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Election Can Restore Fiscal Fairness

November 05, 2012 By Justin Caron, Fellow

Despite "no-new-tax" pledges, Minnesota's taxes are going up again. In a recent set of 2013 projections, Minnesota's House Research Department has determined that statewide property taxes will increase by 1.8 percent, or $153 million, with even steeper increases in Greater Minnesota.

Farmland, apartments, and business properties will experience another year of significant spikes. Homestead property taxes are projected to remain flat or decrease slightly in the coming year.  However, fiscal experts say flat homestead taxes will be short lived.  As the housing market bounces back, homeowners will share higher property taxes' true costs, if there are no major changes in state tax law.

Don't be mislead by conservatives' touting "no-new-tax" policy. Their cuts to social services, education and local government revenue sharing, known as LGA, all trickle down to local governments. In the past decade, local leaders have found innovative ways to deliver quality services while cutting costs. They've also cut many services and education offerings. At a certain point, however, local leaders can only do more with less for so long. To prevent the fiscal avalanche from crushing their communities, locals raised property taxes to maintain services.     

This shift from state income taxes to local property taxes is regressive and unsustainable, eroding 40 years of fiscal fairness. Property taxes are necessary as part of a balanced revenue mix because they are a more stable revenue source than income and sales taxes. However, like sales taxes, property taxes are not based on the ability to pay, meaning that lower income households pay a larger percentage of their income for these taxes.

Yet, this growing reliance on property taxes is the course conservative "no-new-tax" policy has set for Minnesota.

The special session tax bill, which ended the 2011 state government shutdown, reduced city LGA by more than $204 million in its first year alone. Furthermore, it locked in LGA cuts, freezing them at 2010 levels with no inflation or population growth adjustments. This represents an inflation-adjusted 26% LGA decline since the program's 1972 incpetion. The plan also included $642 million in cuts to property tax aids and credits including the elimination of the Homestead Credit and a reduction of the Renters’ Property Tax Refund.

According to the Minnesota Department of Revenue’s latest Tax Incident Study, median-income households in the state making between $53,315 and $68,696 pay an average of 12.1 percent of their incomes in state and local taxes. By comparison, households with and income over $429,354 pay an average of 9.7 percent. The report underscores these numbers by pointing out that revenue from income taxes has been declining in Minnesota while revenues from property taxes have been increasing. It also points out that, prior to recent changes, property tax refunds for renters and homeowners “substantially reduce overall regressivity.”

Even in the face of a 2011 state shutdown, legislative conservatives continued their refusal to pass any budget bill that raised income taxes on the state’s wealthiest households despite Governor Dayton’s repeated attempts at compromise that included substantial budget cuts. The resulting shutdown cost the state millions in lost revenue and incurred expenses. Minnesota's on going fiscal issues caused two agencies to downgrade the state’s credit rating, while Moody’s credit outlook went from stable to negative, an outcome that will likely continue to cost the state down the road.

When the budget was eventually passed, the wealthiest Minnesotans saw no increase in income taxes, yet property taxes rose across the state, particularly for farmers, businesses, and renters. Despite calls that government is growing out of control Minnesota Management and Budget office's Price of Government Report indicates government spending as a percent of overall income is down.

Minnesotans should think about this when they head to the polls tomorrow. Are you comfortable with growing fiscal disparities? Or should Minnesota take a balanced solution to get our budget back on track, one that asks our state’s wealthiest to pay their fair share, stops shifting the tax burden from the state to local governments, and halts the increasingly regressive trend in taxation?

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  • Bernice Vetsch says:

    November 6, 2012 at 4:40 pm

    A couple of years ago, a group of 200 (I believe) of Minnesota’s wealthiest individuals and families begged that their taxes be increased in order that the common good be better served.

    These good citizens know well that tax policies based on legislators’ signing an unbreakable pledge to anti-tax guru Grover Norquist harm our ability locally and nationally to maintain our physical, intellectual and social infrastructure. 

    Their pleas went unanswered by our Republican governor and legislature, and will continue to be ignored unless today’s election leads to the return of Democratic majorities in the House and Senate.