawlenty administration.  The graph below shows the cut in city Local Government Aid (LGA) from 2002 to 2010; in this graph, 2009 and 2010 reflect the governor's proposed aid cuts.

The governor succeeded in reducing city LGA from $565 million in 2002 to $485 million in 2007, a reduction of $80 million.  The December 2008 aid unallotment combined with the governor's proposed cuts in 2009 and 2010 would reduce 2010 LGA by another $116 million below the 2002 level to $369 million.  If the governor's proposed aid cuts become reality, city LGA will be 35 percent less in 2010 than it was in 2002.

The situation for Minnesota counties is no better.  The governor was successful in cutting county general purpose aid2 from $232 million in 2002 to $205 million in 2007, a cut of $27 million.  The December 2008 aid unallotment combined with the governor's proposed cuts in 2009 and 2010 will further reduce county aids by another $56 million below the 2002 level to $149 million.  Under the governor's proposed budget, general purpose county aid will be 36 percent less in 2010 than it was in 2002.

To make matters worse, this decline in county and city aid does not take into account the decline in the purchasing power of the dollar over time due to inflation.  If the governor unallots county and city aid in the manner outlined in his proposed budget, inflation-adjusted city LGA and general purpose county aid in 2010 will be less than half of what they were in 2002.

There are other components of the governor's proposed budget that will contribute to property tax increases and/or local budget reductions that are not factored into the House Research simulations.  For example, the school aid shifts that the governor proposed (that are also likely to be part of his "go it alone" budget balancing strategy) could compel some school districts to engage in short-term borrowing, which will increase school costs in a way that will likely contribute to higher property taxes or deeper school funding cuts or both.

In addition, the House Research simulations do not factor in increases in county uncompensated care costs resulting from cuts in health care coverage for low income people or cuts in state payments to local governments to cover the cost of services provided to tax exempt state-owned land.  As with school aid shifts, these components of the governor's budget proposal will create increased pressure for property tax increases and/or local budget cuts that are not reflected in this analysis.

While the recurring mantra from the Pawlenty administration is that local governments must learn to control budget growth, Minnesota 2020 continues to illustrate how counties, cities, and school districts in Minnesota have been more frugal than state government during the time that Governor Pawlenty has been in office.  In fact, over the last six years real per capita county and city revenue and real per pupil school revenue has fallen, while real per capita state revenue has increased.  It is hypocritical for the Pawlenty administration to lecture local governments about the need for fiscal restraint.

The bad news for progressives is that Governor Pawlenty won the budget battle during the 2009 legislative session, which means that there is once again a very real possibility that property taxpayers and those who rely on local services will be bearing a disproportionate share of the pain involved in balancing the state's budget.

The bad news for Governor Pawlenty is that he is now completely responsible for the additional property tax increases and local funding cuts that will inevitably result from his unallotment approach; by effectively cutting the legislature out of the decision making process, he cannot plausibly blame them for these outcomes.  To the victor goes the accountability.

1In addition to the $230 million increase in property taxes paid directly to cities, counties, and townships, tax increment financing (TIF) levies would also increase by $17 million based on House Research simulations.  The $17 million increase in TIF levies would be the result of tax rate increases resulting from the aid cuts, not the result of decisions made by local elected officials or development authorities to increase TIF revenue.

2The general purpose county aids included in this analysis are family preservation aid (FPA), county criminal justice aid (CCJA), and homestead and agricultural credit aid (HACA) for 2002 through 2003 and county program aid (CPA) for 2004 through 2010.  Beginning in 2004, FPA, CCJA, and HACA were folded into CPA.  To assure comparability over time, county aid amounts for 2002 and 2003 are adjusted to reflect the aid reduction associated with the state takeover of various court costs; without this adjustment, the decline in general purpose county aid from 2002 to 2010 would have been 43 percent instead of 36 percent.

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