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Pawlenty's Property Tax Caps Don't Work

January 10, 2010 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

Property taxes are expected to increase by 3.5 percent statewide from 2009 to 2010 based on preliminary levy information, which is "relatively modest" growth according to the Minnesota Department of Revenue.  Contrary to claims from the Pawlenty administration, state imposed caps on local government property taxes--known as "levy limits"--had little if anything to do with the modest rate of property tax growth.

The graph below shows the percentage growth in property tax levies for counties, school districts, towns, and cities from tax payable year 2009 to tax payable year 2010.  Only cities with a population over 2,500 are subject to levy limits; a separate bar shows the levy growth for these cities.


The final levy of local governments can be reduced below the preliminary levy amount, but they cannot be increased.  Thus, the preliminary pay 2010 property tax increases summarized in the graph represent the maximum allowable increase; the actual increase could be less than this.

Revenue Commissioner Ward Einess credits the relatively low property tax increases to levy limits.  According to Einess, "It's clear that the property tax cap has imposed some fiscal discipline on local government spending, even after many jurisdictions experienced reductions in local government aid this year."

An examination of the data reveals that Commissioner Einess is mistaken.  The vast majority of Minnesota counties and cities subject to levy limits in 2010 are not constrained by these limits either because these jurisdictions have not levied the maximum allowable amount or because they have "special levy" authority that they have not claimed.  "Special levies" are levies that are exempt from levy limits.*

If counties and cities had levied the maximum levy allowable after claiming all possible special levy authority, the aggregate property tax increase among jurisdictions subject to levy limits would have been at least double the actual 2010 levy increase.  It is clear that levy limits had little to do with the fiscal restraint that Commissioner Einess references.

"Fixation on arbitrary spending caps like levy limits is just a way to distract people from real, substantive discussions about the deep crisis facing the State of Minnesota," according to Joe Mathews, policy analyst for the Association of Minnesota Counties.  "The Governor needs to spend more time working on the Minnesota budget and stop wasting time second guessing locally elected officials who have a proven track record of fiscal responsibility."

The consternation of local officials is understandable.  Since Pawlenty came to office, local government revenues have grown less rapidly than state government revenue.  In fact, per capita local government revenue has declined after adjusting for inflation.  It is hypocritical for the Governor to push for levy limits on local governments when local governments have been more frugal than state government.

A statistical analysis conducted by the Research Department of the Minnesota House of Representatives concluded that, "In general, there is no relationship between cities under levy limits vs. cities not subject to limits with respect to variation in certified levy growth rates."  Translation: levy limits are an ineffective way to control levies.  The 2010 levy information further reinforces this conclusion.

Given that cities had faster levy growth than counties, towns, and school districts, a closer scrutiny of city finances is in order.  Adjusted for inflation and population growth, the real per capita increase in city property taxes from 2009 to 2010 is slightly under three percent.

However, the increase in real per capita city property taxes was not sufficient to replace the real per capita cut in state aid resulting from the Governor's unallotment.  From 2009 to 2010, the statewide real per capita city revenue base will decline slightly.

Furthermore, the fiscal situation of cities is worse than the slight decline of revenue would indicate.  The $67 million cut in CY 2009 state aids and credits to cities imposed by the Governor last July came half way through the cities' 2009 budget year; thus, a portion of the impact of the 2009 aid cut will have to be dealt with in 2010 city budgets.

The bottom line is that the real per capita revenue base of cities in 2010 will be 3.4 percent less than it was in 2000 and 7.1 percent less than it was in 1990.  These percentages assume no further reduction in city aids and credits in 2010; this may be an optimistic assumption, given the projected $1.2 billion deficit projected for the current biennium and the $7.4 billion deficit projected for the next biennium, compounded by the potential unraveling of Pawlenty's July 2009 unallotments.

The two levels of local government with the lowest rate of levy growth are townships and school districts.  (The rate of growth in school levies is a fraction of a percentage below that of counties.)  It is worth noting that neither townships nor school districts are subject to levy limits.  Furthermore, the rate of levy growth in 2010 among the 225 cities subject to levy limits (i.e., cities with a population over 2,500) is approximately the same as the levy growth among cities not subject to levy limits.  All of this is further indication that levy limits are largely irrelevant to the rate of property tax growth in 2010.

What explains the more rapid rate of growth in city levies vis-à-vis townships?  Quite simply, cities were subject to much greater state revenue losses.  As a percentage of 2009 levies, the 2009 and 2010 city aid and credit unallotments were three times greater than those of townships.  On a per capita basis, the city unallotments were six times greater.

Given that levy limits are largely irrelevant, what explains the "relatively modest" levy increases in 2010?  Despite a significant decline in real per capita local government revenue over the last eight years, local elected officials are reluctant to further increase property taxes because they realize that property owners have been hard hit by past increases.  According to Joe Mathews, "Our commissioners are elected--and very close to their communities.  They know how badly their communities are hurt by rising property taxes and can find the appropriate balance between spending and taxation levels for themselves without state interference in the form of levy limits."

Local elected officials are caught between a rock and a hard place.  Ongoing state aid cuts create pressure for further cuts in local services and infrastructure.  At the same time, local residents are resistant to higher property taxes.  Local elected officials weighed these competing goals and settled on a "relatively modest" tax increase.  In making these calculations, levy limits were largely irrelevant to the outcome.

Levy limits are a perennial gimmick that politicians hide behind when they want to pretend they are doing something about property taxes.  Levy limits were ineffective in the past and are ineffective today.  Rather than gimmicks, Minnesotans would be better served by a true state-local fiscal partnership that recognizes the spending demands and the fiscal constraints encountered by all levels of government.

*There are approximately twenty categories of special levies.  One of these special levy categories allows counties and cities to increase their levy to replace 2008 and 2009 unalloted aid amounts.  In this one category alone, counties and cities have nearly $90 million of levy authority that they will not use in 2010.  There is certainly unclaimed levy authority in other special levy categories as well, although these cannot be quantified.

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