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Most County Governments Shrinking

May 20, 2014 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

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 new report 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.

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 Implicit Price Deflator for State and Local Government Purchases, 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.

From 2003 to 2012, total county taxes increased from $458 per capita to $523 per capita in constant 2012 dollars—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’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—a $115 per capita (9.4 percent) decline.

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—the product of a “no new state tax” policy that shifted recurring state budget deficits on to local governments and local property taxpayers through state aid reductions.

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—a decline of 10.9 percent. Funding for the ongoing operations of government (known as “current expenditures”) declined by 14.5 percent over this period, while funding for longer term assets such as land, buildings, and equipment (known as “capital expenditures”) declined by 3.8 percent.

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 “Price of Government” (POG) report published by Minnesota Management & 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.

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 January 2014 Minnesota 2020 article.) 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.

These findings in regard to counties are consistent with a broader analysis which shows a decline 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.

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