In recent debates, gubernatorial hopeful Tom Emmer has said his proposals make the “hard choices” to balance Minnesota’s budget. One of those “hard choices” is his plan to cut $1.15 billion from “property tax aids and credits,” which include money the state shares with local governments to help hold down property taxes and assure local governments can provide adequate public services.
Rep. Emmer’s “hard choices” regarding state aid and credits reductions are not as hard as he would have us believe. Emmer has provided no specifics as to precisely how he would cut aids and credits, so it is unclear which programs would be cut and which communities and property taxpayers would be hardest hit. Emmer’s ambiguity on this issue enables him to talk about “hard choices” without actually telling voters whose property taxes will be increased and whose public services will be cut. This is the political equivalent of having your cake and eating it too.
Minnesota 2020 has analyzed what Emmer’s $1.15 billion property tax aid and credit cut could look like, based on Rep. Emmer’s comments as well as some educated guesses. It is widely acknowledged that property tax refunds effectively target property tax relief based on the ability to pay, so we assume that Rep. Emmer would not cut these programs. We also assume that Emmer would not cut police and fire aid, given his repeated statements about importance of “core services.”
On the other hand, we assume that Emmer would eliminate the political contribution refund. (For some unbeknownst reason, this state expenditure is categorized with “property tax aids and credits.”) We also assume that he would cut general purpose aid programs, such as city Local Government Aid (LGA), County Program Aid (CPA), and disparity reduction aid. Emmer has criticized the LGA program during gubernatorial debates. Finally, we assume that Emmer would reduce the homestead market value credit, since these dollars are not targeted based on the need for property tax relief.
We do not know how Emmer would apportion cuts to LGA because he hasn’t told us that either. Thus, for purposes of this analysis, Minnesota 2020 will assume a proportional cut of 57.6 percent to each jurisdiction’s aid and each homeowner’s market value credit. A cut of 57.6 percent is necessary to make the target of a $1.15 billion cut after taking into account elimination of the political contribution refund.
Rep. Emmer’s claim that his cuts to property tax aids and credits will not translate into property tax increases lacks credibility, given that Emmer’s own actions on the Delano City Council show that he voted to increase property taxes in 2003; according to Emmer, his decision to increase property taxes was to “fill the hole” left by state aid cuts.
Non-partisan staff with the Minnesota House and Senate, Revenue Department, and Minnesota Management & Budget have all recognized that aid cuts translate into property tax increases. Consistent with standard Legislative and Revenue Department assumptions, this analysis will assume that two-thirds on each dollar cut from LGA, CPA, and disparity reduction aid will translate into a property tax increase and one-third will translate into cuts in funding for local government services.
So–based on these assumptions–what would a $1.15 billion cut to property tax aids and credits look like? The following analysis will examine the impact on residential homestead* property taxes and on local government budgets. Tomorrow’s article will examine the impact on business property taxes.
The average homestead property tax increase statewide would be approximately $215 per year ($430 for the biennium) or 8.8 percent. As illustrated in figure 1, homestead property tax increases would be greater in cities than in townships; this is primarily because city property taxpayers would be hit harder by the cut to LGA.
There is significant regional variation in homeowner property tax increases resulting from the $1.15 billion aid and credit cut. As illustrated in figure 2, homeowners in greater Minnesota cities and the metropolitan central cities of Minneapolis and Saint Paul would be particularly hard hit, while property tax increase would be significantly less in other metro cities.
It should be noted that there is significant variation among cities even within the same region. For example, older metropolitan cities would experience an average annual homeowner property tax increase of $193 (7.6 percent), while “high income” metro cities would experience an estimated increase of $88 (1.4 percent).† A table accompanying this report shows the property tax increase resulting from the $1.15 billion aid and credit cut on low, average, and high value residential homesteads in each Minnesota city.
In the vast majority of Minnesota communities, lower value homes are hit harder because of the cuts to the homestead market value credit, which typically provides more property tax relief to lower value homeowners.
As noted above, it is assumed that counties and cities replace only two-thirds of their aid cut through property tax increases. The remaining third is covered through budget cuts. Under this assumption, the resulting budget cuts will generally be greater among greater Minnesota cities and the metro central cities of Minneapolis and Saint Paul than among other metropolitan cities. Figure 3 shows the net revenue loss resulting from the aid cut as a percentage of revenue base‡ for these three categories of cities.
As with the property tax increases, the percentage reduction in city revenue base resulting from the aid cut varies significantly from community to community, as seen in the final column of the accompanying table. This comes on top of cuts already made.
From 2002 to 2010, the per capita revenue base of Minnesota cities has declined by 9.6 percent in constant 2010 dollars and the per capita spending of Minnesota cities has dropped below the U.S. average.
Homeowners and local governments will not be alone in bearing the impact of a $1.15 billion cut in property tax aids and credits. Tomorrow Minnesota 2020 will examine the impact of a $1.15 billion cut on Minnesota business property taxes.
*A “homestead” refers to a residential dwelling that is occupied by the owner or, in some instances, a relative of the owner.
†The designation of metropolitan “older cities” and metropolitan “high income” cities is based on a statistical analysis conducted by the League of Minnesota Cities. On-line documentation describes the League’s methodology and includes a list of metro “older cities” and “high income” cities.
‡City “revenue base” refers to the sum of city levies plus property tax aids and credits. “Revenue base” is a commonly used proxy of city spending.