With more cooperative majorities in both houses of the legislature, look for Governor Dayton to propose not only property tax relief, but also property tax reform, during the 2013 legislative session. This after two years of conservatives blocking his property tax relief proposals while slashing revenue sharing with local governments and eliminating the homestead credit.
As the state stumbled from deficit to deficit over the last decade, state-paid property tax relief aid became a perennial target for budget cuts from Governor Pawlenty and his “no new tax” allies in the legislature. Never mind the fact that these cuts in property tax relief translated into higher property taxes—Pawlenty and his tea party allies could pass these off as the work of those nefarious local governments. In reality, local governments were being more frugal than state government during the Pawlenty years; nonetheless, property taxes increased as local governments struggled to replace at least a portion of revenue sharing cuts.
In 2011, legislative conservatives employed the same stratagem: cut property tax relief programs and eliminate the homestead credit in order to help balance the state budget. Their plan to replace the homestead credit with a convoluted “homestead value exclusion” partially softened the blow on homeowners (“only” 84% of homeowners saw a property tax increase in 2012 as a combined result of the homestead credit elimination and the new value exclusion), but produced a shift of taxes on to other types of property, resulting in tax increases for nearly every business, farm, cabin, and rental property in the state.
After a protracted state government shutdown, Dayton was compelled to yield to GOP demands for more cuts to property tax relief programs. The results were similar to those observed during the Pawlenty years: higher property taxes and reductions in local government services.
In 2013, look for Governor Dayton to reverse these policy blunders. One option would be to eliminate the homestead value exclusion—thereby reversing the shift in property taxes on to business, farms, cabins, and rental properties—and restore the homestead credit in the form of a direct payment to homeowners equal to a percentage of property taxes paid up to a specified maximum. (A credit that is paid directly to homeowners would avoid some of the problems of previous versions of the homestead credit, which involved homestead tax relief that was provided indirectly through payments to local governments; on occasion, the state would renege on these payments to local governments, thereby depriving local governments of the revenue they budgeted for.)
A homestead credit paid directly to homeowners could take a number of different forms. For example, a reconstituted homestead credit that would pay 100% of homestead property taxes up to a maximum of $500 would cost the state approximately $745 million per year; a credit that paid 100% of taxes to a $300 maximum would cost approximately $450 million per year; a credit that paid 20% of taxes up to a $300 maximum would cost just under $300 million.
From 2002 to 2013, city Local Government Aid (LGA) has been slashed by $137 million (24%), while County Program Aid (CPA) has been slashed by $97 million (37%).* Funding for both programs has been cut approximately in half after adjusting for inflation,† resulting in property tax increases and real reductions in spending on public safety, snow removal, infrastructure, and other county and city services.
The constraints imposed by yet another state budget deficit plus demand for other public investments that have been neglected for a decade will likely prevent Governor Dayton from fully restoring cuts to LGA and CPA in his 2013 budget proposal. Preliminary expectations are that Dayton will seek an $80 million increase in LGA and a $40 million increase in CPA, which will be sufficient to restore just over half of the nominal cut to LGA and just under half of the nominal cut to CPA since 2002.
Regardless of the LGA and CPA increase that Dayton proposes in 2013, it is essential that funding for both programs be adjusted for inflation and population growth in subsequent years. Permanently freezing the funding for these programs will guarantee that the property tax relief they provide in future years will decline as the value of the dollar erodes and as the state’s population increases. For example, if LGA had remained frozen at $565 million from 2002 to 2013 with no nominal cuts, the combined pressure of inflation and population growth would have still caused the real per capita purchasing power of these dollars to decline by 39%. Without adjusting LGA and CPA for the effects of inflation and population growth, the value of these programs will erode over time, thereby creating pressure for property tax increases down the road, which is precisely the outcome that the Governor wants to avoid.
The LGA formula is also in need of revision. Because the factors that influence a city’s need for state aid change over time, it is necessary to periodically update the LGA formula to reflect changing conditions. Given that the last comprehensive update of the LGA formula occurred in 2003, the program is again due for an overhaul. To this end, the Governor has charged a task force comprised of mayors from around Minnesota to make recommendations for an updated and simpler LGA program, which will be incorporated into the Governor’s 2013 budget.
Finally, school levies have skyrocketed over the last ten years as school districts were forced to rely more heavily on voter approved “referendum levies” to replace diminishing levels of real per pupil state aid. Dayton’s budget proposal is likely to provide state dollars to buy down these referendum levies, thereby reducing school property taxes and providing an added measure of property tax relief.
After a decade in which state budget problems were repeatedly shifted on to property taxpayers and local governments through cuts in property tax relief programs, Minnesota is hopefully on the verge of substantive property tax reform and relief in 2013. The Governor’s budget should reduce regressive property taxes while at the same time making Minnesota’s property tax system simpler and more efficient.
*The CPA program did not exist in 2002. The determination of the decline from 2002 to 2013 is based on a comparison of 2013 CPA to the 2002 total of the following aid programs: county Homestead and Agricultural Credit Aid (HACA), county mobile home HACA, Family Preservation Aid, and County Criminal Justice Aid.
†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 government purchases.