Cities, counties blame high property taxes on state cuts

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Local governments must set levies by Sept. 15

Special to Capitol Report

Larry Kleindl chuckles when he hears state lawmakers insist that they balanced the state’s budget without raising taxes in July’s special session deal.

“That’s a myth,” the Kandiyohi County administrator said. “The truth is, someone’s got to pay. Counties and cities will still get the dollars they need to keep running, but the state decided that, instead of everybody picking up the tab, property tax payers will.”

Like all Minnesota counties and cities, Kandiyohi has to put together its initial property tax levy by Sept. 15. The central Minnesota county’s board of commissioners will be voting soon on a 2.6 percent levy increase for next year, Kleindl said.

But thanks to changes in property tax law enacted in that special session deal, the county’s portion of the overall tax bill will be going up by an average of 8 percent next year, he said.

Residents won’t be getting anything more in return for paying higher taxes, either. The county’s levy increase will only partially backfill lost state aid so that it can keep on providing services — many of them state-mandated — without severe cuts, Kleindl said.

The state’s elimination of the Homestead Market Value Credit to counties and cities and its replacement with a direct tax exemption will keep some property taxes from going up. But it will shift more of the regressive tax burden to business properties, apartments and high-end homes.

Reform or shift?

Eliminating the credit was a mercy killing, said Rep. Linda Runbeck, R-Circle Pines, chairwoman of the House Property and Local Tax Division.

Created as part of the tripartisan tax reform under Gov. Jesse Ventura a decade ago, the credit was an early casualty of the budget instability that has plagued the state since 2003 and has only fully been provided to local governments once since then, Runbeck said.

“In the past, they had to reduce spending because the reimbursement never showed up,” she said. “Here, they know in advance what to expect from the state.”

Instead, residential homeowners whose property is worth between $78,000 and $304,000 will receive a scaled exemption that means their properties will be taxed at less than full market value.

But that just makes an already complicated tax system even more complicated, said Wendell Sande, North Mankato’s city manager. “It’s a shift,” he said. “They eliminated $26 million from the statewide property tax pool. The exclusion buffers lower-valued homes from increases, but our businesses will be paying for it.”

Combined with a proposed 9.8 percent city levy increase, the overall effect on a typical $150,000 house in North Mankato would be a property tax increase of roughly $60 a year, just from the city, Sande said.

That levy increase is necessary because the city has lost a cumulative $1.9 million in state aid since 2008, he said. During those three years, the city has taken temporary steps, including layoffs, deferred purchases of police and fire equipment, and use of money from its reserves.

“But the Legislature decided to make those cuts permanent this year. So now, we’re recommending that we levy back 100 percent of what we lost,” Sande said. “You either replace the money from local sources or you make substantial cuts to the services you deliver.”

Unsustainable position

For Ramsey County, where only 15 percent of its annual budget is not tied to a state-mandated services, that means examining whether to continue providing a nonmandated counseling program through the county courts for families, said Jim McDonough, county commissioner.

It also means adding up to 40 percent to county workers’ caseloads in sensitive areas such as domestic abuse, support for the elderly and child welfare because of layoffs and positions left vacant, McDonough said.
The urban county is proposing a 2.8 percent levy increase in both 2012 and 2013, but because of state aid cuts, the county will still have an estimated 1.7 percent less to spend next year overall than this year, he said.

McDonough lays the responsibility at the feet of legislators and governors over the past decade who have failed to find a structural solution to the state’s budget problems. “They have not sat down and faced the problem head-on,” he said. “We need a structurally sound and balanced budget, and all parts of the equation should be used, including new revenue.”

Runbeck says the tax changes will encourage a more honest discussion about what local government can and should provide, and how much residents are prepared to pay for it.

“I think we’re moving in the right direction,” she said. “When cities spend money, it should be money they raised so taxpayers understand where it came from. That doesn’t happen with our current tax system, especially when it comes to state aid.”

But that fails to take into account the numerous state-mandated services that counties are required to provide in health, human services and the courts, said Joe Mathews, policy analyst for the Association of Minnesota Counties. The Legislature cut nearly $263 million in state funding for counties just for this year, without a corresponding reduction in mandated services, he said.

It also ignores the amount of services regional centers in outstate Minnesota provide to nonresidents who do not pay property taxes to those cities, St. Cloud Mayor Dave Kleis said. “Our daytime population is so much larger than our overnight population, and we have so many tax-exempt properties, that to rely on property taxes for everything is unreasonable,” the former Republican state senator said. “And further shifting that property tax burden to businesses and rental property is wrong and hurtful to our economy.”

In response to the Legislature’s changes, St. Cloud is actually proposing to cut its property tax levy by $1.2 million next year. It’s not a sustainable budget for a city that has already shed roughly 50 positions to a flexible hiring freeze since 2008, Kleis said.

But the city has found federal grants to cover open police and fire positions and will dip into its reserves for the first time to buy new emergency vehicles, even as it continues to postpone infrastructure improvements and search for regional partnerships to reduce costs, he said.

Kleis advocates for increasing the state’s local government aid formula, recalibrating the formula to give more to regional centers or giving regional centers the option to keep some of the sales tax revenues they raise that now go to the state.

Taxpayer pain

Without some help, cities such as Moorhead, across the Red River from Fargo, N.D., will have to follow through on the 8 percent levy increase it proposed this year, said City Manager Michael Redlinger.

That’s how much the city would have to levy to make up for lost aid and keep services at current levels, even though it would mean an 18 percent increase in the city portion of residents’ property taxes, when combined with the Homestead Market Value Credit changes, Redlinger said.

City officials are examining alternatives that would result in lower tax increases, but most of those involve reductions in services that would reduce the city’s quality of life, he said. “If we can’t retain staff now and maintain our public places at a high quality for the next five years, our residents have lots of choices to go elsewhere where they can get that quality of life,” Redlinger said.

The city of Austin, in southern Minnesota, faces a similar challenge, said Finance Director Tom Dankert. City officials there are contemplating a 14 percent property tax levy increase, despite the knowledge that the city would still be spending less next year than it is this year, he said. “The question is, what are our residents willing to live without, or what are they willing to raise?” Dankert said. “That’s the choice the Legislature has left us with. Something has to give.”