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Pawlenty's MMB Office Recognizes What Pawlenty Does Not

July 12, 2010 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis
For three years, Minnesota 2020 has been presenting evidence showing that large cuts in state aid to local governments cause property tax increases. The most current confirmation of this comes from none other than the state's official number crunchers at Minnesota Management & Budget (MMB).  Based on MMB projections, the aid cuts enacted by the legislature and signed into law by the Governor in 2010 will cause property tax increases in 2011 and 2012.

In approximately June of each year, MMB updates the February forecast "Price of Government" (POG) report based on changes made during the legislative session(s).  This "end-of-session" POG report is based on the same assumptions used in the February forecast POG report, except that it reflects changes in law that occurred after the release of February's forecast.  From the perspective of non-school local governments,* the only change from the February forecast POG report to the end-of-session POG report is a net reduction of $313 million in state aid and a resulting property tax increase that partially offsets the aid loss.

The following graph shows the projected total non-school local government aid loss and the resulting property tax increase and revenue reduction for calendar years (CY) 2010, 2011, and 2012 due to 2010 legislative action.?  In terms of state aid payments to non-school local governments, CY 2010, 2011, and 2012 correspond with state fiscal years (FY) 2011, 2012, and 2013.

Based on projections from MMB, about 70 percent of state aid cuts to non-school local governments will translate into property tax increases, with the remainder being "eaten" by local governments (and residents of Minnesota communities) through funding reductions.  This is a scenario that property taxpayers have seen many times over the last eight years: pay higher property taxes for reduced local government services.

The property tax increases resulting from the 2010 legislative session would be much worse if Governor Pawlenty had his way.  The Governor proposed cutting state aid to non-school local governments by more than $1.1 billion in 2010, 2011, and 2012, not including the $200 million aid cut he made in the summer of 2009 using his unallotment authority.  Legislative leaders managed to whittle the Governor's proposed $1.1 billion aid reduction to a reduction of just more than $300 million.

Even so, an aid reduction of $300 million plus is still substantial, especially in light of the 37 percent reduction in real (i.e., inflation-adjusted) per capita state aid that occurred during the preceding eight years.  The graph below shows the projected 2011 property tax increases for counties, cities, and towns resulting from the aid cuts enacted during the 2010 session based on MMB analysis.

County property taxes will be 3.0 percent higher in 2011 than they would have been in the absence of the aid cuts enacted during the 2010 session, based on MMB projections.  Meanwhile, city property taxes will be 3.6 percent higher and township property taxes will be 1.5 percent higher.  These property tax increases are not the result of local spending increases.  In fact, the same aid cuts that are causing property tax increases are also causing reductions in funding for local governments.

The Governor has insisted that aid cuts do not necessarily cause property tax increases, arguing instead that property tax increases are the result of a lack of frugality on the part of local governments.  In reality, local governments have been more frugal than state government during the period that Pawlenty has been governor.  Real per capita local government revenue has declined significantly since 2002.

In response to massive state aid cuts, local governments will continue to do what they have done over the last eight years: increase property taxes and cut real spending levels.  As aid cuts grow deeper, local budgets cuts will grow more painful and property tax increases will shift more public costs on to those families with the least ability to pay.

In crafting Price of Government projections, the experts in Pawlenty's office of MMB recognize what the Governor himself either cannot or will not recognize: that large reductions in state aid to local governments lead to property tax increases.

It has long been apparent that the "no new tax" policy is in fact a shell game.  State officials manage to hold down state taxes by shifting a disproportionate share of the state's budget problems on to the backs of local governments and property taxpayers.  It is time for state policymakers to address the state's fiscal mess honestly, rather than merely passing the buck to local governments.

*In the POG report, counties, cities, towns, and special taxing districts are lumped together under the category of "non-school local governments."

?The Governor's 2010 (FY 2011) aid unallotments (made during the summer of 2009) were codified into statute as part of House File 1671, which was enacted in April.  Thus, these 2010 aid reductions are incorporated into both the February forecast and the end-of-session POG reports.  The non-school local government aid reduction in the 2010 end-of-session POG report relative to the February forecast POG report is the result of additional aid reductions made in HF 1671.

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