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The County Levy Kerfuffle in Perspective

January 02, 2014 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

A number of state policymakers of both parties are in a snit regarding the possibility of property tax increases. Based on preliminary levy information for 2014 recently released by the Minnesota Department of Revenue, a number of Minnesota local governments will increase property taxes next year, despite an increase in state aid. However, the angst regarding the 2014 preliminary levies is unwarranted. A mid-December Minnesota 2020 article looked at the 2014 levy controversy as it pertains to cities. Today we’ll turn our attention to Minnesota counties.

During the 2013 legislative session, state policymakers increased County Program Aid (CPA) by $40 million—a 24 percent increase. Even though the amount of CPA distributed in 2014 will be significantly less than the amount of county general purpose aid distributed in 2002, it nonetheless represents a significant increase above the 2013 level. With this increase in state aid, many policymakers predicted a reduction in county property taxes in 2014; however, based on the recently released preliminary levies, county property taxes will increase by 1.5 percent statewide.

However, this 1.5 percent increase needs to be placed in perspective. The anticipated rate of inflation in 2014 is approximately 2.0 percent, so the real purchasing power of county levies will actually decline from 2013 to 2014 based on 2014 preliminary levies. If we further factor in population growth, real per capita county property taxes will decline by approximately one percent from 2013 to 2014.

In addition, this information is based on 2014 preliminary levies; the final property tax levy of local governments can be reduced below the level of the preliminary levy, although they cannot be increased. Consequently, final levies are frequently less than preliminary levies. Over the last decade (i.e., from 2003 to 2013), final county levies have on average been 0.4 percent less than preliminary levies.

Furthermore, it should be noted that eleven of the 87 Minnesota counties did not receive a CPA increase in 2014. The 2014 nominal levy increases in these eleven counties are significantly higher than among the 76 counties that did receive a CPA increase—a clear indication that the CPA increase played a role in holding down 2014 property taxes. In fact, real (i.e., inflation-adjusted) per capita county property taxes will drop by 1.3 percent from 2013 to 2014 among counties that received a CPA increase. This analysis does not take into account reductions that will likely occur from the preliminary to final 2014 levies.

The modest nominal increase in county levies from 2013 to 2014 should also be considered in the context of the sharp decline in real per capita county revenue that occurred since 2000. The graph below is based on the 2013 end-of-session Price of Government data converted to real per capita dollars, except that the county property tax component of 2014 county revenues is revised based on the 2014 preliminary levy information. While revenue amounts for 2011 to 2014 are not final, the amounts used here represent the best estimates currently available.

Even with the increase indicated by the 2014 preliminary levies, total 2014 real per capita county revenue will be 10 percent less than it was in 2000 and nearly 14 percent below what it was in the peak year of 2002. The modest increase in county property taxes in 2014 should be interpreted in the context of the double digit decline in real per capita county revenue since the beginning of the century. This levy increase is allowing counties to recoup only a fraction of prior revenue losses that necessitated perennial cuts to county services in preceding years.

Furthermore, it should be noted that county property taxes and CPA combined comprise less than forty percent of total county revenues. The portion of county revenues outside of property taxes and CPA—consisting primarily of state and federal government transfers and other revenues—is not expected to keep pace with inflation and population growth from 2013 to 2014. As a result, total real per capita county revenue from all sources is projected to decline slightly from 2013 to 2014, even with the preliminary levy increase.

The bottom line is that the increase in County Program Aid is helping to hold down county property taxes, as demonstrated by the difference in preliminary levy increases between counties that did and did not receive a CPA increase. Furthermore, to the extent that levy increases are occurring, they are only replacing a tiny fraction of the real per capita county revenue loss that occurred over preceding years. State policymakers who are in a huff over the 2014 levy increase need to consider these increases in the broader context of total county finances. Over the long-term, counties have been excellent stewards of public resources; there is nothing in the 2014 preliminary levy data to indicate that that has changed.

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