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Don't Confuse Budget Slashing with Greater Efficiency

March 11, 2010 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

In a recent Star Tribune op ed, former gubernatorial candidate and current state auditor aspirant Patricia Anderson attempts to prop up Governor Pawlenty's property tax Ponzi scheme.  Liberated from Ms. Anderson's ideological filter, the facts regarding city finances clearly demonstrate that Pawlenty's "no new tax" agenda has caused large increases in city property taxes and harmful cuts to city budgets.
Anderson's analysis focuses on inflation-adjusted city spending data from 1999 to 2008.  She divides this period into a Pawlenty period of 2004 to 2008 and a pre-Pawlenty period of 1999 to 2003.  However, Governor Pawlenty succeeded in pushing through large state aid cuts in both 2003 and 2004; by marking the beginning of the Pawlenty era as 2004, Anderson omits two years of city aid cuts for which the Governor rightfully deserves credit.  The appropriate baseline year for evaluating Pawlenty policies is 2002-the year before he got the keys to the executive mansion.

Furthermore, Anderson's analysis ignores city growth.  As the population and number of households in a city increases, so too does the demand for city services.  The following analysis will take into account growth in city population by examining city expenditures, property taxes, and state aid in inflation-adjusted per capita dollars.

Anderson is right about one thing.  The decline in city current expenditures during the Pawlenty era has been modest.  Total per capita current expenditures declined by only four percent from 2002 to 2008, while public safety current expenditures actually increased by two percent.  (Please note that both the Anderson op ed and this analysis are based on aggregate statewide trends; the experience of individual cities can deviate substantially from the aggregate.)  Both trends are only a modest departure from the spending trends in the pre-Pawlenty era (1999-2002).

However, by focusing narrowly on current spending, Anderson ignores the substantial portion of city budgets used to pay for long-term capital and infrastructure investments.  During the pre-Pawlenty years of 1999 to 2002, per capita city spending in this area fell by five percent; from 2002 to 2008, the rate of decline accelerated to 17 percent.

At the same time that that per capita city spending was falling, property taxes were increasing.  The rate of real per capita property tax growth accelerated from five percent during the period from 1999 to 2002 to 14 percent during the period from 2002 to 2008.  Literally, taxpayers were paying more and getting less.

A major contributor to both declining city capital investments and rising city property taxes is undoubtedly the decline in real per capita state aid.  During the period from 1999 to 2002, real per capita state aid (including city LGA, homestead credits, and other general purpose city aid) stayed almost flat, falling by a mere one percent.  However, from 2002 to 2008, real per capita aid was nearly slashed in half, falling 47 percent.

Viewed in aggregate, these trends create a clear picture.  Forced with a significant loss in revenue due in large part to a massive decline in state aid, city officials have been forced into some no-win choices.  In general, Minnesota cities have opted to protect funding for critical services, such as public safety, at the expense of (1) higher property taxes and (2) reduced capital investments.

The harm caused by higher property taxes is clear.  The property tax is a regressive tax in that it falls most heavily on those with the least ability to pay.  Currently low and middle income families pay over 20 percent more of their income in the form of state and local taxes than do the wealthiest five percent of Minnesota households.  As more public costs are shifted on to the property tax, this inequity will grow.  The fact that Pawlenty aid cuts have accelerated property tax increases for cities and other Minnesota local governments is indisputable.

The harm of reduced capital investments is also clear.  For example, real per capita capital expenditures for city streets have fallen by 22 percent from 2002 to 2008.  Reduced investment in this area has contributed to Minnesota's deteriorating road infrastructure.  Since 2002, the number of Minnesota road miles in poor condition has more than doubled and Minnesota's rank among the 50 states in terms of road quality has fallen from 8th to 27th.

In claiming that aid cuts have made cities more efficient, Anderson confuses budget cutting with cost-effectiveness.  The cuts to long-term capital investments that cities have been compelled to make in order to avoid the ugly alternative of even higher property taxes or cuts to critical services will not make Minnesota more efficient.  Rather, it will contribute to a deteriorating infrastructure, which will in turn lead to a weaker economy and higher public costs in the future.

The assertion that state aid cuts were necessary to impose discipline on city budgets demonstrates a profound misunderstanding of city finances.  In 2002, per capita city spending in Minnesota was already below the national average and real per capita city spending had been flat for three years.

The aid cuts that Anderson lionizes were part of a property tax shell game, in which state leaders solve a disproportionate share of the state's budget mess on the backs of local governments and property taxpayers so that state politicians can claim that they did not increase state taxes.  As a result, cities and other local governments are compelled to impose property tax increases at the same time that they are making deeper budget cuts than so-called "no new tax" state politicians. 

The Governor's supplemental budget calls for a continuation of the property tax Ponzi scheme-city aids that have already been cut nearly in half would be cut by another third by 2011.  This is a recipe for even more regressive property tax increases and deeper cuts in infrastructure investment.  It would be foolhardy to assume that budget cuts will not impact public safety and the livability of Minnesota cities.

The city budget cuts and property tax increases enacted since 2002 have made Minnesota weaker and our tax system more regressive.  Minnesota policymakers should take a balanced approach to Minnesota's ongoing deficit that does not resolve the problem at the expense of higher property taxes and more cuts in local government investments.

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