Get ready for Governor Pawlenty’s property tax hike

Coming soon to a property tax statement near you: Governor Tim Pawlenty’s 2010 property tax increases!

The governor has indicated that he will not work with the legislature on a balanced solution. He instead will use a go-it-alone strategy of direct budget cuts. The governor, who already took $110 million in revenue from counties and cities in December of 2008, has made clear that many of his future unallotments will be even more cuts to Minnesota communities.

No one yet knows the manner or the level of cuts the governor will unilaterally impose. The best indicator is his 2009 budget proposal to the legislature. The non-partisan Research Department of the Minnesota House of Representatives has simulated the impact of current law and the governor’s proposed aid cuts based upon projected information for property taxes payable in 2010.

Based on these simulations, the governor’s budget proposal would cause 2010 statewide property taxes to be $247 million higher than they would have been. More than half of these property tax increases ($129 million) will fall on Minnesota homeowners. Under the governor’s proposed budget, the average homeowner property tax in Minnesota will be 3.5 percent higher in 2010 than they would have been under current law aid levels. The projected 2010 property tax increase resulting from the governor’s proposed aid cuts for the seven county metro area and greater Minnesota is shown below; Greater Minnesota cities and towns are shown separately.

Homeowner property tax increases resulting from the governor’s proposal would be greater among greater Minnesota cities than among greater Minnesota towns and metropolitan communities because greater Minnesota cities are more dependent on Local Government Aid (LGA) and will be hurt more by the governor’s proposed cuts to LGA.

However, there is considerable variation within the metro area and Greater Minnesota in the level of property tax increases resulting from the governor’s proposal. The graph below breaks down the projected average home property tax increase resulting from the governor’s aid cut for each of the specific counties, cities, and regions identified in the House Research simulations. (For a description of these regions, click here).

Based on House Research simulations, property taxes on the average value home in taconite cities (the Iron Range) will be 10.8 percent higher under the governor’s proposed aid cuts then they would have been under current law aid levels. In addition to taconite cities, the portions of the state that will see the largest home property tax increases as a result of the governor’s proposed aid cuts include northwest cities, southwest cities, south central cities, and the core cities of Minneapolis and Saint Paul.

Townships and suburban metropolitan communities will be subject to the smallest property tax increases under the governor’s proposal based on the House Research simulations. In general, these portions of the state are least dependent on city LGA and would be hurt least by the cuts to LGA proposed by the governor.

The portions of the state with the largest percentage property tax increases are not necessarily the portions of the state with the largest dollar increases. For example, while the governor’s proposal will cause the largest percentage property tax increases among taconite cities, the largest dollar increase in the average value home property tax is expected to be in Minneapolis ($228) and Saint Paul ($134).

The bottom line: homeowners will be hit hard. But other classes of property will also see property tax increases if the aid cuts that the governor proposed during the 2009 legislative session become reality. The graph below shows the projected 2010 property tax increase under the governor’s proposed aid cuts for six major classes of property.

The property tax increases that would occur because of the governor’s proposed aid cuts vary both by region and by type of property. However, Minnesotans throughout the state would see at least some property tax increase if the governor’s proposed aid cuts were to become a reality.

In addition, the House Research simulation does not attempt to measure the provisions in the governor’s budget beyond direct aid and credit cuts. For example, the following components of the governor’s proposal will increase local costs in ways that could translate into further property tax increases:

* Cuts in health care coverage for low-income families could lead to increases in uncompensated care costs for counties.

* The governor’s proposal to shift school aid payments could lead to short-term borrowing costs for school districts.

* The proposed cuts to “payments in lieu of taxes” made by the state to local governments that provide services to tax exempt state land will leave yet another hole in local government budgets.

The House Research simulations make no attempt to incorporate the impact of these measures on property taxes and thereby could understate the magnitude of property tax increases resulting from the governor’s proposal in its entirety.

There are additional types of tax increases resulting from the governor’s proposal that do not show up on the House Research simulation. For example, the governor’s is proposing to cut $50 million from the renters’ credit; this program refunds a portion of the property taxes borne by low-income renters. By cutting this credit, the governor’s proposal is increasing the property tax that is passed on to renters.

Of course, the governor can take credit for thwarting the progressive state tax increases the Minnesota House and Senate passed. For example, in the closing weeks of the session, the governor vetoed House File (HF) 885, a bill that would have increased state taxes by nearly $500 million per year. However, the majority of the revenue in HF 885 would have come from the wealthiest 2.3 percent of Minnesota tax filers who are enjoying (and who would continue to enjoy even after the tax increase) an effective state and local tax rate below that of low and moderate income families. In short, the governor opted for an increase in property taxes, which fall disproportionately on low and moderate income families, so that high income households could be protected.

As noted above, this analysis is based on the governor’s proposed budget from the 2009 session. The actual aid cuts imposed by the governor through unallotment could differ from his earlier proposal. Given that the governor’s “tobacco appropriation bonds” (an elaborate accounting shift that was rejected by the vast majority of legislators of his own party) are off the table, the governor will have to rely more on direct cuts and less on funding shifts to balance the state’s budget. This could lead to even deeper aid cuts-and larger property tax increases-than would have occurred in the governor’s original budget proposal.

The property tax increases that will result from the aid cuts proposed by the governor are only the tip of the ice berg. Based on the assumptions used by the House Research Department, funding for county and city services will fall by over $200 million because a large portion of the governor’s aid cut will not be recovered through property tax increases. The impact of these aid cuts on local government finances will be examined tomorrow as this two part series concludes.