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

October 16, 2009 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

Part 3 of 4  (read part 1, part 2)

Property taxes have shot up dramatically in Minnesota over the last several years, with school property taxes growing most rapidly of all.  However, despite this growth, schools have fewer resources to educate students. Real per pupil school revenues are expected to be less in fiscal year (FY) 2011 than they were in FY 2003.  Both rising property taxes and shrinking school budgets are the result of a state policy that has pushed the state's fiscal problems on to Minnesota communities in order to avoid state tax increases.

The first two parts of this series demonstrated how cuts in state aid have caused county and city revenues to fall at the same time that property taxes increased.  In this regard, the situation of Minnesota public schools is similar.

This article is the third of a four part series examining trends in local property taxes, state aid, and total revenue during the "no new tax" era.  This analysis is based on data from the July "Price of Government" report and will cover the period from the last year under a budget set during the Ventura administration (FY 2003) through the last year of the current biennium (FY 2011).  ("Price of Government" data after FY 2007 are estimated.)  All amounts in today's analysis will be expressed in constant FY 2010 dollars.*

FY 2003 is a watershed year for school finance in Minnesota.  Real (i.e., inflation-adjusted) per pupil school property taxes were cut in half from FY 2002 to FY 2003 (corresponding to tax payable years 2001 to 2002) when general education property taxes -- with the exception of operating referendum levies -- were eliminated and replaced with state dollars.  However, since FY 2003 real per pupil state aid has declined and school property taxes have shot up due to the passage of voter-approved levies and the re-introduction of some general education property taxes, such as operating capital, equity, and transition levies.

From FY 2003 to FY 2011 (pay 2002 to pay 2010), real per pupil school property taxes are estimated to increase by 73.1 percent.  The percent change in school property taxes, state aid, and total revenue is illustrated below.

The dip is state aid to schools from FY 2009 to FY 2010 is due to a one-time $500 million reduction in state general education aid that was replaced with federal recovery dollars.  The revenue spike in FY 2010 was due to a one-time infusion of over $1 billion in federal dollars that was in addition to the $500 million used to replace the reduction in state aid.  (The "Price of Government" information used to create this graph does not reflect the reduction in state aid in FY 2010 and FY 2011 resulting from the state aid payment and levy recognition shifts.)

In FY 2011, the levels of federal and state aid and total school revenue are estimated to return to the typical trend line.  From FY 2003 to 2011, real per pupil state aid to school districts is expected to fall by 14.6 percent (again, not including the impact of school funding shifts).  The percentage aid cut experienced by Minnesota public schools is smaller than that experienced by cities and counties; however, school districts are much more dependent on state aid than are cities and counties and thus an equivalent percentage cut in state aid has a more severe impact on total school revenue than on total city or county revenue.

From FY 2002 to FY 2011, total state aid is expected to fall by $1,412 per pupil, while school property taxes are estimated to grow by $1,145, for a net revenue loss of $268 per pupil.

Revenue from all other sources (e.g., federal aid, fee revenue, etc.) is expected to increase by $62 per pupil, leaving school districts with a total revenue loss of $206 per pupil (1.6 percent) over the entire eight year period.

Naturally, many Minnesotans likely assume that real school revenue has increased on the basis of the growth in school property taxes that they pay.  However, the 73.1 percent growth in school property taxes since FY 2003 is driven by a large reduction in real per pupil state aid, not by growth in real per pupil revenue.  Large school property tax increases since FY 2003 (pay 2002) have been insufficient to replace the entire state aid cut, leaving school districts with a net loss of revenue.

Approximately half of school property tax increases from FY 2003 to FY 2010 have been in the form of "referendum market value levies."  To make a long story short, referendum market value levies fall more heavily on homeowners than do ordinary tax capacity levies, thereby contributing to a more rapid rate of growth in homeowner property taxes.**  The large increase in referendum market value levies is one of the reasons why homeowner property taxes have increased more rapidly than property taxes in general since FY 2003.

It is important to note that at the same time that school revenues have fallen, new costs have been imposed on school districts in the form of new testing requirements and higher performance standards.  In addition, the concentration of higher cost special education students in public schools has increased.  In short, Minnesota public schools are being asked to do more with less.

The situation with Minnesota school districts parallels that of counties and cities.  As the result of recurring state revenue shortages, real per pupil state funding for Minnesota public schools has been cut significantly.  Like counties and cities, school districts have dealt with declining revenue from the state through a combination of budget cuts and property tax increases.  The numbers speak clearly: the growth in real per pupil school property taxes is the result of state aid cuts, not growth in real per pupil school budgets.

This series will wrap up on Monday with an overview of the combined revenue, state aid, and property taxes of all Minnesota communities.

Click here to read part 4.

*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.

**"Minnesota Property Taxes by the Numbers: 2009 Edition" from Minnesota 2020 explains the linkage between referendum market value levies and rising homestead property taxes as follows: "Unlike other levies, levies spread against referendum market value afford no preferential tax treatment to homeowners; for this reason, an increase in referendum market value levies translates into a larger percentage increase in homestead taxes than business taxes."


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