Rising Property Taxes and Local Government Aid - Time for Reform
By David Anderson
10/15/2006

There has been a lot of talk lately about how it is Governor Pawlenty or the Republican's fault local property taxes have gone up. Let's take a look at the state budget for a moment and realize that only a fraction of the state's general budget comes from property taxes -- 4.1%. The rest of the states revenue comes from the sales tax -- 28.8%, Individual Income Taxes -- 42.9%, Corporate Income Taxes -- 5.8% and a variety of other smaller sources.

When you look at your tax statement is there a line for the state? For most of us the answer is no. However, there are lines for schools, cities, county and other local taxing authorities. The state property tax levy is a general tax on commercial/industrial and seasonal recreational residential properties. Now let's put things in perspective.

In 2003 the city LGA program underwent a major reform. Prior to 2003, about 60 percent of the appropriation was grandfathered to certain cities and the rest was distributed via a needs based formula. The 2003 reform eliminated virtually the entire grandfathered portion of the LGA and developed a new need based formula that now distributes 95 percent of the appropriation. However, need based is entirely different than essential services based.

But let's keep in mind also that that money is not free money. It is tax money paid for others so some communities get aid while others receive nothing. A report by the Minnesota State Auditor's office found that those cities which received the highest levels of LGA per capita also spent significantly more per capita than those cities that received little to no LGA. Thus rather than a lifeline that allows cities with little property wealth to support a minimum level of essential services, LGA provides the means for cities to spend well above the median and average on both essential and non-essential services.

The spending patterns of those cities that have high levels of LGA indicate that it is the ease of access to non-residential taxpayer revenues that drives spending decisions. Cities above the median in LGA per capita spend 42 percent more on total current expenditures than those below the median LGA per capita.

When residents do not directly bear the full cost of programs, they are less likely to exert control of costs. Officials who do not need to go to the taxpayers to justify costs are less likely to look for more efficient ways of providing services. Thus a lot of LGA funding is really spent on non-essential services and when the funding needs to be controlled or scaled back on such a program then cities like Minneapolis and St. Paul look to cut essential services such as police and fire rather than the logical approach of cutting non-essential services. The result is they raise your taxes to say they are restoring essential services because of state cuts and leave the other spending unchecked.

The same OSA report found that while it is not feasible to totally eliminate LGA, or to make across the board reductions, it is possible to make adjusted reductions that would result in an overall reduction in LGA for large cities of 51 percent (which translates to a 43 percent reduction in total city LGA) and still allow virtually all cities to provide essential services at current levels, and non-essential services at the current per capita median level, without raising property taxes.

When residents do not directly bear the full cost of programs they are less likely to voice opposition to higher spending. Also, city officials may be more prone to increase spending if it does not directly impact local taxpayers.

The fact is that LGA is a failed program and has not kept property taxes as low as they should be given the level of aid. LGA really hides the true cost of local government programs and continued expansion of LGA creates a large disconnect between taxpayers and services provided as there is no incentive to hold down costs. In light of the budget crisis that the state faced with a $4.5 billion deficit, LGA with its $1.2 billion dollar cost for the 2004-05 biennium was and still is a very expensive program.

As a 1995 report noted, "a distinguished group of national experts studied our state's system and concluded that the allocation to cities is almost random. That is, those cities most in need -- with little property to tax, or with especially serious crime or poverty - were barely more likely to receive as much state aid as did many more prosperous cities. The current program is wasteful; a more fair distribution could be achieved with less money. An Agenda for Reform, November 1995

Good public policy would dictate that reforms to LGA should look at clarifying its purpose and creating measurable results. Priorities should be set to determine how much funding is really needed to meet those redefined purposes without encouraging and rewarding increased spending. LGA can be significantly reduced without cutting essential services or forcing a local property tax increase.

It is time for local governments to rein in their spending, just like the state had to do during tight budget times. I don't think that LGA, is a fair way of bringing property tax relief. Half the citizens of Minnesota don't get LGA. Talk about any farmer, talk about anybody who lives out in a township, they get no LGA. Talk about citizens who live in communities like Orono or ... Eagan; they get no LGA.

Property tax reform will not occur when all Democrats do is continue to propose new spending. Reform needs to occur alongside a discussion of all governments living within its means and focusing on core essential services. Government is not and can not be the solutions to all our problems -- it is the problem.

Local Government Aid is itself - wealth redistribution -- can we say socialism. Many cities foolishly used it to pay for public safety and other critical items instead of looking at collaboration and partnerships where necessary. That way they could use their regular funds gathered from their own citizens for pet projects of the local government.

The state went through its budget deficit and these funds were cut. I'm not sorry about that and you should not be either. The state should and must balance its checkbook just like you and I and not think if they are short they should just raise taxes. I believe local taxpayers should pay taxes for essential services to only pay for important items, and the best way to do that is to hold your local government accountable. Your property taxes have probably gone up.

That means 2 things.

1) Your local government did not plan wisely. LGA was and is a subsidy. It should have been used for greater goods, not necessities. Your Local Government should be able to operate on its own if it was fiscally sound and run efficiently. If your city had no choice but to raise taxes in order to go on, it is their fault. The state-wide tax payers should not be held responsible for the funding of your city. It is your city and your county, you pay for it.

2) Your property values have gone up as well. Unless there were rate cuts, it was going to happen. I have heard of some instances where property values skyrocketed, and there was suspicion of inflating the numbers for more tax revenue. This does occur and will occur. Well, your county did that. They are the ones that control that and only you can hold them accountable.

It is about time that Minnesotans wake up and realize that there are a lot of people in various levels of Government that are trying to make people accountable to Government when it should be the other way around.