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MN2020: Fiscal Policy http://www.mn2020.org/issues-that-matter/fiscal-policy Responsible, progressive fiscal policy creates state and community prosperity. Sat, 11 Jul 2020 00:05:30 -0500 VIDEO: MN 2020 Property Tax Report http://mn2020.org/issues-that-matter/fiscal-policy/mn-2020-property-tax-report http://mn2020.org/8825 <p> By Briana Johnson, {related_entries id="article_author_blogger"}Briana Johnson, Video Production Specialist </p> <p> This week, Minnesota 2020 released a <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/delivering-dollars-2014-homeowner-property-tax-report" target="_blank">report</a> showing the impact of the 2013 tax bill on property taxes. &nbsp;Because of the historic homestead credit refund, most Minnesotans saw their property taxes decrease substantially. This credit successfully targeted tax credits to the people with the lowest ability to pay, making our state's tax system less regressive and more equitable for Minnesota homeowners. &nbsp;Here's our video coverage of the press conference at the Capitol, which was followed by a statewide media tour including Rochester. Duluth, Bemidji, Moorhead, Fergus Falls, St. Cloud, and more. &nbsp;</p> <p> &nbsp;</p> <p> </p> <p> &nbsp;</p> <p> You can also check out a sampling of the news coverage from the first day of the press tour:</p> <a href="http://kstp.com/news/stories/S3569156.shtml">KSTP</a>,&nbsp;Minneapolis/St. Paul <a href="http://www.kttc.com/story/26611151/2014/09/23/report-claims-decline-in-minnesota-property-taxes-in-2014">KTTC</a>, Rochester <a href="http://www.sctimes.com/story/news/local/2014/09/23/smaller-tax-bills-coming-minnesota-homeowners/16131695/">The St. Cloud Times</a> Thu, 25 Sep 2014 11:00:17 +0000 Delivering Dollars: 2014 Homeowner Property Tax Report http://mn2020.org/issues-that-matter/fiscal-policy/delivering-dollars-2014-homeowner-property-tax-report http://mn2020.org/8803 <p> By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis </p> <p> <a href="/assets/uploads/article/delivering_dollars_print.pdf"><strong>Download full report</strong></a> (<em><a href="/assets/uploads/article/delivering_dollars_print.pdf">high quality</a> or <a href="/assets/uploads/article/delivering_dollars_web.pdf" target="_blank">small size</a></em>)<br /> <a href="http://www.scribd.com/doc/240597821/Delivering-Dollars-2014-Homeowner-Property-Tax-Report?secret_password=DRlKDKUxrUCQO1qEFhtA" target="_blank"><strong>View online at Scribd</strong></a></p> <p> <em>All files contain complete appendix data</em></p> <p> In 2014, Minnesota homeowners will experience the largest property tax reduction in twelve years and will begin to benefit from the most significant reform of homestead taxation in at least three decades. The final property tax after refunds paid by the typical homeowner with a median income residing in a median value home will decline by over ten percent from 2013 to 2014 in the majority of Minnesota communities.</p> <p> This comes as welcome news to homeowners, who experienced rapidly escalating property taxes over the preceding decade. From 2002 to 2013, statewide homeowner property taxes increased by 87 percent&mdash;double the rate of inflation. The large drop in property taxes from 2013 to 2014 is primarily the result of tax reforms passed during the 2013 and, to a lesser extent, 2014 legislative sessions, including significant increases in state aid to local governments (replacing a portion of aid cuts enacted over the preceding decade), improvements to aid distribution formulas, an increase in the renter property tax refund, and&mdash;most importantly from the perspective of homeowners&mdash;an expansion of the homeowner property tax refund in the form of the homestead credit refund. A decline in statewide homestead values relative to other classes of property also contributed to 2014 property tax increases</p> <p> <strong>Methodology</strong></p> <p> This report estimates final 2013 and 2014 property taxes after refunds for typical Minnesota homeowners using property value and tax information from the Minnesota Department of Revenue and median owner-occupied household income data from the U.S. Census Bureau&rsquo;s American Community Survey (ACS). Specifics regarding the data and methods used in and limitations of this analysis are&nbsp;described in the Introduction.</p> <p> <strong>Findings</strong></p> <p> For a homeowner with an income equal to the statewide median (estimated at $72,431 in 2013 and $74,180 in 2014) living in a home with a value equal to the statewide median (estimated at $159,300 in 2013 and $158,300 in 2014) and subject to statewide average tax rates, property taxes dropped from $1,905 in 2013 to $1,592 in 2014, a decline of $313 or 16.4 percent.</p> <p> Of course, not everyone has the median income and lives in a median value home. On a statewide basis and for selected cities, this report examines 2013 and 2014 homeowner property taxes under nine different scenarios by combining low, median, and high income levels with low, median, and high home values. In each case, &ldquo;low&rdquo; is defined as one-third below the median and &ldquo;high&rdquo; as defined as one third above the median. Based on statewide average tax rates, the smallest 2013 to 2014 property tax reduction was $44 (3.9 percent) for a high income homeowner living in a low value home, while the largest reduction was $484 (20.5 percent) for a median income homeowner in a high value home. The chief mechanism for delivering 2014 homeowner property tax relief is the expanded property tax refund, renamed the &ldquo;homestead credit refund.&rdquo; This refund is targeted to homeowners who have high property taxes in relation to their ability to pay as measured by annual income. For this reason, homeowners with the greatest 2013 property tax relative to their income tended to receive the most&nbsp;property tax relief in 2014 as indicated in the following graph.</p> <p style="text-align: center;"> <a href="/assets/uploads/article/p8_g1_taxaspercent_income.png" target="_blank"><img alt="estimated property tax as a percent of income" src="/assets/uploads/article/p8_g1_taxaspercent_income.png" style="width: 600px; height: 335px;" /></a></p> <p> The income-sensitive property tax refund has been embraced by progressives, conservatives, and non-partisan policy wonks as a highly efficient way of reducing tax regressivity and directing tax relief to those homeowners who need it most. The large and widespread 2014 homeowner property tax reductions documented in this report were primarily due to the expansion of this program in the 2013 and 2014 tax acts in the form of the homestead credit refund.</p> <p> &ldquo;In an era when good public policy often falls victim to partisan gridlock, this outcome is something that Minnesotans of all political persuasions should recognize and celebrate, &ldquo; said Jeff Van Wychen, Minnesota 2020 Fellow and Tax Policy Director. &ldquo;The new homestead credit refund is the most important homeowner property tax relief in last three decades and it is important to protect and preserve this accomplishment in coming years.&rdquo;</p> Tue, 23 Sep 2014 15:15:14 +0000 Local Government Aid: Actions Speak Louder than Words http://mn2020.org/issues-that-matter/fiscal-policy/local-government-aid-actions-speak-louder-than-words http://mn2020.org/8773 <p> By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis </p> <p> Gubernatorial candidates of all political persuasions support city Local Government Aid (LGA), at least while on the campaign trail. After all, LGA is an important source of funding for city services and helps keep property tax rates at reasonable levels, particularly in communities that have small tax bases or a demographically driven demand for higher spending levels. Few aspirants to the state&rsquo;s executive mansion campaign on a platform of kyboshing LGA, given the legitimate role it plays within the property tax system and its statewide popularity, particularly in greater Minnesota.</p> <p> For example, in 2010 candidate Mark Dayton pledged support for LGA while on the campaign trail. For the most part, Dayton following through on this commitment. In 2011, Dayton&rsquo;s proposed budget contained no cuts to the LGA program (or&mdash;for that matter&mdash;to any other property tax relief program), despite the fact that the state was facing a <a href="http://www.mn.gov/mmb/images/Budget%2526Economic_Forecast_Feb2011.pdf" target="_blank">$5 billion deficit</a>. Dayton ultimately acquiesced to conservative demands to cut LGA, the renters&rsquo; property tax refund, and other property tax relief programs in order to end the 2011 state government shutdown.</p> <p> With progressives in control of the legislature in 2013, Dayton proposed an $80 million (19 percent) increase to LGA funding, replacing half of the nominal funding cut to the program over the preceding decade. Dayton also cooperated with the legislature to produce the most comprehensive reform of the LGA formula in twenty years, resulting in a better targeted and less volatile distribution of aid dollars. The only disappointment from the perspective of LGA advocates was the failure to enact an ongoing adjustment to the LGA appropriation to ensure that it <a href="http://www.mn2020hindsight.org/view/lga-and-the-three-legged-stool-part-ii">keeps pace with inflation and population</a> growth in future years, although state policymakers did approve a one-time LGA increase for 2015. All in all, Dayton gets solid marks for following through on his 2010 commitment to LGA.</p> <p> While nearly all credible gubernatorial candidates voice support for LGA, not all of them follow through. For example, in 2002 candidate Tim Pawlenty made the following statement to a group of city officials regarding his commitment to LGA:</p> <p style="margin-left: 40px;"> In the near term we need to preserve and protect your aid, government aid, and in the long term too. And I want to make sure that that commitment is there... you know you can&rsquo;t turn around the state and say I&rsquo;m not going to increase taxes and then cut LGA in a way that drives up local property taxes. I understand that.</p> <p> Pawlenty was not the first candidate to renege on a campaign promise, but most at least wait until taking office before doing so. However, after winning the 2002 gubernatorial election in November 2002 but before taking the oath of office in January 2003, Pawlenty urged outgoing Governor Jesse Ventura to cut the December 2002 LGA payment to cities. (Ventura declined.)</p> <p> After assuming office, Pawlenty sought and achieved a series of LGA reductions. In fairness, Pawlenty was not the first governor to cut LGA during a recession. Twice before&mdash;during 1981-82 recession and the 1990-91 recession&mdash;city LGA was trimmed. However, the depth and duration of the aid cuts during the Pawlenty years were far greater than anything seen previously. For the sake of consistency of comparison, the graph below focuses on all general purpose city aid, of which LGA is by far the largest but not the only component.*</p> <p style="text-align: center;"> <a href="/assets/uploads/article/cityaid_credit_reductions.png" target="_blank"><img alt="Total city aid and credit reductions" src="/assets/uploads/article/cityaid_credit_reductions.png" style="width: 600px; height: 345px;" /></a></p> <p> Despite the fact that the recession of the early 2000s was less severe than either the 1981-82 recession or the 1990-91 recession,&dagger; cuts to city aid&mdash;measured as a percentage of the aid level prior to the cuts&mdash;were over four times deeper. Furthermore, after the 1981-1982 and 1990-1991 cuts, funding for general purpose city aid was restored to its pre-cut level within one or two years. Not so with the 2002-2005 cuts. In fact, two years after the 2002-2005 aid cuts ended, a new round of aid cuts commenced. At the end of the Pawlenty administration, general purpose city aid was 33 percent less than it was at the beginning, even prior to factoring in the effects of inflation. The <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/finally-a-halt-in-escalating-city-property-taxes">net result</a> was a dramatic reduction in funding for city services and a dramatic increase in city property taxes.</p> <p> So when it came to support for LGA, Tim Pawlenty talked the talk, but didn&rsquo;t walk the walk. Mark Dayton, on the other hand, did both&mdash;not only keeping his commitment to increase LGA funding but also participating in substantive reform of the LGA formula. What about 2014 conservative gubernatorial hopeful Jeff Johnson?</p> <p> In a recent appearance before city officials, Johnson expressed general support for the city LGA program. However, Johnson&rsquo;s record on LGA as a member of the Minnesota House is less than encouraging. As assistant majority leader of the Republican caucus from 2003 to 2006, Johnson generally supported the Pawlenty fiscal agenda, which included perennial cuts to city LGA. There is certainly no indication that Johnson used his leadership position to block or mitigate the 22.9 percent cut to LGA from 2003 to 2005&mdash;the largest cut in the history of the LGA program.</p> <p> Jeff Johnson&rsquo;s <a href="http://johnsonforgovernor.org/proven-record/#.VA_EOqNuqsA" target="_blank">&ldquo;legislative record&rdquo;</a> on his website gives no hint of support for LGA, something that he would presumably tout if there were anything there to tout. The <a href="http://johnsonforgovernor.org/issues/#.VA_UtaNuqsA" target="_blank">&ldquo;issues&rdquo; section</a> of his site contains the standard right wing platitudes about &ldquo;cutting taxes&rdquo; and &ldquo;reducing government&rdquo; (the same rhetoric that Tim Pawlenty used in justifying his <a href="http://www.mn2020.org/issues-that-matter/economic-development/-no-new-tax-policy-shifts-public-costs-to-property-taxpayers">cuts in aid</a> to cities, counties, and school districts), but again is silent on the topic of support for LGA or any other property tax relief program. Apparently candidate Johnson is comfortable talking about his fondness for LGA to city officials, but not on his website where his Tea Party supporters might see it.</p> <p> When it comes to support for Local Government Aid, actions speak louder than words. Jeff Johnson&rsquo;s past actions regarding LGA give no indication that his current support for LGA&mdash;like Tim Pawlenty&rsquo;s support in 2002&mdash;is anything more than a soothing bromide designed to pacify unsuspecting city officials and local property taxpayers.</p> <p> <br /> <em>*During the 1981-1982 period, general purpose city aid was comprised entirely of LGA. During the 1990-1991 period, city general purpose was comprised of LGA, Homestead and Agricultural Credit Aid, Equalization Aid, and Disparity Reduction Aid. During the period from 2002 to 2012, general purpose city aid consisted of LGA and the city portion of the homestead market value credit.</em></p> <p> <em>&dagger;This conclusion is based on a <a href="http://www.accessecon.com/Pubs/EB/2010/Volume30/EB-10-V30-I3-P210.pdf" target="_blank">model-based ranking of U.S. recessions</a> published in a 2010 issue of Economics Bulletin (volume 30, issue 3).</em></p> Mon, 15 Sep 2014 11:22:55 +0000 2013 Tax Act: Best Deal for Homeowners in 30 Years http://mn2020.org/issues-that-matter/fiscal-policy/2013-tax-act-best-deal-for-homeowners-in-30-years http://mn2020.org/8757 <p> By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis </p> <p> Over the last three decades, years in which statewide homeowner property taxes fell were rare. The largest reduction occurred from 2001 to 2002 and was the result of the 2001 tax act. The second largest occurred from 2013 to 2014 and was driven primarily by the 2013 and 2014 tax acts.* While the 2013 and 2014 acts provided far less immediate relief than the 2001 act, over the long haul they should turn out to be a much better deal for Minnesota homeowners.</p> <p> The aggregate homeowner property tax reduction from 2001 to 2002 was approximately 16 percent&mdash;over three times greater than the aggregate 5.2 percent reduction from 2013 to 2014. However, tucked away within the pages of the tax act that delivered the 2002 property tax reductions were provisions that&mdash;as noted in<a href="http://mn2020.org/issues-that-matter/fiscal-policy/comparing-the-2001-and-2013-tax-acts-which-was-better" target="_blank"> part 1 of this series</a>&mdash;caused homeowner property taxes to escalate in subsequent years. Over the long haul, the 2001 tax act turned out to be a bad deal for homeowners. The tax relief provided to homeowners in the 2013 tax act&mdash;while not initially as grand as that delivered in the 2001 tax act&mdash;should turn out to be more reliable over the long term, provided that future legislatures don&rsquo;t screw it up.</p> <p> A major reason the 2013 tax act should provide more stable long-term property tax relief for homeowners has to do with the primary mechanism for delivering that relief: the expanded <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/targeted-powerful-property-tax-relief">homestead credit refund</a>. This refund program&mdash;in essence an expansion of the pre-existing homeowner property tax refund&mdash;is paid directly to homeowners. The direct and transparent nature of the homestead credit refund will make it politically difficult for state policymakers to cut it in response to state budget problems, since any cut to the refund will take tax relief dollars directly out of the pockets of homeowners, leading to political repercussions that legislators would just as soon avoid.</p> <p> Contrast this to the principal mechanism for targeting tax relief to homeowners created in the 2001 tax act: the <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/homestead-credit-old-versus-new">homestead market value credit</a>. This credit was an appealing target for budget cutters because it was paid to local governments, rather than directly to homeowners. It is easier for state policymakers to cut payments to local governments than to homeowners because local governments don&rsquo;t vote, while homeowners do. While at least some portion of payment cuts to local governments ultimately translate into higher property taxes, it is easy for state officials to blame the resulting tax hikes on local elected officials. No such obfuscation is possible when the tax relief is paid directly to homeowners, as is the case with the homestead credit refund.</p> <p> The vulnerability of the homestead market value credit to budget cuts was repeatedly demonstrated over its ten year history (2002-2011). In eight of these ten years, the credit was reduced below its statutorily prescribed level. Contrast this with the precursor of the homestead credit refund&mdash;the homeowner property tax refund&mdash;which was not cut a single time over this period.</p> <p> In addition to being more resistant to budget cuts, the homestead credit refund is superior to the old homestead market value credit in other ways as well. For example:</p> The homestead credit refund effectively targets tax relief to homeowners who have high property taxes relative to their ability to pay; the market value credit did not. On a dollar for dollar basis, the homestead credit refund is much more efficient in reducing tax regressivity than the old market value credit. Homestead credit refund payments tend to increase as property taxes increase, thereby keeping pace with the demand for property tax relief; the exact opposite tended to happen under the market value credit, for reasons noted in <a href="http://mn2020.org/issues-that-matter/fiscal-policy/comparing-the-2001-and-2013-tax-acts-which-was-better" target="_blank">part 1</a>. <p> In short, the 2013 tax act should provide more stable long-term property tax relief to homeowners because&mdash;unlike the 2001 act&mdash;it targets tax relief to homeowners through a more reliable mechanism and does not contain any ticking time bombs that will explode in the face of homeowners down the road.</p> <p> Of course, policymakers cannot guarantee that property taxes will never rise again, short of imposing property tax freezes or caps&mdash;a cure to the problem of rising property taxes that is worse than the disease. Future property tax growth will always be a possibility&mdash;if only to keep pace with growth in government costs resulting from inflation and population growth. In addition, shifts in property values can contribute to homeowner property tax increases or decreases; such shifts are unavoidable in an <a href="http://tax.findlaw.com/federal-taxes/the-property-ad-valorem-tax.html" target="_blank">ad valorem property tax system</a>.</p> <p> The best thing that state policymakers can do to protect homeowners from unreasonable property tax increases over the long haul is to establish reliable and adequately funded programs that direct tax relief to those who need it most. In 2013 and 2014, the state legislature did precisely this not only by reforming and increasing state aid to local governments, but more importantly by expanding the property tax refund program in the form of the homestead credit refund. This type of refund has historically enjoyed broad bi-partisan support because it is transparent, efficient, and well targeted. While the 2013 and 2014 tax acts did not provide the largest homeowner property tax relief in recent history, they did provide the best.</p> <p> <br /> <em>*Most of the &ldquo;heavy lifting&rdquo; in terms of property tax reform occurred in the 2013 tax act and included permanent increases in homeowners and renters property tax refunds, reform of the city Local Government Aid formula, and increases in various state aids to local governments. From a property tax perspective, the changes in the 2014 tax acts were comparatively minor; the changes in the 2014 acts that affect property taxes payable in 2014 include one-time increases to the property tax refunds and an increase in the agricultural land market value credit.</em></p> Mon, 08 Sep 2014 11:32:18 +0000 Comparing the 2001 and 2013 Tax Acts: Which was Better? http://mn2020.org/issues-that-matter/fiscal-policy/comparing-the-2001-and-2013-tax-acts-which-was-better http://mn2020.org/8750 <p> By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis </p> <p> Over the last thirty years, the tax acts of 2001 and 2013 stand out in terms of providing homeowner property tax relief. The largest single year reduction in homeowner property taxes over the last three decades occurred in 2002 as a result of the 2001 tax act, with the 2014 tax reductions resulting from the 2013 tax act coming in second place.* While the 2001 tax act produced the largest single-year homeowner tax reductions, the long-term impact of the 2001 act on Minnesota homeowner property taxes was decidedly negative.</p> <p> According to a <a href="http://www.house.leg.state.mn.us/hrd/issinfo/csim2A7.pdf" target="_blank">2002 simulation</a> from the Research Department of the Minnesota House of Representatives, homestead property taxes fell by 12.8 percent from 2001 to 2002. This large decline was driven by several features of the <a href="http://www.house.leg.state.mn.us/hrd/as/82/2001-1/as005.pdf" target="_blank">2001 tax act</a>, most notably a massive 68 percent reduction in school property taxes resulting from full state funding of general education and the elimination of the general education property tax levy, combined with a significant reduction in school referendum levies.</p> <p> By reducing business &ldquo;class rates&rdquo; (i.e., the rate used to determine the portion of business value that is locally taxable), the 2001 tax act increased the share of local property taxes borne by homeowners. However, the shift of local taxes on to homeowners in 2002 was more than offset by the school property tax reduction noted above, a reduction in other local levies resulting from increased state funding for transit, and by a new &ldquo;homestead market value credit.&rdquo;</p> <p> The 12.8 percent reduction in homeowner property taxes from 2001 to 2002 reported in the 2002 House Research Department simulation arguably understates the magnitude of homestead property tax relief in 2002 because it does not include the homeowner property tax refund (PTR) increase that was part of the 2001 tax act. If we include the effects of the PTR increase and focus only on existing properties (a better basis for year to year comparisons of homeowner taxes because it focuses only on properties that underwent no new construction from 2001 to 2002), total homestead property taxes actually fell by a whopping 16 percent.</p> <p> So in 2002, the 2001 tax act looked like a great deal for Minnesota homeowners. However, tucked within the 561 pages of this act were other provisions&mdash;some obvious and some subtle&mdash;that, when combined with the serpentine complexity of Minnesota&rsquo;s property tax system, contributed to a series of large annual homeowner property tax increases in 2003 and subsequent years. Like little time bombs, these provisions began producing homestead property tax increases beginning in 2003 that ultimately obliterated the 2002 tax reductions. It is difficult to understand these arcane intricacies, much less explain them in a cogent fashion, but here goes nothing.</p> <p> The first&mdash;and perhaps most technical&mdash;of the homeowner time bombs in the 2001 tax act is the result of an interaction between (1) the business class rate reductions in the 2001 act and (2) tax base sharing programs in the seven-county metropolitan area and taconite relief area, referred to as the metro and taconite &ldquo;fiscal disparity&rdquo; programs. As a result of the year lag in value data used to make fiscal disparity calculations, the full amount of business property tax relief resulting from the 2002 class rate reductions and the full tax shift on to homeowners did not materialize until the following year, resulting in significant new business tax relief and sizable homeowner property tax increases in 2003.</p> <p> Second, the 2001 tax act began phasing out the <a href="http://www.house.leg.state.mn.us/hrd/pubs/ss/sslmtmv.pdf" target="_blank">&ldquo;limited market value&rdquo; (LMV) program</a> beginning in 2003. The LMV program capped the rate of taxable value growth for selected classes of property, including homesteads, in order to keep a lid on value-driven property tax growth. Beginning in 2003 and for several years thereafter, the LMV phase-out returned homestead value which had been excluded from taxation to the tax rolls, resulting in a steady increase in homestead taxable value on top of already escalating value growth occurring prior to the collapse of the housing bubble in 2008. The acceleration of homestead taxable value growth resulting from the LMV phase-out contributed to significant homeowner property tax increases in 2003 through 2005, with a diminishing impact after that.&dagger;</p> <p> Third, a curious feature of the homestead market value credit (HMVC) created in the 2001 tax act was that credit payments would shrink as homestead value increased, as described in a <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/homestead-credit-old-versus-new" target="_blank">June 2013 Minnesota 2020 article</a>. Thus, as market forces and the LMV phase-out pushed homestead taxable value upward, HMVC payments declined. From 2002 to 2008, per homestead property tax relief received through the HMVC declined by 24 percent (even before factoring in inflation and cuts made to the HMVC in response to state budget deficits), thereby contributing to steady growth in homestead property taxes.</p> <p> While other provisions of the 2001 tax act played a role, the three features described above were the most significant in terms of driving homestead property tax increases after 2002. From 2002 to 2003, the tax on the average value homestead in Minnesota increased by approximately 15.5 percent, wiping out nearly all of homeowner property tax reductions occurring from 2001 to 2002. By 2004, the average tax had surpassed the 2001 level and by 2006 it was higher than the 2001 level even after <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/taking-the-spin-out-of-inflation-estimates">adjusting for inflation</a>.</p> <p> <a href="/assets/uploads/article/Jeffgraphfri600.png"><img alt="" src="/assets/uploads/article/fiscal_policy/Jeffgraphfri600.png?f=1409768293" style="width: 600px; height: 289px;" /></a></p> <p> Homestead tax growth began to level off in 2009, with the bursting of the housing bubble. By that time, the homestead time bombs in the 2001 tax act had already exploded or been rendered inert due to crashing home values, but the damage had already been done. From 2002 to 2008, the average Minnesota homestead tax grew 30 percent faster than the rate of inflation, despite the fact that total local government revenue had grown less rapidly than inflation over this period and the homestead share of statewide estimated market value had declined.</p> <p> The 2001 tax act was not the only cause of rapid growth in homeowner property taxes beginning in 2003; large cuts in state aid to local governments also played a role. However, a 2002 analysis completed for the City of Saint Paul determined that the provisions of the 2001 tax act would cause taxes on the average value home in that city to increase by 23 percent from 2002 to 2008, even if there were no reductions in state aid, no increase in local levies or spending, and no change in estimated market values.</p> <p> While the 2001 tax act provided massive homeowner property tax relief in 2002, other provisions in that act caused that relief to quickly dissipate and contributed to escalating homestead taxes down the road. Not so with the 2013 tax act. While the 2013 tax act provided less initial tax relief than the 2001 tax act, the 2013 act will provide more predictable and stable homeowner tax relief over the long haul. In fact, the 2013 tax act is likely the best deal for homeowners to come out of the state legislature in over thirty years. More on this in <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/2013-tax-act-best-deal-for-homeowners-in-30-years" target="_blank">part 2</a> of this series.</p> <p> <br /> <em>*Determining the annual change in final statewide homestead tax levels (i.e., after the subtraction of the property tax refund) going back thirty years is no simple tax, since gross tax and refund amounts for each year are not routinely compiled in a single source. However, based on information gleaned from various Revenue Department and legislative documents, it appears as if the largest reduction in final homestead property taxes over the last three decades occurred from 2001 to 2002, followed by the reduction that occurred from 2013 to 2014.</em></p> <p> <em>&dagger;The LMV program was flawed public policy insofar as it resulted in similarly valued properties within the same class and located within the same local jurisdictions being taxed at the significantly different levels. The legislature could have begun phasing-out the LMV program effective for taxes payable in 2002, but opted not to, presumably because they did not want to erode the double-digit homeowner property tax relief going into the fall 2002 election. Rather, the legislature deferred the LMV phase-out until 2003, there producing a large increase in homeowner taxes in 2003 on the heels of the large decline that occurred in 2002. The LMV phase-out continued to cause homestead property tax increases for the next several years, but by approximately 2006 the level of statewide homestead value still excluded from taxation due to the LMV program was small and the LMV phase-out was no longer contributing to annual homeowner property tax increases.</em></p> Fri, 05 Sep 2014 12:15:15 +0000 Finally, a Halt in Escalating City Property Taxes http://mn2020.org/issues-that-matter/fiscal-policy/finally-a-halt-in-escalating-city-property-taxes http://mn2020.org/8720 <p> By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis </p> <p> From 2002 to 2013, city budgets shrank while city property taxes increased, thanks to rapidly declining state aid. Legislative actions in 2013 and 2014 mercifully reversed this trend. However, while much progress has been made in terms of reforming Minnesota&rsquo;s property tax and state aid system, more work needs to be done.</p> <p> The recent history of city finances is an intricate tale that involves city budget decisions, fluctuations in state aid, and resistance from taxpayers to rising property taxes. To help unravel the various threads that influence city finances, the following analysis will examine: (1) total city property taxes, (2) total state aids and credits to cities, and (3) the sum of these two items, referred to in statute as city &ldquo;revenue base.&rdquo; While not inclusive of all city revenues, revenue base is commonly used to analyze city finance trends because accurate amounts are available through the current budget year. To compensate for the <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/taking-the-spin-out-of-inflation-estimates" target="_blank">effects of inflation</a> and population growth, amounts below are expressed in constant 2014 dollars per capita. <a href="/assets/uploads/article/City_Property_Taxes_Property_Tax_Aids_Credits.pdf">Click here</a> for a table showing the data used in this analysis.</p> <p> During the 1990s, city finances were stable&mdash;at least in comparison to the tumultuous decade that was to follow. During most years of the 1990s, city Local Government Aid (LGA) was adjusted annually for inflation; however, the LGA appropriation was not adjusted for growth in city population, so total statewide LGA in real (i.e., inflation-adjusted) dollars per capita declined modestly over the decade. Fluctuation in other aid programs also contributed to a modest overall reduction in city aid from 1990 to 2002, which was recouped through a combination of property tax increases and city budget reductions. However, from 1990 to 2002 city property tax increases (12 percent) and revenue base reductions (4 percent) were modest and manageable relative to what was to come.</p> <p> This relatively stable period of city finances ended abruptly with the advent of &ldquo;no new tax&rdquo; policies in 2003. Unfortunately for cities and property taxpayers, &ldquo;no new taxes&rdquo; applied only to state income and sales taxes; conservative state policymakers had no qualms about shifting state budget problems on to regressive property taxes through reductions in state aid. From 2002 to 2013, state aid to Minnesota cities fell by $143 per capita or nearly 59 percent. The single largest one-year decline ($55 per capita) occurred from 2002 to 2003, although aid continued to drop in all but two of the next ten years. With the abrupt drop in city aid, the downward plunge in the city finance roller coaster was underway.</p> <p style="text-align: center;"> <a href="/assets/uploads/article/since2002_change_cityrev.png" target="_blank"><img alt="" src="/assets/uploads/article/since2002_change_cityrev.png" style="width: 600px; height: 344px;" /></a></p> <p> While the level of aid cuts and the response to them varied from city to city, the loss in state assistance was generally dealt with through two strategies: property tax increases and budget reductions. From 2002 to 2013, city property taxes increased by $83 per capita (23 percent)&mdash;double the annual average growth rate from 1990 to 2002. Two-thirds of this property tax increase occurred from 2002 to 2008, although city property tax increases continued in each of the next five years (2009 through 2013) with only one exception.</p> <p> The other coping strategy adopted by cities to deal with state aid cuts was budget cuts. From 2002 to 2013, the statewide revenue base of Minnesota cities fell by $60 per capita (10 percent). Nearly three quarters of this revenue decline occurred from 2002 to 2003; because the 2003 aid cuts occurred after 2003 city property taxes were set, cities had no other option in that year other than to cut budgets in response to a massive state aid cut. After 2003, city revenue base fluctuated over the next ten years, gradually drifting downward, reaching the lowest point in at least three decades in 2011, before rebounding slightly in 2012 and 2013.</p> <p> The argument that city budgets were flush in 2002 and thus cities could deal with a decade of perennial aid cuts is not supported by the facts. Previous Minnesota 2020 analyses show that per capita city spending was <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/minnesota-city-spending-below-national-average" target="_blank">slightly below</a> the nationwide city average per capita in 2002 and <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/minnesota-city-spending-falls-further-below-u-s-average">significantly below</a> by 2007, after adjusting for differences in city funding responsibilities among the states. (This analysis will be updated when the 2012 Census of Governments in released.)</p> <p> The period of &ldquo;no new state taxes&rdquo; but continually escalating local property taxes ended in 2014 as the result of progressive takeover of the state legislature in the preceding year. In the above graph, the increase in 2014 per capita city aid looks modest because it is measured relative to the robust to 2002 city aid total. In reality, the $15 per capita increase in state aid in 2014 represents a 15 percent increase above the 2013 aid level. With this $15 per capita aid increase, cities increased their revenue base by $9 per capita (recovering 18 percent of what was lost from 2002 to 2013) and reduced city property taxes by $6 per capita. The increase in city aid in 2014 was a contributor to the <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/property-taxes-drop-for-first-time-since-2002" target="_blank">first statewide reduction in property taxes in twelve years</a>.</p> <p> Two lessons can be gleaned from this analysis. First, the increase in city property tax from 2002 to 2013 was not the result of increases in local budgets, as demonstrated by the fact that real per capita city revenue base declined over this period. This is confirmed by Price of Government information and <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/new-data-show-big-drop-in-city-revenue-spending" target="_blank">State Auditor&rsquo;s data</a>, which also shows a double digit real per capita decline in total city revenue.&nbsp; Rather, the growth in property taxes was driven by reductions in state aid.</p> <p> Second, conservative &ldquo;no new tax&rdquo; lingo does not apply property taxes. During the decade when they were effectively running state government, purportedly anti-tax politicians repeatedly shifted state budget problems on to property taxpayers through reductions in property tax relief programs, not to mention shifts in funding responsibilities from state to local government which thereby created even more pressure for property tax increases.</p> <p> The task of reforming state aid is not complete. In 2015 state policymakers approved a modest increase in city LGA funding, but not sufficient to keep pace with growth in the cost of the goods and services that cities purchase or the size of the population that cities serve. In order to help avoid future property tax increases, policymakers should annually adjust funding for LGA and other general purpose aids to <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/lga-should-be-adjusted-to-keep-up-with-city-costs" target="_blank">keep pace with inflation and population growth</a>.</p> <p> Nonetheless, significant property tax reform was achieved during the 2013 and 2014 legislative sessions, not just through increases in LGA and other local aid programs, but through the <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/targeted-powerful-property-tax-relief" target="_blank">new homestead credit refund</a>, increases in the renters&rsquo; refund, and <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/2013-legislature-enacts-major-reforms-to-lga" target="_blank">reform of the city LGA formula</a>. Minnesotans need to decide whether they want to continue on this course or return to the &ldquo;no new tax&rdquo; property tax increases that preceded it.<br /> &nbsp;</p> Mon, 25 Aug 2014 11:00:01 +0000 General Fund Revenue Remains Well Below 2000 Level http://mn2020.org/issues-that-matter/fiscal-policy/general-fund-revenue-remains-well-below-2000-level http://mn2020.org/8657 <p> By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis </p> <p> True to form, the anti-tax right continues to rail against the tax increases enacted by a progressive legislature and governor in 2013. However, real per capita state general fund revenue is significantly less than it was a decade ago, even after the 2013 tax hikes. In fact, the net increase in state revenue resulting from 2013 and 2014 legislation will be sufficient to replace only one-third of the revenue lost over the course of the preceding decade.</p> <p> These conclusions are based on an examination of <a href="http://mn.gov/mmb/images/14-detail-fba.pdf" target="_blank">general fund revenue totals</a> compiled by Minnesota Management &amp; Budget (MMB) at the end of the 2014 legislative session, compared to MMB revenue totals <a href="http://www.mn.gov/mmb/forecast/overview/reports/" target="_blank">from preceding years</a>.* This information reflects the tax increases enacted during the 2013 legislative session and subsequent tax reductions enacted in 2014, which partially offset the 2013 increases. Amounts cited below are expressed in <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/taking-the-spin-out-of-inflation-estimates">constant (i.e., inflation-adjusted)</a> FY 2014 dollars per capita.</p> <p> During the first several years of the century (FY 2000-2007), average annual general fund revenues hovered around $3,800 per capita. Due to a combination of the Great Recession and &ldquo;no new state tax&rdquo; policies, revenues declined sharply during the FY 2008-09 biennia before bottoming out in FY 2010-11 at $3,136 per capita.</p> <p> The level of current resources in FY 2010-11 actually understates the size of state government, since much general fund activity during that biennium was paid for with one-time federal recovery dollars. The graph below shows annual per capita state general fund current resources for each biennium from FY 2000-01 through FY 2014-15. (FY 2014-15 revenues are projected.) The dashed line includes one-time federal recovery dollars that were used to supplement general fund spending during the FY 2008-09 and FY 2010-11 biennia in addition ordinary general fund current resources.</p> <p style="text-align: center;"> <a href="/assets/uploads/article/gen_fund_resources_14.png" style="font-size: 16.363636016845703px; line-height: 1;" target="_blank"><img alt="" src="/assets/uploads/article/gen_fund_resources_14.png" style="width: 600px; height: 334px;" /></a></p> <p> In the austere budget imposed by conservatives as the price for ending the 2011 state government shutdown, state general fund current resources rebounded to $3,399 per capita. While this represents a significant increase from the artificially deflated FY 2010-11 current resources, it is represents little change from the FY 2010-11 current resources including federal recovery dollars. In reality, the FY 2012-13 budget that conservatives pushed through over the objections of Governor Dayton continued general fund revenue at about the level of the two preceding biennia (FY 2008-09 and FY 2010-11), after taking federal recovery dollars into account.</p> <p> During the 2013 session, Dayton and new progressive majorities in the Minnesota House and Senate enacted several tax increases&mdash;most prominently, an income tax increase targeted at the top two percent. In response to a budget surplus, taxes were reduced during the 2014 session. The net impact of 2013 and 2014 legislation was to increase projected FY 2014-15 general fund current resources to $3,531 per capita. While this represents a $132 per capita (3.9 percent) increase above FY 2012-13 current resources, it is sufficient to replace only a third of the real per capita decline that occurred since the early years of the century.</p> <p> Even after the tax increases enacted in 2013 and 2014, annual per capita general fund current resources will remain approximately $400 per capita or ten percent less than they were during the peak biennium of FY 2004-05 and $270 per capita (seven percent) less than the average from FY 2000 to FY 2007.</p> <p> The increase in state general fund resources was achieved in a way that <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/2014-tax-acts-increased-tax-fairness">reduced tax regressivity and increased tax fairness</a>. In fact, most Minnesota taxpayers&mdash;especially middle-income families&mdash;will see a <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/progressive-leadership-reduces-taxes-for-most-minnesotans">reduction in taxes</a> as a result of the tax changes enacted in 2013 and 2014. While extremely high income households will see a tax increase, the average rate of state and local taxes that they pay per dollar of income <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/tax-rates-fall-for-most-minnesotans-thanks-to-progressive-tax-acts">will remain less</a> than that paid by any other income group.</p> <p> Those who are still miffed about the tax changes enacted in 2013 and 2014 should take consolation from the fact that, despite these tax hikes, Minnesota&rsquo;s &ldquo;Price of Government&rdquo; (i.e., total state and local own-source revenue as a percentage of statewide personal income) is <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/price-of-government-projected-to-hit-all-time-low">projected to drop</a> to historic lows. This is a clear indication that growth in Minnesota&rsquo;s public sector will not outpace growth in the state&rsquo;s economy.</p> <p> Additional consolation can be taken from the fact that significant public good was accomplished with the reasonable revenue increase that did occur, including:</p> Property tax reforms, including a <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/targeted-powerful-property-tax-relief">new homestead credit refund</a>, which helped produce the first <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/property-taxes-drop-for-first-time-since-2002">statewide decline in property taxes</a> in 12 years and a 5.2 percent <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/2014-homeowner-property-tax-reduction-is-wide-deep">reduction in homestead property taxes</a> from 2013 to 2014. An <a href="http://www.mn2020.org/issues-that-matter/education/a-decade-of-school-funding-cuts-reversed">increase in funding for K-12 education</a> which replaced a significant portion of the real per pupil state aid cut that occurred since FY 2003. This infusion of new dollars not only helped to reduce class sizes, properly fund special education, and <a href="http://education.state.mn.us/MDE/SchSup/SchFin/053818" target="_blank">buy-back</a> the <a href="http://www.house.leg.state.mn.us/fiscal/files/09edshifts.pdf" target="_blank">school funding shift</a>, but also helped to reduce school property taxes. A <a href="http://minnesotabudgetbites.org/2013/05/21/higher-education-omnibus-budget-bill-increases-financial-aid-freezes-tuition/#.Ulxds1PrSG4" target="_blank">freeze in tuition</a> at state colleges and universities, thereby ending a decade in which the cost of higher education in Minnesota escalated wildly. New funding for <a href="http://www.mprnews.org/story/2013/05/22/politics/all-day-kindergarten-early-childhood-education-bill-signing" target="_blank">all-day kindergarten and early childhood education</a>, initiatives long overdue given the high return-on-investment that they produce. Increased funding for workforce development, affordable housing and healthcare, and other important state assets. <p> The bottom line is that on top of the positive good accomplished with the increase in state resources, the tax changes enacted over the last two years will replace only a third of the revenue lost over the last decade, leaving real per capita general fund resources several hundred dollars less than they were at their peak. At the same time, the state&rsquo;s Price of Government and taxes paid by most Minnesotans are projected to fall. Something to keep mind during this season of right wing tax rants.</p> <p> <br /> <em>*Specifically, this analysis will focus on general fund biennial current resources, which includes all revenue generated within the state general fund over the course of a biennium, excluding balances carried forward from the preceding biennium. Current resources are the basis for determining Minnesota&rsquo;s structural budget deficit or surplus.</em></p> Mon, 18 Aug 2014 11:00:31 +0000 Conservative Excuses Aside, Minnesota Still Outperforms Wisconsin http://mn2020.org/issues-that-matter/fiscal-policy/conservative-excuses-aside-minnesota-still-outperforms-wisconsin http://mn2020.org/8647 <p> By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis </p> <p> Since the 2010 election of progressive Governor Mark Dayton in Minnesota and conservative Governor Scott Walker in Wisconsin, the Gopher State has outperformed the Badger State in terms of job and income growth. While acknowledging the reality of Wisconsin&rsquo;s subpar performance vis-&agrave;-vis Minnesota (the weight of evidence makes it difficult to deny), conservatives have sought to explain it away in a manner that leaves the viability of their anti-tax agenda intact. Their efforts thus far are unconvincing.</p> <p> The explanation <a href="http://www.looktruenorth.com/9-blogs/608-david-strom-minnesota-v-wisconsin-huh.html" target="_blank">they have come up with</a> is that Minnesota&rsquo;s superior performance vis-&agrave;-vis Wisconsin is not related to different tax and investment strategies between the two states, but to differences in the mix of industries. According to this line analysis, Minnesota&rsquo;s economy is concentrated more heavily in industries that have done well&mdash;or at least less badly&mdash;in recent years: specifically, finance and insurance, healthcare, and low-end retail. Meanwhile, Wisconsin&rsquo;s economy is more heavily concentrated in manufacturing, a sector that has fared poorly in recent years. These differences, according to conservatives, explain why Minnesota&rsquo;s economy has outperformed Wisconsin&rsquo;s.</p> <p> The veracity of the conservative explanation of Wisconsin&rsquo;s lackluster economic performance can be examined using annual Gross Domestic Product (GDP) data compiled annually for each state by the U.S. Bureau of Economic Analysis (BEA). GDP represents the monetary value of all the finished goods and services produced within a jurisdiction's borders within a time period (usually measured on an annual basis). BEA estimates breakdown each state&rsquo;s GDP into specific industries, thereby allowing us to determine the industries that comprise each state&rsquo;s economy and rate of growth within each industry.</p> <p> As with income and job growth, Minnesota&rsquo;s real GDP growth (7.5 percent) has far surpassed Wisconsin&rsquo;s (4.5 percent) from 2010 to 2013 (the most current year for which state-specific BEA GDP information is available). If we focus exclusively on private sector GDP growth, Minnesota (8.7 percent) again outpaces Wisconsin (5.5 percent). Minnesota&rsquo;s GDP growth exceeds the national and Great Lakes* averages, while Wisconsin&rsquo;s falls short of both.</p> <p style="text-align: center;"> <a href="/assets/uploads/article/growth_real_gdp.png" style="font-size: 16.363636016845703px; line-height: 1;" target="_blank"><img alt="" src="/assets/uploads/article/growth_real_gdp.png" style="width: 600px; height: 368px;" /></a></p> <p> The conservative premise that Minnesota&rsquo;s economy is more heavily vested in the relatively prosperous industries of finance and insurance, healthcare, and low-cost retail is not borne out by BEA data. First off, the GDP of these industries have not grown significantly more rapidly than total GDP&mdash;and in some instances less rapidly&mdash;during the period in question. Secondly, these industries are no more heavily concentrated in Minnesota than in Wisconsin.&dagger; In short, the assertion that Minnesota &ldquo;has been more blessed [than Wisconsin] by industries that have enjoyed an economic bounce the past few years&rdquo; is not borne out by the facts.</p> <p> It is true that Wisconsin&rsquo;s economy is more heavily vested in manufacturing than Minnesota&rsquo;s; manufacturing comprises 19.5 percent of Wisconsin&rsquo;s GDP, a full third greater than in Minnesota (14.4 percent). However, the cause of Wisconsin&rsquo;s low rate of GDP growth relative to Minnesota is not the result of Wisconsin&rsquo;s heavier dependence on manufacturing, but rather the fact that manufacturing in Wisconsin has grown at a significantly lower rate than in Minnesota: 10.7 percent in Minnesota versus 4.0 percent in Wisconsin.</p> <p style="text-align: center;"> <a href="/assets/uploads/article/growth_manufacturing.png" style="font-size: 16.363636016845703px; line-height: 1;"><img alt="" src="/assets/uploads/article/growth_manufacturing.png" style="width: 600px; height: 319px;" /></a></p> <p> Nationally, growth in manufacturing from 2010 to 2013 was not significantly below the rate of total GDP growth, while manufacturing growth exceeded total GDP growth in Great Lakes states. The problem from the Wisconsin perspective is not that it is heavily dependent on manufacturing, but rather that the rate of manufacturing growth in America&rsquo;s Dairyland was less than half that of Minnesota and well below that over every other Great Lakes state.</p> <p> Furthermore, even if Wisconsin had a mix of industries identical to that of Minnesota, its rate of real GDP growth would only improve from 4.5 percent to 5.1 percent&mdash;still below the national and Great Lakes averages and nearly two and a half percent below Minnesota&rsquo;s growth rate. The explanation for Wisconsin&rsquo;s anemic economic growth lies not in its mix of industries, but in its low growth rate across multiple industries.</p> <p> This analysis does not prove that Minnesota&rsquo;s superior economic performance relative to Wisconsin is the result of the different policy courses that the two states have pursued in recent years. The prosperity that Minnesota enjoys today is in large part the result of <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/a-look-back-at-a-state-that-worked" target="_blank">smart public investments</a> in education, infrastructure, and other public assets made over the last half century for which no current leader can claim credit. However, this analysis does show that conservative attempts to explain away Wisconsin&rsquo;s inferior performance relative to Minnesota as the result of differences in the mix of industries within the two states does not pass empirical muster.</p> <p> Under progressive leadership, Minnesota has responsibly balanced the state budget, restored a portion of past funding cuts to <a href="http://www.parentsunited.org/wp-content/uploads/2013/07/Newsletter-Spring-2013.pdf" target="_blank">K-12</a> and <a href="http://minnesotabudgetbites.org/2013/05/21/higher-education-omnibus-budget-bill-increases-financial-aid-freezes-tuition/#.Ulxds1PrSG4" target="_blank">higher education</a>, and made important new investments in <a href="http://www.mprnews.org/story/2013/05/22/politics/all-day-kindergarten-early-childhood-education-bill-signing" target="_blank">all-day kindergarten and early childhood education</a>, infrastructure, workforce development, and affordable housing and healthcare. All this was achieved while simultaneously <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/2014-tax-acts-increased-tax-fairness">increasing tax fairness</a>, <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/progressive-leadership-reduces-taxes-for-most-minnesotans">lowering taxes</a> for most Minnesotans, and <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/price-of-government-projected-to-hit-all-time-low">reducing the projected Price of Government</a> to an all-time low.</p> <p> In light of these accomplishments and Minnesota&rsquo;s superior track record in job, income, and GDP growth relative to Wisconsin, conservatives have yet to make any even remotely compelling case as to why we should let them &ldquo;<a href="http://mn2020hindsight.org/view/the-problem-with-going-all-scott-walker-on-minnesota">go all Scott Walker on Minnesota</a>,&rdquo; as one GOP gubernatorial candidate has suggested. After all, the failed should emulate the successful, not the other way around.</p> <p> &nbsp;</p> <p> <em>*&ldquo;Great Lakes states&rdquo; as used here refers to the states of Illinois, Indiana, Michigan, Minnesota, Ohio, and Wisconsin.</em></p> <p> <em>&dagger;&ldquo;Low-cost retail&rdquo; is not a category reported by the BEA. However, total retail is a slightly larger share of total GDP in Wisconsin (5.6 percent) than in Minnesota (5.3 percent).</em></p> Mon, 11 Aug 2014 11:00:43 +0000 Tax Rates Fall For Most Minnesotans Thanks to Progressive Tax Acts http://mn2020.org/issues-that-matter/fiscal-policy/tax-rates-fall-for-most-minnesotans-thanks-to-progressive-tax-acts http://mn2020.org/8638 <p> By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis </p> <p> Taxes will decline for most Minnesotans&mdash;particularly middle-income families&mdash;as a result of progressive tax legislation enacted during the 2013 and 2014 sessions. A <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/progressive-leadership-reduces-taxes-for-most-minnesotans">July 7 Minnesota 2020 article</a> examined the change in state and local taxes by income level resulting from the 2013 and 2014 tax acts. Another way of exploring the effects of the 2013 and 2014 acts is through an examination of effective tax rates.</p> <p> &ldquo;Effective tax rate&rdquo; (or ETR) as used here refers to state and local taxes as a percentage of income. A recent <a href="http://www.revenue.state.mn.us/research_stats/revenue_analyses/2013_2014/hf3167%28sf2726%29_3.pdf" target="_blank">Minnesota Revenue Department analysis</a> examines the impact of the 2013 and 2014 tax acts upon ETRs across ten equally sized groups or &ldquo;deciles,&rdquo; with the tenth (highest income) decile further broken down into three parts: the &ldquo;next 5%&rdquo; (i.e., the bottom half of the tenth decile), the &ldquo;next 4%,&rdquo; and the &ldquo;next 1%.&rdquo; A table from the July 7 article summarizes the range of annual incomes associated with each of these groups. By comparing ETRs based on the recent DOR analysis to data from DOR&rsquo;s <a href="http://www.revenue.state.mn.us/research_stats/research_reports/2013/2013_tax_incidence_study_links.pdf" target="_blank">2013 Minnesota Tax Incidence Study</a> (published prior to passage of the 2013 and 2014 tax acts), it is possible assess the ETR change for each income group resulting from the 2013 and 2014 acts.</p> <p> The 2013 and 2014 tax acts are projected to reduce total state and local ETRs within six of the ten deciles, covering a broad spectrum of middle-income households ranging from $26,398 to $146,400 annual income. The largest ETR reductions (0.15 to 0.16 percent) occur within the fifth to seventh deciles with incomes from $35,601 to $77,704, while the smallest reductions (0.02 percent) occurring within the fourth and ninth deciles, which includes incomes from $26,398 to $35,600 and from $101,617 to $146,600 respectively. The bottom half of the tenth decile with incomes from $146,601 to $202,407 is expected to see no change in ETRs resulting from the 2013 and 2014 tax acts.</p> <p style="text-align: center;"> <a href="/assets/uploads/article/change_effetive_tax_rates.png" target="_blank"><img alt="" src="/assets/uploads/article/change_effetive_tax_rates.png" style="width: 600px; height: 329px;" /></a></p> <p> ETRs in the first three deciles (incomes under $26,398) and in the top half of the tenth decile (incomes over $202,407) are projected to increase as a result of the 2013 and 2014 tax acts. The largest ETR increase&mdash;1.16 percent&mdash;will occur among the top 1% with incomes in excess of $510,005; this is largely the result of the 2013 income tax increase that was focused on very high-income households. The ETR increase in the first decile is projected to be 0.96 percent, although this increase is probably overstated due to first decile data anomalies described in the 2013 Minnesota Tax Incidence Study. Because of these anomalies, the first decile is omitted from graphs in this article.</p> <p> As noted in the July 7 article, tax increases among low-income households are concentrated among tobacco users due to the $1.60 per pack cigarette tax increase in the 2013 tax act. This tax increase was steeply regressive, but was nonetheless justified because it will&nbsp;<a href="http://www.mn2020hindsight.org/view/cigarette-tax-increase-succeeds-in-reducing-tobacco-usage">incentivize current smokers to quit</a> and encourage non-smokers&mdash;particularly price sensitive teens&mdash;from starting in the first place. In addition, the tobacco tax increase generates additional revenue to defray the heavy societal costs associated with tobacco usage, as noted in a <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/despite-regressivity-tobacco-tax-increase-was-good-policy">2013 Minnesota 2020 article</a>.</p> <p> According to the <a href="http://clearwaymn.org/wp-content/uploads/2012/11/MATS2010-FACT.pdf" target="_blank">2010 Minnesota Adult Tobacco Survey</a>, only 16 percent of Minnesota adults smoke; the remaining 84 percent would be unaffected by the 2013 cigarette tax increase. An analysis which excludes the impact of the cigarette tax increase would provide a better indicator of the impact of the 2013 and 2014 tax acts upon the vast majority of non-smoking Minnesotans.</p> <p style="text-align: center;"> <a href="/assets/uploads/article/change_state_local_ETR.png" target="_blank"><img alt="" src="/assets/uploads/article/change_state_local_ETR.png" style="width: 600px; height: 329px;" /></a></p> <p> Excluding the effects of the tobacco tax increase, ETRs drop for every income group with the exception of the top half of the tenth decile, with the largest ETR increase (1.2 percent) occurring within the top 1%. The largest ETR reductions occur in the first decile (0.41 percent), although the decline again may be overstated due to first decile data anomalies. In the second through fifth deciles, ETRs decline by 0.27 percent to 0.35 percent; above the fifth decile, the ETR reductions shrink as income rises.</p> <p> Up to this point, the effects of the 2013 and 2014 tax acts might appear to constitute the &ldquo;class warfare&rdquo; that conservatives often complain about. However, an examination of total ETRs after the 2013 and 2014 tax acts reveals that this is not the case.</p> <p style="text-align: center;"> <a href="/assets/uploads/article/total_ERSs.png" target="_blank"><img alt="" src="/assets/uploads/article/total_ERSs.png" style="width: 600px; height: 329px;" /></a></p> <p> Even after the <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/2014-tax-acts-increased-tax-fairness">powerfully progressive 2013 and 2014 tax acts</a>, total state and local ETRs continue to be lowest among Minnesota&rsquo;s highest income households. Only within the highest income decile do ETRs dip below eleven percent, with the very lowest ETR (10.7 percent) reserved for the top 1% with incomes in excess of $510,005.</p> <p> Prior to the 2013 and 2014 tax acts, state and local taxes per dollar of income among middle-income households* were 23.3 percent greater than among the top 1%. As a result of these acts, this disparity is projected to shrink to 8.6 percent. The 2013 and 2014 tax acts did not &ldquo;make war&rdquo; on Minnesota&rsquo;s highest income households; it merely reduced the magnitude of the tax advantage that they enjoy relative to their less well-off neighbors.</p> <p> Despite the fact that taxes will decline for most Minnesotans as a result of the 2013 and 2014 tax acts, significant new revenue was generated by focusing tax increases among the highest income households where wealth is most heavily concentrated and ETRs are the lowest. In this way, the tax acts of the 2013 and 2014 legislative sessions not only enhanced fairness in Minnesota tax system and reduced taxes for the majority of Minnesota taxpayers, but it also generated sufficient revenue to increase funding for education, infrastructure, workforce development, and affordable housing and healthcare&mdash;all things considered, an impressive string of progressive accomplishments.</p> <p> <br /> <em>*&ldquo;Middle-income households,&rdquo; as used here, refers to the fifth and sixth deciles (middle fifth of all households by income), which encompasses incomes from $35,601 to $59,998.</em></p> Mon, 04 Aug 2014 11:00:17 +0000 New Data Show Big Drop in City Revenue, Spending http://mn2020.org/issues-that-matter/fiscal-policy/new-data-show-big-drop-in-city-revenue-spending http://mn2020.org/8567 <p> By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis </p> <p> As governor from 2003 to 2011, Tim Pawlenty chided local governments for failing to &quot;live within their means.&quot; A recent report reveals that T-Paw's accusations were wildly off target. The total revenue of all Minnesota cities declined by 9.2 percent from 2003 to 2012 in real (i.e., inflation-adjusted) dollars, while real city spending fell by 15.7 percent. On a per capita basis, real city revenues declined by a whopping 15.6 percent over this period, while real expenditures declined by 21.7 percent.</p> <p> These conclusions are based on information from the <a href="http://www.osa.state.mn.us/reports/gid/2012/ciRed/ciRed_12_Report.pdf" target="_blank">2012 Minnesota City Finances report</a> from the Office of the State Auditor (OSA), released last March. The OSA adjusts for inflation in city revenue and spending using the <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/taking-the-spin-out-of-inflation-estimates" target="_blank">Implicit Price Deflator for State and Local Government Purchases</a>. Minnesota 2020 converted the inflation-adjusted revenue and expenditure data to per capita amounts using population data from the annual OSA city finance reports.</p> <p> While city revenues declined, real per capita city taxes&mdash;consisting primarily of property taxes&mdash;climbed by 7.7 percent from 2003 to 2012. The apparent contradiction between growing taxes and shrinking revenue can be explained by the sharp decline in real per capita state aid to cities, which fell 37.6 percent over this ten year span. This abrupt drop in state aid was the result of a conservative &ldquo;no new state tax&rdquo; mentality, which led state policymakers to cut state aid to cities and other local governments rather than increase progressive income taxes. As a result of the decision to slash aid to cities, real per capita city property taxes increased at the same time that city budgets were being cut.</p> <p style="text-align: center;"> <a href="/assets/uploads/article/city_revenues.png" target="_blank"><img alt="" src="/assets/uploads/article/city_revenues.png" style="width: 600px; height: 394px;" /></a></p> <p> In constant 2012 dollars, state aid to Minnesota cities declined from $308 per capita in 2003 to $192 in 2012&mdash;a decline of $116 per capita.* Over the same period, total city taxes increased from $506 to $545. The $39 per capita growth in taxes was sufficient to replace only one-third of the $116 per capita decline in state aid. Combined with the decline in other revenues,&dagger; total city revenues fell from $1,294 in 2003 to $1,092 in 2012&mdash;a 15.6 percent decline.</p> <p> The growth in real per capita city taxes and the decline in city revenue during the period from 2003 to 2012 corresponds with a similar trend observed among Minnesota counties, as described in a <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/most-county-governments-shrinking">recent Minnesota 2020 article</a>. For both cities and counties, the decline in revenue and growth in taxes is the result of a sharp decline in state aid.</p> <p> The decline in city revenue was matched by substantial decline in total city expenditures. From 2003 to 2012, city spending fell by $338 per capita (21.7 percent) in constant 2012 dollars. The largest single decline occurred among capital expenditures (i.e., spending on long-term assets such as land, buildings, and equipment), which declined by 40 percent in real per capita dollars over this period. Meanwhile, real per capita city current expenditures declined by a comparatively small 10 percent.</p> <p> Audited OSA city finance data for 2013 and 2014 are not yet available; thus, we do not have definitive information on the impact of city aid increases enacted in 2013, effective in 2014. However, projections of city revenues for 2013 and 2014 are available from the most recent <a href="http://mn.gov/mmb/images/POG_May2014.pdf" target="_blank">&ldquo;Price of Government&rdquo; (POG) report</a> published periodically by Minnesota Management &amp; Budget. While the city revenue total from the POG report is somewhat broader and thus not identical to total city revenue compiled by the OSA, the POG report nonetheless provides the best projections of total 2014 city revenue currently available.</p> <p> Data from the most recent POG report indicates that total city revenue is projected to increase by 4.7 percent from 2012 to 2014 in nominal dollars. However, after adjusting for inflation and growth in the population of Minnesota cities, total real per capita city revenues increased by only 0.4 percent from 2002 to 2014&mdash;sufficient to recapture only a tiny percentage of the revenue decline that occurred since 2003.</p> <p> These findings are consistent with the findings of a <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/on-our-way-to-average-ranking-minnesota-s-economic-performance">2010 Minnesota 2020 report</a> which revealed that Minnesota experienced one of the largest state and local government revenue and spending declines in the nation since 2002. Minnesota cities were a significant contributor to this trend, with a double digit real per capita revenue decline from 2003 to 2012 and only a marginal increase from 2012 to 2014. While Minnesota conservatives are complaining about excessive public spending growth, the facts show otherwise.</p> <p> <br /> <em>*The OSA&rsquo;s 2012 City Finances Report summarizes the trend in city revenues and expenditures from 2003 to 2012. The largest single year decline in city revenue in recent memory occurred from 2002 to 2003. From 2002 to 2012, total state aid to Minnesota cities declined by $189 per capita (49.6 percent) in constant 2012 dollars. A <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/2013-tax-act-restores-badly-needed-lga-funding">September 2013 Minnesota 2020 article</a> examines the trend in the single largest category of city aid&mdash;Local Government Aid&mdash;since its inception in 1972.</em></p> <p> <em>&dagger;Most of the real per capita decline in &ldquo;other&rdquo; city revenues that occurred since 2003 occurred during the years of the Great Recession (2007 to 2009).</em><br /> &nbsp;</p> Mon, 28 Jul 2014 11:00:19 +0000 2014 Homeowner Property Tax Reduction is Wide &amp; Deep http://mn2020.org/issues-that-matter/fiscal-policy/2014-homeowner-property-tax-reduction-is-wide-deep http://mn2020.org/8585 <p> By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis </p> <p> The fact that Minnesota <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/2014-homeowner-property-tax-relief-is-widespread">property taxes will decline in 2014</a> for the first time in twelve years is well established. However, a <a href="http://www.house.leg.state.mn.us/hrd/issinfo/csim14A2Z.pdf" target="_blank">new simulation</a> from non-partisan staff at the Minnesota House Research Department reveals the breadth and depth of those tax reductions. From 2013 to 2014, taxes on existing residential homestead property will decline statewide by $171 million or 5.2 percent; total homeowner property taxes in 80 of the 87 Minnesota counties&mdash;containing 93 percent of residential homesteads in the state&mdash;will drop.</p> <p> Credit for the 2014 homestead property tax reductions largely goes to progressive legislation passed during the 2013 and 2014 legislative sessions&mdash;especially the <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/targeted-powerful-property-tax-relief">new homestead credit refund</a>. The homestead credit refund&mdash;part of the <a href="http://www.house.leg.state.mn.us/hrd/as/88/as143.pdf" target="_blank">2013 omnibus tax act</a>&mdash;is a souped-up version of the old homeowner property tax refund (PTR) that targets property tax relief to homeowners who have high property taxes relative to their income. The credit was further enhanced during the <a href="http://www.house.leg.state.mn.us/hrd/as/88/as308.pdf" target="_blank">second tax act of the 2014 session</a> on a one-time basis. Among policy wonks, the PTR has long been a popular mechanism for delivering property tax relief because it is targeted based on the ability to pay.</p> <p> A comparison data from the new House Research simulation and previous simulations reveals that the new homestead credit refund enacted in 2013 and enhanced in 2014 is responsible for 70 percent of the reduction in taxes on existing homestead property in 2014. Other factors&mdash;including state aid increases enacted in 2013 and a decline in homestead values relative to other types of property&mdash;explain the remaining decline from 2013 to 2014.</p> <p style="text-align: center;"> <a href="/assets/uploads/article/homestead_tax_change.png" target="_blank"><img alt="" src="/assets/uploads/article/homestead_tax_change.png" style="width: 599px; height: 362px;" /></a></p> <p> Among the twenty largest counties in the state, two will see 2013 to 2014 tax reductions on existing residential homesteads in excess of 10 percent, while nine see will reductions in excess of 5 percent. Only one, Saint Louis County, will see a tax increase&mdash;and even that increase (0.7 percent) is well below the rate of inflation. The fact that Saint Louis alone among the twenty largest counties will experience a tax increase from 2013 to 2014 is not surprising, given that it had the lowest 2013 average residential homestead tax and the lowest homestead tax as a percent of income among these counties.* This is a clear indication that the 2013 and 2014 tax acts successfully directed the bulk of tax relief to areas in which average homestead taxes and homeowner taxes as a percent of income are greatest.</p> <p> An analysis of all 87 counties reveals that average residential homestead taxes and taxes as a percent of income are significantly higher among the 80 counties that will see a 2014 reduction in existing residential homestead taxes than among the seven counties that will see an increase. For example, the 2013 average residential tax among the 80 counties with a 2014 tax reduction was $2,554&mdash;$1,100 (75 percent) greater than among the seven counties that experienced a 2014 tax increase. Rather than distributing property tax relief randomly across the state, the 2013 and 2014 tax acts successfully targeted tax relief to homeowners with the highest property taxes through the homestead credit refund.</p> <p> A <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/progressive-leadership-reduces-taxes-for-most-minnesotans">recent Minnesota 2020 analysis</a> of Minnesota Revenue Department data demonstrated that the 2013 and 2014 tax acts resulted in a net tax reduction for most Minnesota taxpayers, with the largest tax reductions occurring among middle-income households. The homestead credit refund, along with federal conformity provisions related to the marriage penalty, the student loan interest deduction, and the mortgage insurance premium deduction, were the primary mechanisms for achieving this middle-class tax relief.</p> <p> After a decade in which &ldquo;no new <em>state </em>tax&rdquo; policies contributed to a 6 percent annual average increase in residential homestead property taxes, homeowner taxes are finally falling for the vast majority of Minnesota homeowners in the vast majority of Minnesota counties. At the same time, public investments in education, infrastructure, and other areas have been enhanced, the state budget has been balanced responsibly, and Minnesota&rsquo;s tax system has become more fair. Credit smart progressive leadership at the State Capitol for these accomplishments.</p> <p> &nbsp;</p> <p> <em>*Homestead taxes as a percentage of homeowner income for Minnesota counties were calculated by combining residential homestead tax information from the House Research simulation with owner-occupied household income data from the American Community Survey, published by the U.S. Census Bureau.</em></p> Mon, 21 Jul 2014 11:00:11 +0000 Price of Government Projected to Hit All-Time Low http://mn2020.org/issues-that-matter/fiscal-policy/price-of-government-projected-to-hit-all-time-low http://mn2020.org/8552 <p> By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis </p> <p> Despite all of the crying from the right about tax increases, <a href="http://www.mmb.state.mn.us/doc/budget/pog-may2014.pdf" target="_blank">Minnesota&rsquo;s &ldquo;Price of Government&rdquo;</a> is projected to reach the lowest level in its 25 year history. The &ldquo;Price of Government&rdquo; (or POG) is calculated periodically by non-partisan staff at Minnesota Management &amp; Budget (MMB) and is equal to total state and local government revenue excluding federal grants (referred to as &ldquo;own-source revenue&rdquo;) as a percentage of statewide personal income.</p> <p> MMB has calculated the POG percentage each year since fiscal year (FY) 1991. According to MMB:</p> <p style="margin-left: 40px;"> In broad terms, the &ldquo;Price of Government&rdquo; is a measure of the cost of all general government services statewide. It answers the question: How much do Minnesotans pay to state and local governments in total? It is comprehensive and includes nearly all revenues generated by state and local units of government as well as public school districts. All state taxes, property taxes, special assessments, fees and charges are included. Federal taxes are not included. The measure serves as a financial index for the cost of public services in Minnesota.</p> <p> According to the conservative Coalition of Minnesota Businesses, the POG percentage is &ldquo;an index of what taxpayers can afford.&rdquo;</p> <p> The &ldquo;index of what taxpayers can afford&rdquo; is projected to drop to 14.66 percent by FY 2017&mdash;the lowest level in the POG&rsquo;s quarter century history. The next lowest POG percentage&mdash;14.72 percent&mdash;was set in FY 2009. The FY 2009 POG is atypically low because state and local own-source revenues in that year were depressed due to the Great Recession; while Minnesota and other states received stimulus funding beginning in FY 2009 through the <a href="http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009" target="_blank">American Recovery and Reinvestment Act</a>, these dollars were federal grants and thus excluded from the POG calculation.</p> <p> Excluding FY 2009, the only other time prior to the current fiscal year in which the POG percentage dipped below 15 percent was in FY 2003 (14.99 percent). The graph below shows the entire history of the POG percentage from FY 1991 through projected FY 2017.*</p> <p style="text-align: center;"> <a href="/assets/uploads/article/MN_price_govt.png" target="_blank"><img alt="" src="/assets/uploads/article/MN_price_govt.png" style="width: 600px; height: 310px;" /><br /> <em>State and Local Revenues as % of MN Personal Income</em></a></p> <p> The POG percentage increased from 15.28 percent in FY 2013 to 15.64 percent in FY 2014 as a result of <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/2013-tax-bill-makes-progress-on-revenue-adequacy-tax-fairness">tax increases</a> in the <a href="http://www.house.leg.state.mn.us/hrd/as/88/as143.pdf" target="_blank">2013 tax act</a>. However, the FY 2014 POG percentage is still less than in 15 of the 23 preceding years. Furthermore, the POG percentage is projected to drop steadily after FY 2014. The extent of the decline in the POG percentage after FY 2014 accelerated relative to what was predicted in the <a href="http://www.mmb.state.mn.us/doc/budget/pog-final4-17-14.pdf" target="_blank">preceding POG report</a> (from February 2014) as a result of the tax reductions enacted in the 2014 session, which reduced total state and local own-source revenue in FY 2016 and FY 2017 by 1.2 percent relative to earlier projections.</p> <p> With all the complaints from the right about the 2013 tax increases, it may come as a surprise to many that Minnesota&rsquo;s average POG during the four years following enactment of the 2013 tax increases (15.04 percent) is less than during the preceding four years (15.41 percent), less than during the years under &ldquo;no new tax&rdquo; Governor Tim Pawlenty (15.58 percent), and dramatically less than during the 1990s (16.99 percent).</p> <p> To be sure, government revenue increased as a result of the 2013 tax act. Furthermore, the tax reductions included in the two tax acts passed during the 2014 were far less than the tax increases enacted in 2013, so the result of the 2013 and 2014 sessions was a net increase in state and local government revenue. However, even after passage of the 2013 and 2014 tax acts, <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/taking-the-spin-out-of-inflation-estimates">real (i.e., inflation-adjusted)</a> per capita state and local government own-source revenue will be less than it was at the beginning of the century&mdash;a clear indication that the net revenue increase enacted over the last two years was merely replacing a portion of the revenue lost since 2000.</p> <p> Furthermore, the fact that the POG is projected to fall to an all-time low belies conservative claims that government is growing faster than the state&rsquo;s economy. Growth in personal income is a reasonable proxy of growth in Minnesota&rsquo;s economy. By definition, the fact that the POG is projected to fall to new lows means that state and local own-source revenue is growing less rapidly than statewide personal income and, by extension, less rapidly than the state&rsquo;s economy.</p> <p> During the 2013 and 2014 sessions, progressive state policymakers succeeded in increasing state investments in education, infrastructure, workforce development, and affordable healthcare and housing, while at the same time reducing the Price of Government&mdash;the &ldquo;index of what taxpayers can afford.&rdquo; In doing so, progressive leaders showed their ability to properly fund important public assets while simultaneously limiting government growth to reasonable levels.</p> <p> &nbsp;</p> <p> <em>*Due to differences in the budget year for state and local governments, the POG report groups state and school district fiscal year data with county, city, town, and special taxing district data from the preceding calendar year. For example, the FY 2014 POG is based on state and school district own-source revenue for fiscal year 2014 (which began on July 1, 2013) and non-school local government own-source revenue for calendar year 2013 (which began on January 1, 2013).</em></p> Mon, 14 Jul 2014 11:00:54 +0000 Progressive Leadership Reduces Taxes for Most Minnesotans http://mn2020.org/issues-that-matter/fiscal-policy/progressive-leadership-reduces-taxes-for-most-minnesotans http://mn2020.org/8525 <p> By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis </p> <p> For over a year now, Minnesota conservatives have been complaining about the tax increases enacted under progressive control of state government. However, an analysis of new information produced by non-partisan staff at the Minnesota Department of Revenue (DOR) indicates that taxes will decline for most Minnesotans as a result of the 2013 and 2014 tax acts passed by the progressive legislature and signed into law by Governor Dayton.</p> <p> DOR&rsquo;s <a href="http://www.revenue.state.mn.us/research_stats/research_reports/2013/2013_tax_incidence_study_links.pdf" target="_blank">2013 Minnesota Tax Incidence Study</a> provides the baseline of what projected state and local taxes in Minnesota would have been in 2015 if the 2013 and 2014 tax acts (specifically, <a href="http://www.house.leg.state.mn.us/hrd/as/88/as143.pdf" target="_blank">chapter 143</a> passed in May 2013, <a href="http://www.house.leg.state.mn.us/hrd/as/88/as150.pdf" target="_blank">chapter 150</a> passed in March 2014, and <a href="http://www.house.leg.state.mn.us/hrd/as/88/as308.pdf" target="_blank">chapter 308</a> passed in May 2014) had never been enacted. Last month, DOR released an <a href="http://www.revenue.state.mn.us/research_stats/revenue_analyses/2013_2014/hf3167%28sf2726%29_3.pdf" target="_blank">updated tax analysis</a> which incorporates the impact of these three tax acts. By comparing these two analyses, we can assess the state and local tax changes resulting from the 2013 and 2014 acts.</p> <p> The tax incidence analyses prepared by DOR breaks Minnesota taxpayers into ten equally sized groups or &ldquo;deciles&rdquo; ordered by income, with the first decile consisting of the lowest income households and the tenth decile consisting of the highest income households. In addition, the tenth decile is further broken down into three parts, consisting of the &ldquo;next 5%&rdquo; (i.e., the bottom half of the tenth decile), the &ldquo;next 4%,&rdquo; and the &ldquo;top 1%.&rdquo; The income ranges associated with each of these groups based on projected tax year 2015 data is shown below.</p> <p style="text-align: center;"> <a href="/assets/uploads/article/pop_decline.png" style="font-size: 16.363636016845703px; line-height: 1;" target="_blank"><img alt="" src="/assets/uploads/article/pop_decline.png" style="width: 500px; height: 513px;" /></a></p> <p> DOR data shows that taxes will decline across the entire middle portion of Minnesota&rsquo;s income spectrum as a result of progressive tax legislation passed in 2013 and 2014. State and local taxes in the fourth through ninth deciles, covering households with annual incomes ranging from $26,398 to $146,400, will decline collectively by 0.8 percent. The reductions range from a modest 0.2 percent in the fourth and ninth deciles to 1.4 percent in the fifth decile. Taxes in the lower half of the tenth decile, covering incomes from $146,401 to $202,407, are expected to remain flat.</p> <p style="text-align: center;"> <a href="/assets/uploads/article/tax_change_2013_2014.png" style="font-size: 16.363636016845703px; line-height: 1;" target="_blank"><img alt="" src="/assets/uploads/article/tax_change_2013_2014.png" style="width: 600px; height: 346px;" /></a></p> <p> Taxes are projected to increase at both the low and high ends of the income distribution. Taxes are expected to increase collectively by 1.7 percent in the first through third deciles covering households with incomes below $26,398, peaking at a 3.2 percent increase in the first decile. The largest tax increases are in the top half of the tenth decile consisting of households with incomes in excess of $202,407, with the top 1% seeing a total tax increase of 12.1 percent; tax increases in this income range are driven primarily by the 2013 income tax increase directed at high income households.</p> <p> The tax increases among low income households are heavily concentrated among tobacco users, driven largely by the $1.60 per pack cigarette tax increase in the 2013 tax act. As noted in a <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/despite-regressivity-tobacco-tax-increase-was-good-policy">July 2013 Minnesota 2020 article</a>, the tobacco tax increases&mdash;despite being steeply regressive&mdash;were justified on the grounds that it would reduce and prevent cigarette usage, particularly among price sensitive teens, and produce revenue to partially defray the heavy societal costs associated with tobacco usage.</p> <p> It should be noted that <a href="http://mntobacco.nonprofitoffice.com/vertical/Sites/%7B988CF811-1678-459A-A9CE-34BD4C0D8B40%7D/uploads/%7B7CA6AA41-89A6-4701-BB43-C54E32FA157B%7D.PDF" target="_blank">less than one in six</a> Minnesota adults are smokers and would be affected by the cigarette tax increase. Thus, excluding the impact of the 2013 cigarette tax increase would provide a better indicator of the impact of the 2013 and 2014 tax acts upon the vast majority of non-smoking Minnesota taxpayers.</p> <p style="text-align: center;"> <a href="/assets/uploads/article/tax_change_tabacco_increases.png" style="font-size: 16.363636016845703px; line-height: 1;" target="_blank"><img alt="" src="/assets/uploads/article/tax_change_tabacco_increases.png" style="width: 600px; height: 346px;" /></a></p> <p> Excluding the tobacco tax increases, the 2013 and 2014 tax acts will reduce taxes in each of the first nine deciles and in the bottom half of the tenth decile. The collective non-tobacco tax reduction for this group, which includes all households with incomes below $202,407, would be 1.6 percent, ranging from a high of 3.0 percent in the fifth decile to a low of 0.3 percent in the bottom half of the ninth decile. The only income range that would experience a net increase in non-tobacco taxes would be the top half of the tenth decile, with that increase largely concentrated in the top 1% with incomes in excess of $510,005.</p> <p> The DOR tax incidence analyses do not allow us to calculate the precise percentage of Minnesota households that will experience a tax reduction as a result of the 2013 and 2014 tax acts. However, based on what we do know, it is reasonably clear that a majority of Minnesota households&mdash;and a large majority of middle-income households&mdash;will experience a tax reduction as a result of 2013 and 2014 tax legislation.</p> <p> Despite the fact that most Minnesotans will see a tax reduction, the 2013 and 2014 tax acts succeeded in generating significant new revenue by concentrating the largest tax increases among high income households where a disproportionate share of Minnesota&rsquo;s wealth resides. However, there is no need to shed tears for these high income households. As noted in <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/2014-tax-acts-increased-tax-fairness">part one</a> of this series, the top half of the tenth decile&mdash;and specifically the top 1%&mdash;will continue to pay less of each dollar of income in state and local taxes than any other income group in the state. The 2013 and 2014 tax acts significantly reduced, but did not eliminate, the tax advantage enjoyed by the wealthiest Minnesotans.</p> <p> These findings round out a portrait of astounding public policy successes achieved over the last two years. Not only did progressive state policymakers succeed in balancing the state budget, restoring a portion of past budget cuts, increasing state investments in education and other critical public assets, and reducing tax regressivity and enhancing tax fairness, but they accomplished these goals while simultaneously reducing taxes for most Minnesotans.<br /> &nbsp;</p> Mon, 07 Jul 2014 11:00:41 +0000 2014 Tax Acts Increased Tax Fairness http://mn2020.org/issues-that-matter/fiscal-policy/2014-tax-acts-increased-tax-fairness http://mn2020.org/8506 <p> By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis </p> <p> Minnesota&rsquo;s tax system is regressive, meaning that low and moderate income households pay a higher percentage of their income in state and local taxes than do high income households. Fortunately, the 2013 tax act led to a <a href="http://mn2020hindsight.org/view/new-report-reveals-2013-tax-act-is-powerfully-progressive">significant reduction in tax regressivity</a>. A <a href="http://www.revenue.state.mn.us/research_stats/revenue_analyses/2013_2014/hf3167%28sf2726%29_3.pdf" target="_blank">new analysis</a> from non-partisan staff at the Minnesota Department of Revenue (DOR) reveals that the two tax acts passed during the 2014 session not only reduced total state and local taxes paid by Minnesotans by 1.7 percent, but also further nudged Minnesota&rsquo;s tax system toward reduced regressivity and greater tax fairness.</p> <p> The DOR analysis estimates the impact of permanent tax changes made in the two tax acts (<a href="http://www.house.leg.state.mn.us/hrd/as/88/as150.pdf" target="_blank">chapter 150</a> and <a href="http://www.house.leg.state.mn.us/hrd/as/88/as308.pdf" target="_blank">chapter 308</a>) passed during the 2014 legislative session, assuming all provisions of both acts are fully phased-in. For example, the first tax act included a <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/new-estate-tax-break-comes-with-high-cost-in-revenue-fairness">substantial reduction in Minnesota&rsquo;s estate tax</a> phased-in over five years. The DOR analysis shows the tax impact of this provision once it is fully phased-in. In addition, the DOR analysis excludes the impact of temporary tax changes. The DOR analysis is based on projected 2015 data.</p> <p> The 2014 tax acts contained <a href="http://www.revenue.state.mn.us/individuals/individ_income/Pages/FederalIncomeTaxConformityChanges.aspx" target="_blank">federal conformity</a> and other provisions which reduced state and local tax regressivity, including an increase in the <a href="http://www.revenue.state.mn.us/individuals/individ_income/Pages/Working_Family_Credit.aspx" target="_blank">Working Family Credit</a> which targets tax relief to low-income working families, an increased <a href="http://www.revenue.state.mn.us/individuals/individ_income/Pages/Child_and_Dependent_Care_Credit.aspx" target="_blank">child and dependent care credit</a>, an increase in the standard deduction for married joint filers, elimination of <a href="http://www.revenue.state.mn.us/businesses/sut/Pages/B2B_2014_repeal.aspx" target="_blank">three business-to-business sales taxes</a>, and a combination of provisions that led to a small net reduction in property taxes. (The second tax act contained one-time increases to the homestead credit refund and renters&rsquo; property tax refund that will provide substantial tax relief to low and moderate income families in 2014, but they are excluded from the DOR analysis because they are temporary.) On the other hand, the estate tax reduction and gift tax repeal will lead to increased regressivity.</p> <p> The graph below, taken directly from the DOR analysis, shows the change in average state and local effective tax rates (defined here as state and local taxes as a percentage of income) for Minnesota households grouped by deciles (groups of ten percent), ordered from lowest to highest income.* The highest income decile is further broken down into three parts consisting of the first five percent (i.e., the bottom half of the tenth decile), the next four percent, and the top one percent. The combined height of the red and blue portions of each bar represent the effective tax rate (ETR) prior to enactment of the 2014 tax acts, the red portion represents the ETR reduction resulting from the 2014 tax acts, and the blue portion represents the ETR after the 2014 tax acts.</p> <p style="text-align: center;"> <a href="/assets/uploads/article/law_changes.png" style="font-size: 16.363636016845703px; line-height: 1;" target="_blank"><img alt="Impact of 2014 Law Changes on Effective MN State and Local Tax Rates, by Decile " src="/assets/uploads/article/law_changes.png" style="width: 600px; height: 435px;" /></a></p> <p> The largest ETR reductions occur among the first five deciles with incomes ranging from $0 to $47,000, while the smallest reductions occur among the top two deciles with incomes in excess of $102,000. The top one percent receives a significant ETR reduction (0.25%) largely as a result of the estate tax reduction and gift tax repeal, although the decline is still smaller than that in any of the first five deciles. In general, this analysis reveals that the overall impact of the 2014 tax act&mdash;even excluding the impact of the one-time property tax refund increases&mdash;is still significantly progressive, focusing relief on low and moderate income households.</p> <p> While high income households are receiving the smallest ETR reductions as a result of the 2014 tax acts, complaints about &ldquo;soaking the rich&rdquo; are unwarranted. As the graph shows, the top decile&mdash;and specifically the top one percent&mdash;still have lower ETRs than any other income group even after the 2014 tax act reductions. Collectively, the tax acts passed in 2013 and 2014 have merely reduced, but not eliminated, the state and local tax advantage enjoyed by Minnesota high income households.</p> <p> DOR analysis of the 2013 and 2014 tax acts demonstrates that progressive state policymakers followed through on their commitment to restore a portion of past funding cuts to K-12 and higher education and enhance state investments in early childhood education, affordable healthcare, workforce development, and other critical public assets, while at the same time reducing tax regressivity. Not only did the 2013 and 2014 tax acts shore up important state investments and increase tax fairness, but they also reduced taxes for the majority of Minnesotans. More on this in <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/progressive-leadership-reduces-taxes-for-most-minnesotans" target="_blank">part 2</a> of this series.</p> <p> <br /> <em>*The first decile is omitted from this graph due to data anomalies described in the recent DOR analysis and, more extensively, in the <a href="http://www.revenue.state.mn.us/research_stats/research_reports/2013/2013_tax_incidence_study_links.pdf" target="_blank">2013 Minnesota Tax Incidence Study</a>.</em></p> Mon, 30 Jun 2014 10:59:21 +0000 Tax Fairness: How Minnesota Compares to Other States http://mn2020.org/issues-that-matter/fiscal-policy/tax-fairness-how-does-minnesota-compare-to-other-states http://mn2020.org/8378 <p> By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis </p> <p> Low- and middle-income households pay a disproportionate share of Minnesota state and local taxes relative to high income households. However, these taxpayers can take some consolation from the fact that Minnesota&rsquo;s income-based tax disparities are less pronounced here than in most other states, as demonstrated in a recent Minnesota 2020 report, <em><a href="http://www.mn2020.org/assets/uploads/article/MN_moves_ahead_web.pdf">Minnesota Moves Ahead: Tax Fairness in the 50 States</a></em>. That report further demonstrates that Minnesota made strides toward increased tax fairness as a result of the 2013 tax act.</p> <p> The level of taxes are commonly measured in terms of the &ldquo;effective tax rate&rdquo; (or ETR), which&mdash;as used in this article&mdash;refers to combined state and local taxes as a percentage of income. In a regressive tax system, low- and middle-income households tend to have higher ETRs than high-income households. In a progressive system, high-income households tend to have higher ETRs. In a proportional tax system, the average ETRs of high- and low-income households are the same.</p> <p> We can measure the degree of regressivity or progressivity in a tax system using the &quot;Suits index.&quot; The Suits index has a range from -1.0 to +1.0. The closer to +1.0, the more progressive a tax system is and, conversely, the lower the value (i.e., the closer to -1.0) the more regressive it is. A perfectly proportional tax system has a Suits index of zero.</p> <p> Based on the Suits index, Minnesota had the 16th least regressive state and local tax system in the nation in 2010, the last year for which tax incidence information for all 50 states is available.* In that year, Minnesota's Suits index was -0.0331. By comparison, California has the nation's most progressive tax system (ranked #1), with a +0.0497 Suits index.&dagger; Florida has the most regressive system (ranked #50), with a -0.2152 Suits index.</p> <p> If we adjust Minnesota&rsquo;s Suits index to reflect the progressive impact of the 2013 tax act, Minnesota improves from the 16th to the 10th least regressive state, holding all other states constant. Minnesota's Suits index increases from -0.0331 prior to the 2013 tax act to an estimated -0.0178 after the 2013 act.</p> <p> The Suits index is admittedly an abstract measurement of tax regressivity. For that reason, it is difficult to translate into layman&rsquo;s terms the significance of the increase in Minnesota's Suits index. Furthermore, it is difficult to interpret the significance of the difference between Minnesota&rsquo;s Suits index and that of other more regressive and less regressive states.</p> <p> The task of expressing the degree of regressivity or progressivity associated with a Suits index of a particular value in concrete terms is made difficult by the fact that ETRs generally do not increase or decrease at a uniform rate from the lowest income decile (i.e., the ten percent of households with the lowest income) to the highest decile (i.e., the ten percent of households with the highest income). However, it is possible to make useful generalizations about the degree of regressivity associated with a particular Suits index if we assume that ETRs increase (or decrease) at a uniform rate from the lowest to highest income households.</p> <p> The following analysis uses a technique developed by Dr. Paul Wilson of the Minnesota Department of Revenue (DOR) to illustrate the distribution of Minnesota taxes by population decile from lowest to highest income under various Suits index values assuming (1) an average ETR for all Minnesota taxpayers of 11.6 percent (the actual ETR for Minnesota after passage of the 2013 tax act), (2) an income distribution by decile as projected by DOR for 2015, and (3) a uniform rate of change in ETRs from low- to high- income deciles.</p> <p> Based on these assumptions, the graph below shows Minnesota ETRs by income decile under four scenarios. The ETRs for the highest income decile and the middle-income quintile (a combination of the fifth and sixth deciles) are displayed.</p> <p style="text-align: center;"> &nbsp;<a href="/assets/uploads/article/effective_tax_rates_suits.png" target="_blank"><img alt="" src="/assets/uploads/article/effective_tax_rates_suits.png" style="width: 600px; height: 360px;" /></a>&nbsp;</p> <p> Before the 2013 tax act, based on the assumptions above, high-income households (those in the highest income decile) would have an 11.0 percent average effective tax rate. Meanwhile, middle-income households (those in the middle quintile) would have a 12.5 percent average ETR. Expressed another way, state and local taxes per dollar of income are 13.2 percent higher for middle-income households than for high-income households. If we assume instead a Suits index of -0.0178&mdash;Minnesota&rsquo;s estimated Suits after the 2013 tax act&mdash;the disparity in taxes per dollar of income between the middle-income and high-income households would shrink from 13.2 percent to 6.9 percent.</p> <p> While the information presented above does not represent actual ETRs paid by Minnesota taxpayers (although the reduction in the ETR disparity between the middle-income and high-income households turns out to be similar to the actual reduction), this approach illustrates how significant Minnesota&rsquo;s Suits increase from -0.0331 to -0.0178 is in terms of who pays state and local taxes.</p> <p> Where this approach is most useful is in illustrating how the distribution of state and local taxes by income could change if Minnesota&rsquo;s Suits index were to dramatically increase (i.e., become less regressive) or decrease (i.e., become more regressive). For example, if Minnesota&rsquo;s Suits index looked like California's (the most progressive state at +0.0497), the average ETR for middle-income households would fall to 10.4 percent, while that of high-income households would increase to 12.6 percent under the assumptions described above. In other words, Minnesota's middle-income taxpayers would go from paying almost 6.9 percent more in state and local taxes per dollar of income than high-income households (assuming a -0.0178 Suits index) to paying 17.4 percent less.</p> <p> Meanwhile, if Minnesota&rsquo;s Suits index looked like Florida's (the most regressive state at -0.2152), the average ETR for middle-income households would increase to 17.1 percent, while that of the top decile would fall to 7.7 percent. Under this scenario, middle-income Minnesotans would go from paying 6.9 percent more in state and local taxes per dollar of income than the top decile to paying 124 percent more!</p> <p> State officials should avoid policies that would allow Minnesota to drift in the direction of the extreme regressivity observed in Florida. For reasons explained in <em>Minnesota Moves Ahead</em>, excessive regressivity not only undermines tax fairness, but also jeopardizes revenue adequacy and economic growth.</p> <p> Minnesota&rsquo;s tax system remains regressive, even after the improvements made in the 2013 tax act. Whether Minnesota wants to move in the direction of significant progressivity such as that seen in California is another question and beyond the scope of this article. However, even if policymakers seek to make Minnesota&rsquo;s state and local tax system truly progressive instead of just less regressive, they should not do it in the way that California has done.&Dagger;</p> <p> A closer examination of Suits index disparities using the approach developed by Dr. Wilson shows that the 2013 tax act has succeeded in making significant progress toward tax fairness by reducing the tax disparity between middle- and upper-income households by nearly 50 percent. The same approach also helps to illustrate the range of disparities among states in terms of who pays state and local taxes and the magnitude of change necessary in Minnesota in order to make our tax system comparable to other more regressive and less regressive states.</p> <p> &nbsp;</p> <p> <em>*The Minnesota Suits indices in the <a href="http://www.revenue.state.mn.us/research_stats/research_reports/2013/2013_tax_incidence_study_links.pdf" target="_blank">2013 Minnesota Tax Incidence Study</a> and a subsequent Minnesota Revenue Department <a href="http://www.revenue.state.mn.us/research_stats/revenue_analyses/2013_2014/hf0677%28sf0552%29_6.pdf" target="_blank">tax incidence analysis</a> of the 2013 tax act are more accurate and reveal a greater degree of Minnesota tax regressivity than the Suits indices calculated by Minnesota 2020 using data from the Institute on Taxation &amp; Economic Policy (the basis of the interstate comparisons in </em>Minnesota Moves Ahead<em>). However, this article uses Suits indices calculated using ITEP data because this is the only set of Suits indices that are comparable across all fifty states.&nbsp; That information is based on 2010 data but incorporates tax changes enacted through January 2013.</em></p> <p> <em>&dagger;Only two other states in the nation have positive Suits indices based on 2010 ITEP data; in other words, only two other states have progressive state and local tax systems. They are Oregon (+0.0230) and Delaware (+0.0115).</em></p> <p> <em>&Dagger;Ironically, California&rsquo;s drift toward greater progressivity is largely a product of a conservative tax policy that requires a supermajority for any legislatively approved tax increase; as a result, California frequently foregoes the legislative process in favor of a direct appeal to voters via an <a href="http://ballotpedia.org/Initiated_state_statute" target="_blank">initiative statute</a>. In order to improve the likelihood of public approval, state tax increases in California frequently target only extremely high income households. An example of this is California&rsquo;s <a href="http://ballotpedia.org/California_%22Millionaire%27s_Tax_Initiative%22_%282012%29" target="_blank">&ldquo;millionaires tax&rdquo;</a> approved via the initiative process in 2012. Income tax increases targeted to extremely high income households has made California&rsquo;s tax system more progressive&mdash;an unintended consequence of a conservative policy designed to restrict California tax revenue.</em></p> Mon, 23 Jun 2014 11:00:40 +0000 Minnesota is a Giver State http://mn2020.org/issues-that-matter/fiscal-policy/minnesota-is-a-giver-state http://mn2020.org/8390 <p> By Lee Egerstrom, Economic Development Fellow </p> <p> While Pennsylvania is the home of America's independence, Minnesota is actually one of the nation's most independent states when it comes to federal funding reliance. Researchers at <a href="http://wallethub.com/edu/states-most-least-dependent-on-the-federal-government/2700/" target="_blank">WalletHub.com</a>, the social media research company, have taken a fresh look at states most and least dependent on the federal government and found Minnesota is the third least dependent.</p> <p> For starters, Minnesota gets back only 56 cents for every dollar sent to the federal government in taxes &ndash; the same as No. 2 Illinois. Only Delaware, with a 50-cent return on its federal investment, has less dependence in that category.</p> <p> The return on taxpayer investment was one of three categories used to measure state dependency on the federal government.</p> <p> Another measure found Minnesota gets 28.47 percent of its state revenue from federal funds, ranking 12th among least federally dependent states; and it is the eighth least dependent in the number of federal employees per capita (5.91 percent of the state workforce).</p> <p> John Kiernan, senior writer and editor of Evolution Finance who wrote the report for WalletHub, acknowledged that the disparities reflect profound economic and political differences among the states.</p> <p> Nonetheless, political spin will cast the findings in different light and that will certainly be true in this, another election year for Congressional and state offices.</p> <p> &ldquo;What if, for example, a particular state can afford not to tax its residents at high rates because it&rsquo;s receiving disproportionately more funding from the federal government than states with apparently oppressive tax codes? Kiernan offered. &ldquo;That would change the narrative significantly, revealing federal dependence where bold, efficient stewardship was once thought to preside.&rdquo;</p> <p> Writing about Kiernan&rsquo;s findings on another personal finance media site, <a href="http://wallstcheatsheet.com/personal-finance/10-states-most-dependent-on-the-federal-government.html/?a=viewall#xzz32vqYAYPPI" target="_blank">Eric McWhinnie </a>goes right to issues of political spin by pointing out the apparent hypocrisy of so-called red states opposing the federal government and its programs that help them keep local taxes lower than those in the blue, or progressive states.</p> <p> &ldquo;Red states are known for imposing lower taxes than blue states, but it appears they are able to do so because they are more dependent on federal funding,&rdquo; McWhinnie wrote.</p> <p> Under the three weighted metrics used in the report, Mississippi and New Mexico tied as the most federally dependent states, followed by Alabama, Louisiana, Maine, Montana, Tennessee, West Virginia, South Dakota and Arizona.</p> <p> What might surprise some readers, Michigan ranks 12th as least dependent on the federal government. Iowa, meanwhile, tied with New York and the District of Columbia as 17th least dependent, Wisconsin was 20th and energy rich North Dakota ranked 29th.</p> <p> In one of the first such studies 40 years ago, Scripps Howard Washington correspondent Carl West and I, for what was then Ridder Publications newspapers, collaborated on research that looked at which members of Congress were &ldquo;bringing home the bacon&rdquo; for constituents. The same disparities between progressive and regressive states were apparent then.</p> <p> We asked the late Sen. Hubert Humphrey why there seemed to be a consistency between federal dependence and dislike of government while states such as Minnesota, Massachusetts and California &ndash; then on the other end of the scale &ndash; were more pro government.</p> <p> Humphrey used a whimsical agrarian metaphor about a watering tank to explain what might be red state reasoning. If you are bent over and that deep into the (federal) &ldquo;trough,&rdquo; he said, you don&rsquo;t want any more weight on your shoulders. As for what we now call blue states, he said, &ldquo;We just want the federal government to be a better partner.&rdquo;</p> <p> The WalletHub study shows we should still seek a better partner in the federal government.</p> <p> Minnesota ranks second lowest in government contracts received compared with federal taxes received, which can partly be explained by our lack of major defense contractors based in the state. Becoming more cutting edge on so-called &ldquo;green&rdquo; technology and manufacturing of other advanced technology products would strengthen our return on those tax dollars.</p> <p> We also rank just third among states for federal grants received per tax dollars paid in. Just what these grants are for would reflect what we might be missing, but it has been a concern in Minnesota for more than a decade that we aren&rsquo;t landing the research grants we would desire.</p> <p> Minnesota doesn&rsquo;t have huge military bases, doesn&rsquo;t have large defense contractors, and, fortunately, it doesn&rsquo;t have the systemic poverty that make some states huge recipients of federal &ldquo;safety net&rdquo; fund transfers. All this influences whether we are a net payer or a net receiver in our relations with the federal government.</p> <p> In many ways, Minnesotans should be pleased we are a net payer. Equally important, colleague Jeff Van Wychen recently pointed out we are making progress against other states in state <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/minnesota-moves-ahead-tax-fairness-in-the-50-states" target="_blank">tax fairness</a> and it isn&rsquo;t by having the federal government pick up the tab for local services.</p> <p> Thomas Garrett, from the University of Mississippi, commented on the WalletHub site that the disparity among states paying to and receiving from the federal government is likely to grow. In the 1950s, he said, health and welfare payments represented about 30 percent of the federal budget. Now it is 65 percent.</p> <p> The big difference isn&rsquo;t the direction of the tax flow, or who is subsidizing whom. It is poverty.</p> Wed, 04 Jun 2014 11:00:21 +0000 Minnesota Moves Ahead: Tax Fairness in the 50 States http://mn2020.org/issues-that-matter/fiscal-policy/minnesota-moves-ahead-tax-fairness-in-the-50-states http://mn2020.org/8351 <p> By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis </p> <p> <a href="/assets/uploads/article/MN_moves_ahead_web.pdf" target="_blank"><strong>Download full report</strong></a> (pdf)<br /> <strong><a href="http://www.scribd.com/doc/226831827/Minnesota-Moves-Ahead-Tax-Fairness-in-the-50-States" target="_blank">View online at Scribd</a></strong></p> <p> Over the course of the last decade, state and local taxes in Minnesota became increasingly regressive, meaning that a growing share of taxes were paid by low- and middle-income residents and an shrinking share was paid by those at the top of the income ladder. Now thanks to the powerfully progressive tax act of 2013 that trend has been reversed.</p> <p> In 2008 Minnesota 2020 did the first fifty state tax regressivity ranking based on 2000 data from the Institute on Taxation and Economic Policy (ITEP). A new Minnesota 2020 report, &ldquo;Minnesota Moves Ahead: Tax Fairness in the 50 States,&rdquo; updates this analysis based on 2010 data, with adjustments to Minnesota&rsquo;s regressivity ranking based on the impact of the 2013 tax act.</p> <p> In general, state and local taxes in the United States are borne disproportionately by low- and middle-income households. Minnesota is no exception to this rule. However, in 2000 Minnesota was the 11th least regressive state in the nation, meaning that only ten states had a more fair tax system (i.e., taxes were more evenly distributed between rich, middle-income, and poor), while 39 states had a less fair system.</p> <p> However, during the period from 2000 to 2010, tax regressivity in Minnesota nearly doubled based on ITEP data. Contributing to this tax regressivity growth were conservative policies that shifted an increasing share of public costs on to property taxpayers through real cuts in state aid to Minnesota counties, cities, and school districts and other property tax relief programs. This caused local property taxes to grow, which in turn caused tax regressivity to increase, since property taxes are borne disproportionately by low- and middle-income families. As a result of this and other trends, Minnesota slipped from the 11th least regressive state in 2000 to 16th in 2010.</p> <p> Fortunately, the tax act passed by the legislature in 2013 balanced the state budget and shored up state investments in education, infrastructure, and other public assets not through increases in regressive property taxes that fall heavily on the middle class, but primarily through an income tax increase that was focused on the top two percent of Minnesota households. In fact, the revenue generated by the income tax increase on high income households helped to pay for the new homestead credit refund, increases in renter property tax relief, and an increase in state aid to counties, cities, and school districts, all of which produced the first statewide property tax decline in 12 years.</p> <p style="text-align: center;"> <a href="/assets/uploads/article/chartB_mnmovesahead.png" target="_blank"><img alt="" src="/assets/uploads/article/chartB_mnmovesahead.png" style="width: 600px; height: 335px;" /></a></p> <p> In this way, the 2013 tax act helped reverse the state and local tax regressivity that accumulated under conservative control of state government over the last decade, thereby improving Minnesota&rsquo;s rank among the 50 states in terms of the degree of tax regressivity from 16th to 10th and cutting the level of regressivity by nearly half based on ITEP data.</p> <p> Prior to passage of the 2013 tax act, a middle-income household in Minnesota paid approximately 27 percent more per dollar of income in state and local taxes than the richest one percent of households. After passage of the 2013 act, they were paying only ten percent more.</p> <p style="text-align: center;"> <a href="/assets/uploads/article/chartA_MNmovesahead.png" style="font-size: 16.363636016845703px; line-height: 1;" target="_blank"><img alt="" src="/assets/uploads/article/chartA_MNmovesahead.png" style="width: 600px; height: 379px;" /></a></p> <p> There is no need to shed tears for high income Minnesotans, since they are on average still paying a smaller share of their income in state and local taxes than are middle-income families. However, the 2013 tax act dramatically reduced the tax disparity between middle-income and upper-income families. While detailed tax information for the 2014 tax act is not yet available, it is expected to further reduce tax regressivity in Minnesota.</p> <p> &ldquo;Minnesota Moves Ahead: Tax Fairness in the 50 States&rdquo; examines the causes of regressivity in the fifty states using a combination and data and statistical tools not found in other reports. In regard to Minnesota, this report shows that during the last two legislative sessions, progressive state policymakers not only succeeded in restoring investments in education, infrastructure, workforce development, affordable housing, and healthcare, but they also made Minnesota&rsquo;s tax system more fair by reducing the share of state and local taxes paid by middle-income families.<br /> &nbsp;</p> Thu, 29 May 2014 10:59:17 +0000 Smart Use of Surplus? You decide http://mn2020.org/issues-that-matter/fiscal-policy/smart-use-of-surplus-you-decide http://mn2020.org/8331 <p> By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis </p> <p> After a decade balancing recurring budget deficits, this year legislators faced a more pleasant, but equally daunting task. Thanks to the budget balancing accomplishments of the 2013 session and improvement in state&rsquo;s economy, the 2014 legislature had a projected $1.233 billion surplus for the current (FY 2014-15 biennium).</p> <p> The following summary of the distribution of the FY 2014-15 surplus is based on the preliminary <a href="http://www.senate.mn/departments/fiscalpol/tracking/2014/Overall_BudgetBalance_EOS.pdf" target="_blank">end-of-session general fund budget tracking sheet</a> projections prepared by Senate Counsel, Research, and Fiscal Analysis and other sources. The chart below shows the distribution of the $1.233 billion surplus for the FY 2014-15 biennium.</p> <p style="text-align: center;"> <a href="/assets/uploads/article/budget_surplus.png" target="_blank"><img alt="" src="/assets/uploads/article/budget_surplus.png" style="width: 600px; height: 449px;" /></a></p> <p style="text-align: center;"> <strong>What do you think? Use the comment box below to share your thoughts and ask questions.</strong></p> <p> A total of $550 million of the FY 2014-15 $1.233 billion surplus was returned to taxpayers in the form of tax reductions through two tax acts. The first omnibus tax act of 2014 provided the lion&rsquo;s share of these reductions: $446.7 million. Just over $200 million in tax cuts were distributed by changing Minnesota&rsquo;s tax code pertaining to the marriage penalty, the Working Family Credit (WFC), student loan interest deduction, the dependent care credit, business depreciation, and other areas to <a href="http://mn2020hindsight.org/view/federal-conformity-act-quickly-but-prudently">conform to the federal tax code</a>; these provisions not only provided tax relief, but also simplified tax filing for Minnesota taxpayers.</p> <p> The first tax act also eliminated three unpopular business-to-business sales taxes that were enacted during the 2013 session, at a cost to the state of $232 million in FY 2014-15 in foregone revenue. In addition to WFC federal conformity, this act also <a href="http://mn2020hindsight.org/view/two-tax-relief-bills-that-legislators-should-consider">increased the credit</a>, thereby providing additional tax relief to low-income working families.</p> <p> The second omnibus tax act of 2014 provided $103.3 million in additional tax relief in FY 2014-15, including $45 million in reductions in June accelerated sales tax payments by Minnesota businesses, which were explained in a <a href="http://www.mn2020hindsight.org/view/more-tax-cuts-coming">May 9 Hindsight post</a>.</p> <p> The second tax act also included a $17 million annual increase in the agricultural homestead credit that will reduce taxes on farm land beginning in the current year and a one-time $25 million increase in the homestead credit refund and the renters&rsquo; property tax refund, which will target tax relief to low- and moderate income homeowners and renters. Other major provisions of the second tax act, including an expansion of the local government sales tax exemption (also described in the May 9 post) and a $7.8 million <a href="http://mn2020hindsight.org/view/protecting-property-taxpayers-long-term">Local Government Aid increase</a> (whittled down from $10.1 million from an earlier tentative agreement) will have little or no impact on general fund finances until FY 2016-17.</p> <p> Both the first and second tax acts contained some provisions likely to rankle Minnesota progressives. The first act <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/new-estate-tax-break-comes-with-high-cost-in-revenue-fairness">cut the estate tax</a> and eliminated the gift tax, thereby reducing state revenue by $43 million in FY 2014-15 and by about $200 million per biennium by the time the estate tax reductions are fully phased-in. The estate and gift taxes are highly progressive taxes that offset regressivity in other parts of the state tax code; the large cuts to these taxes will have the effect of increasing tax regressivity, although the first tax act in its entirety is likely to reduce overall tax regressivity (at least in the short term) due to other progressive features of the act.</p> <p> The second tax act contains a one-time <a href="http://www.mn2020hindsight.org/view/the-tax-code-is-the-wrong-place-for-most-education-policy">$2.8 million tax credit</a> to subsidize private tutoring for students that have been tested for, but not determined to have, a learning disability related to reading. This credit, which is not targeted based on income, clutters the tax code with another special tax break and subsidizes participation in a largely unregulated private market.</p> <p> In addition to tax reductions, the first tax act increased the state budget reserve by $150 million, increasing total state reserves (including both the budget reserve and the cash flow account) to $1.16 billion. This increase in the state&rsquo;s reserve marks progress toward the goal of achieving a $2 billion reserve as recommended by the bi-partisan <a href="http://www.mmb.state.mn.us/doc/budget/trends/report-09.pdf" target="_blank">Budget Trend Study Commission</a> and will help the state manage volatility in future state revenue collections. The first tax act also dedicates a portion of future budget surpluses to beefing up the budget reserve.</p> <p> A portion of the $1.2 billion surplus is also dedicated to spending; most of this spending&mdash;$261.9 million&mdash;is concentrated in the omnibus supplemental finance bill and includes $103.9 million for health and human services, $54.3 million for E-12 education, $22.3 million for higher education, $35.0 million for judiciary and public safety, $19.8 million for jobs and economic development, $15.3 million for transportation, and $10.6 million for environment, economic development, and agricultural.</p> <p> Approximately nine-tenths of the $41.9 million &ldquo;other&rdquo; category in the above chart is comprised of spending from smaller bills outside of the omnibus supplemental finance bills. In total, new ongoing state spending will comprise about $300 million in FY 2014-15.</p> <p> The legislature also used $198.7 million of the surplus to pay cash for long-term capital investment projects that ordinarily would have been paid for in the state bonding bill. Conservatives in the legislature balked at the notion of a bonding bill in excess of $850 million and because passage of a bonding bill requires a 60 percent majority in both bodies, they were able to block passage of any bonding bill they deemed too big. As a result, progressive legislative leaders opted to pass an $846 million bonding bill and to pay for nearly $200 million in other capital projects through a separate bill paid for with cash instead of bonding; because this separate bill did not involve bonding, it could be passed with a simple majority and thus did not require conservative support.</p> <p> The combined tax cuts, spending increases, budget reserve increase, and &ldquo;cash for bonding&rdquo; provisions passed during the 2014 session add up to less than the $1.233 billion surplus. The remaining portion of the surplus&mdash;$30.5 million&mdash;will be carried forward into the next biennium in the form of a positive budgetary balance.</p> <p> In final analysis, approximately 45 percent of the FY 2014-15 surplus will be distributed in the form of tax reductions, while about 25 percent will be in the form of new ongoing expenditures. This increase in spending is justified in light of the <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/crumbling-fiscal-foundation-a-decade-of-decline-in-state-investment">significant decline</a> in real (i.e., inflation-adjusted) per capita general fund spending that occurred over the course of the preceding decade. The remainder of the surplus is divided between a needed increase in the state budget reserve and cash investments in long-term capital projects, with a small portion carried forward into the next biennium.</p> <p> Returning to a theme heard repeatedly during the &ldquo;no new tax&rdquo; era, Minnesota conservatives clamored to <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/dangers-of-give-it-back-remember-jesse-checks">&ldquo;give back&rdquo;</a> the entire $1.233 billion surplus. The &ldquo;tax-cut-as-solution-to-every-problem&rdquo; strategy may have worked well politically for conservatives during the last decade, but it also lead to recurring budget deficits, perennial property tax increases, and real cuts in funding for education and other critical state assets. The balanced approach chosen by progressives during the 2014 session&mdash;consisting of a mix of tax cuts, public investments, and an increased state budget reserve&mdash;will better serve the interests of the state in the long term.</p> Wed, 21 May 2014 11:00:57 +0000 Most County Governments Shrinking http://mn2020.org/issues-that-matter/fiscal-policy/most-county-governments-shrinking http://mn2020.org/8322 <p> By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis </p> <p> Despite a large increase in county taxes over the last decade, county revenue and spending in constant dollars have declined significantly since 2003, based on a <a href="http://www.osa.state.mn.us/reports/gid/2012/county/County_12_Report_Final.pdf" target="_blank">new report</a> from the Office of the State Auditor (OSA) covering audited county financial data through 2012. On a per capita basis, real (i.e., inflation-adjusted) county revenues and expenditures have each declined by approximately ten percent over this period.</p> <p> In nominal dollars (i.e., unadjusted for inflation), total Minnesota county revenues and expenditures have increased by 33 percent and 31 percent respectively during the period from 2003 to 2012. However, to properly gauge the purchasing power of those dollars, it is necessary to adjust for the effects of inflation. The OSA adjusts county revenue and expenditure totals for inflation using the <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/taking-the-spin-out-of-inflation-estimates">Implicit Price Deflator for State and Local Government Purchases</a>, compiled by the U.S. Bureau of Economic Analysis. In addition, the analysis below adjusts for growth in demand for county services due to population growth by expressing revenues and expenditures in per capita amounts. Amounts presented in this article represent the statewide total for all 87 Minnesota counties.</p> <p> From 2003 to 2012, total county taxes increased from $458 per capita to $523 per capita in constant 2012 dollars&mdash;a growth of 14.3 percent. With all this additional tax revenue, taxpayers must have thought that Minnesota counties were flush with cash. However, this wasn&rsquo;t the case. The $65 per capita growth in taxes was overwhelmed by a $152 per capita (37.2 percent) reduction in state aid to counties and a $29 decline in all other county revenue. All things considered, real per capita county revenue decreased from $1,223 in 2003 to $1,108 in 2012&mdash;a $115 per capita (9.4 percent) decline.</p> <p style="text-align: center;"> <a href="/assets/uploads/article/county_revenue(1).png" target="_blank"><img alt="" src="/assets/uploads/article/county_revenue(1).png" style="width: 600px; height: 327px;" /></a></p> <p> During the period from 2003 to 2012, the increase in real per capita county taxes was sufficient to replace only 43 cents of every dollar lost in state aid. As a result, county revenues plunged at the same time that county taxes grew&mdash;the product of a &ldquo;no new state tax&rdquo; policy that shifted recurring state budget deficits on to local governments and local property taxpayers through state aid reductions.</p> <p> The trend in county expenditures over the last decade resembles that of county revenues. From 2003 to 2012, county expenditures declined from $1,253 per capita to $1,117 per capita in constant 2012 dollars&mdash;a decline of 10.9 percent. Funding for the ongoing operations of government (known as &ldquo;current expenditures&rdquo;) declined by 14.5 percent over this period, while funding for longer term assets such as land, buildings, and equipment (known as &ldquo;capital expenditures&rdquo;) declined by 3.8 percent.</p> <p> Unfortunately, audited county financial information from the OSA is only available through 2012 and thus does not reflect the impact of the increase in county aid for the 2014 budget year enacted during the 2013 session. However, projections of total county revenues for 2013 and 2014 are available from the <a href="http://www.mmb.state.mn.us/doc/budget/pog-final4-17-14.pdf" target="_blank">&ldquo;Price of Government&rdquo;</a> (POG) report published by Minnesota Management &amp; Budget. While not identical to the county revenue totals compiled by the OSA (the POG report includes a broader set of revenues and thus POG total county revenue is somewhat greater than that reported by the OSA), the POG report nonetheless provides the best projections of total county revenue available through 2014.</p> <p> Based on the POG report, total county revenue is projected to increase by 4.0 percent from 2012 to 2014 in nominal dollars. (Longer-term trends in total county POG revenue were reported in a <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/the-county-levy-kerfuffle-in-perspective">January 2014 Minnesota 2020 article</a>.) However, after adjusting for both inflation and population growth, total county revenues increased by less than 0.1 percent over this two year periods. Despite a modest increase in state aid to counties in 2014, counties have recovered only a negligible portion of the decline in real per capita revenue that occurred over the preceding decade.</p> <p> These findings in regard to counties are consistent with a broader analysis which <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/on-our-way-to-average-ranking-minnesota-s-economic-performance">shows a decline</a> in combined Minnesota state and local government revenues and expenditures since 2002. Real per capita county revenues and expenditures fell by roughly ten percent from 2003 to 2012, despite significant increases in county property taxes driven by substantial cuts in state aid. Since 2012, real per capita county revenue has stayed constant. This information further rebuts the standard conservative narrative about rampant government growth in Minnesota.</p> Tue, 20 May 2014 11:00:39 +0000 LGA Should be Adjusted to Keep Up With City Costs http://mn2020.org/issues-that-matter/fiscal-policy/lga-should-be-adjusted-to-keep-up-with-city-costs http://mn2020.org/8271 <p> By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis </p> <p> A sensible way to maintain the property tax relief value of city Local Government Aid (LGA) is to annually increase the aid appropriation to keep pace with growth in city costs, as proposed by the Minnesota House of Representatives in its <a href="https://www.revisor.mn.gov/bills/text.php?number=HF3167&amp;version=3&amp;session=ls88&amp;session_year=2014&amp;session_number=0" target="_blank">second tax bill</a> of 2014. Without such an adjustment, <a href="http://www.mn2020hindsight.org/view/lga-property-taxes-frozen-aid-tax-increases">property taxes increase</a>, <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/frozen-state-aid-is-declining-state-aid">tax rate disparities grow</a>, and funding for city services shrinks as inflation and population growth erode the real per capita purchasing power of LGA dollars. The cities hurt most under this scenario are low property wealth communities with the greatest need for state assistance.</p> <p> Some state policymakers reject this common sense approach, preferring instead to freeze the LGA appropriation indefinitely&mdash;a policy which translates into a shrinking LGA appropriation in real (i.e., inflation-adjusted) dollars per capita. Proponents of a frozen LGA appropriation offer three justifications for this position.</p> <p> The first reason for opposing an annual adjustment to the LGA appropriation in favor of frozen funding is more of a complaint than a justification. Some legislators argue that cities did not use the $80 million increase in LGA funding provided by the legislature in the 2013 tax act to reduce property taxes, but instead used the additional dollars to increase city spending. For this reason, they are reluctant to approve an ongoing adjustment to the LGA appropriation.</p> <p> In truth, cities did use a significant portion of the 2014 LGA increase provided in the 2013 tax act to increase spending (to make up for a decade of declining LGA), but they also used a significant portion to reduce property taxes. An examination of 2014 final levy information shows that the rate of nominal (unadjusted for inflation) property tax growth was much lower and the rate of real (inflation adjusted) property tax decline was much greater among cities that received a 2014 LGA increase than among cities that did not.</p> <p style="text-align: center;"> <a href="/assets/uploads/article/certified_LGA_13_14.png" target="_top"><img alt="" src="/assets/uploads/article/certified_LGA_13_14.png" style="width: 601px; height: 316px;" /></a></p> <p> A statistical analysis shows that the larger the 2014 LGA increase, the greater the reduction in 2014 city property taxes.* This is clear proof that the 2014 LGA increase did contribute to property tax relief in 2014.</p> <p> It is certainly true that some of the LGA increase went to pay for increased city spending, as demonstrated by the fact that real per capita city levies plus LGA increased by 1.9 percent from 2013 to 2014. However, this growth in city budgets must be considered in the context of the sharp decline in city revenue that occurred in preceding years. From 2002 to 2013, real per capita city levies plus state aids declined by ten percent; the increase from 2013 to 2014 was sufficient to replace less than one-fifth of that decline. The 2014 revenue increase was justified to restore a small portion of the cuts to public safety, transportation, parks, libraries, and other city services over the preceding decade. A modest spending increase under these circumstances is certainly no justification to freeze LGA in perpetuity.</p> <p> The second reason offered for not adjusting the LGA appropriation to keep pace with inflation and population growth is that the state cannot afford it. During the April 30 tax conference committee deliberations, one legislator observed that the annual inflation and population growth adjustment to the LGA appropriation would cost the state nearly $900 million cumulatively over the next decade based on current projections.</p> <p> The $900 million cumulative LGA increase over the next ten years sounds like a lot of money. However, any amount can appear astronomical when projected into the distant future and then summed over the entire period. However, in all likelihood, LGA will shrink as a percentage of total general fund spending over the next decade even with an inflation and population growth adjustment. It is difficult to see how a continually shrinking slice of the state general fund pie is unsustainable.</p> <p> The $900 million cumulative ten year total also represents the amount by which property taxes will need to increase and/or city budgets will have to be cut in order to compensate for the decline in the real per capita purchasing power of LGA due to a frozen appropriation. Legislators need to be honest about the fact that a perpetually frozen LGA pot will inevitably translate into <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/city-property-taxes-up-in-the-no-new-taxes-era">city property tax increases</a> and a return to a cycle of perennial <a href="http://www.mn2020.org/issues-that-matter/fiscal-policy/minnesota-city-spending-falls-further-below-u-s-average">city budget cuts</a> that have harmed the quality of life in many Minnesota communities over the last decade.</p> <p> Finally, frozen LGA proponents argue that the state should not put LGA funding on &ldquo;auto-pilot&rdquo; by annually increasing the appropriation. They further argue that LGA should be increased only when the state has sufficient resources to invest in property tax relief.</p> <p> The &ldquo;auto-pilot&rdquo; argument ignores two critical facts. First, state policymakers have the ability to alter any statute, including the LGA appropriation adjustment, at any time should financial conditions warrant. On numerous instances in the past, state officials have stepped in to reduce LGA funding in response to a state budget shortfall and they could do so again in the future. An annual adjustment to the LGA appropriation would in no way restrict the ability of the legislature to alter LGA funding in response to future fiscal exigencies.</p> <p> Second, a frozen LGA appropriation is also an auto-pilot. Under this auto-pilot, the property tax relief value of LGA is eroded every year due to the effects of inflation and there is no aid adjustment to reflect the increased service demands resulting from population growth. Given the choice between an &ldquo;auto-pilot&rdquo; that recognizes realistic growth in the cost of city services versus one that will inevitably contribute to city property tax increases and funding cuts, smart policymakers should opt for the former.</p> <p> In regard to the argument that LGA should only be increased when the state has sufficient resources, it should be noted that the state budget for the next biennium (which would include 2015 LGA funding) is currently showing a $1.5 billion surplus even after adjusting for inflation. Given the significant surplus, a modest increase in the LGA appropriation at least for 2015 and 2016 is warranted to ensure that LGA keeps pace with inflation and population growth.</p> <p> Arguments in opposition to an LGA appropriation adjustment ultimately fall flat. Increasing LGA funding to keep pace with inflation and population growth will not only reduce the likelihood of property tax increases and city budget reductions, but also provide additional stability in state costs and city revenues. Governor Dayton and the Minnesota Senate should go along with the House proposal to adjust the LGA appropriation for inflation and population growth beginning in 2015.</p> <p> &nbsp;</p> <p> <em>*This relationship was statistically significant at the 0.01 level.</em></p> Mon, 05 May 2014 11:00:07 +0000