Future state aid may be at stake as property taxes appear headed up
By Don Davis
By mid-December, city, county and other local officials decide how much property tax they will collect. Those decisions come on the heels of the Democratic Legislature and governor sending them large bundles of new money in the name of property tax relief.
If taxes go up, local governments may see less state aid in the future. That could lead to service cuts or property tax increases, much like Minnesotans have experienced for a decade.
“People have a right to expect lower property taxes,” state Rep. Paul Marquart, DFL-Dilworth, said.
But many Minnesotans probably will not see lower bills.
A state Revenue Department report earlier this month indicated that property tax levies statewide could rise nearly 2 percent. Cities expect to raise tax levies 2.1 percent, counties 1.5 percent, townships 2.1 percent, schools 2.6 percent and other taxing districts 2.3 percent.
Democratic Gov. Mark Dayton and others are concerned that the preliminary numbers show 63 percent of cities and 77 percent of counties plan higher property tax levies.
Democrats did not think that would happen. They thought that millions of dollars in additional state aid they sent to local governments would result in property tax cuts.
“There will be a number of legislators who seize on any increase as evidence that local governments are (big) spenders and they will take every dollar and spend it and get more and more and they will take every dollar they can get,” Dayton said. “So they are going to undermine the case we have been making.”
With Dayton saying that increases will “seriously undermine our case,” Revenue Commissioner Myron Frans plans to talk to local government leaders who propose raising tax levies in the hope that they will trim their tax levies.
The latest Revenue Department numbers come from preliminary property tax levy decisions local officials have made. Each governing body needs to make a levy final decision by mid-December. State law does not permit preliminary levies to go up, only stay the same or shrink.
Statewide, preliminary levies always are higher than the final ones. They usually fall a percentage point or less, which if it happens this year means tax levies would rise a bit.
The preliminary levies are a mixed bag, Dayton said. “We reduced property tax increases, but our goal was to reduce property taxes.”
Senate Tax Chairman Rod Skoe, DFL-Clearbrook, said that even if levies increase, “the average property taxpayer probably will not see an increase.”
A higher levy does not always mean higher homeowner taxes. For instance, if business property value increases more than home value in a community, businesses would pay a higher percentage of taxes and home property taxes could fall. The situation is different in each community.
Frans and Dayton said that, despite their concerns, they understand the need for higher taxes.
Frans said that in Ada, for instance, he learned that when Local Government Aid was falling in the past 10 years, the city decided to buy a new police car every six years instead of every five years. With higher LGA coming, city officials plan to return to the old purchase schedule to try to prevent equipment problems.
Even if property taxes rise, Gary Carlson of the League of Minnesota Cities and those representing other forms of local government say that new money is needed after 10 years during which state aid often fell, or at least did not keep up with inflation.
The levies announced this month, at less than a 2 percent increase, easily could have been 6 percent or 7 percent hikes without the additional state aid, Carlson said.
Salary freezes, hiring caps and other cuts have hampered local governments, Carlson said. “At some point, and maybe it already has started, there is some pressure to fill some of those jobs, to undertake some of those projects, to kind of get back to the traditional flow of services.”
Local governments have held down property taxes for years, said Beau Berentson of the Association of Minnesota Counties. “We are still dealing with a decade of underinvestment, under funding.”
Skoe said his area is a good example of county-to-county differences.
Beltrami County’s preliminary 2014 levy is the same as the current one. But next door in Clearwater County, officials decided to sell a hospital and have related debt that needs to be paid, leading to a preliminary 14 percent levy increase.
One factor influencing higher taxes is that unexpected local aid cuts over the years have made local officials leery about trusting state government to come through with money that was promised.
“I have had that specific conversation on many occasions,” Frans said.
Given that lack of trust, some local budgets are built without counting on full state aid, possibly triggering larger-than-needed levy increases.
With increases looming, some say, there could be a fight to keep Local Government Aid and County Program Aid as is.
“I do think it makes it harder for local governments to make the argument that LGA is about property tax relief,” House Speaker Paul Thissen, DFL-Minneapolis, said.
Local Government Aid was created in 1971 to give cities without much property wealth (and, thus, a harder time collecting property taxes) the ability to provide fundamental services such as police and fire protection. It has become critical for many cities, such as Minneapolis, St. Paul and Greater Minnesota communities.
A formula designed to determine financial need means most Twin Cities suburbs receive little, if any, LGA. Suburbs generally have more property wealth than communities that receive LGA, so they can collect more property taxes.
“A lot of suburban legislators are going to have doubt,” Marquart said. “‘Is that the right investment to make?’ I’m going to be honest, that is a fair question.”
If the final levies next month show increases, Marquart said, the news will “send a very clear message and determine the future of Local Government Aid.”
“The state of Minnesota is watching,” Marquart warned.
Democrats “came through” for local governments, said Larry Jacobs from the University of Minnesota’s Humphrey School of Public Affairs, “and the taxes still go up. I think this was an overreach on the part of local governments. I think they might have lost an ally in the Capitol.”
Most importantly for local governments, Jacobs added, “this could be an end to what had been a pretty nice gravy train.”
New money the governor and Legislature approved sending to local Minnesota governments next year:
* $140 million in homestead credit refunds and renters’ credits, which goes directly to Minnesotans
* $129 million in sales tax exemptions for cities and counties (a figure cities and counties say actually will be half that size)
* $80 million increase in Local Government Aid, raising the total to $507 million in 2014
* $40 million increase County Program Aid, raising the total to $105 million next year
* $10 million in township aid, a new program
Property taxes, mostly levied by local governments, increased from $4.4 billion in 2002 to $8.3 billion this year.