House Property and Local Tax Division chair Jim Davnie agrees that the property tax system is complex but warns against doing too much at once. (Staff photo: Peter Bartz-Gallagher)

Working group report likely to meet resistance

One day this week, East Grand Forks Mayor Lynn Strauss picked up his copy of the Grand Forks Herald to find divergent stories on the paper’s front page. On one side, the Minnesota Legislature was depicted as trying to maneuver under the weight of a $1 billion-plus deficit. On the other, a story noted elected officials in newly booming North Dakota were full of bold new ideas, including Gov. Jack Dalrymple’s proposal to reduce property taxes by more than $700 million over the next biennium.

With front-page coverage painting such different pictures, Strauss is concerned that citizens and businesses along the Minnesota border might look west, where the oil is plentiful and the property taxes are easy on the wallet.

“We don’t want to see anybody leaving our state,” Strauss said, “especially if the reason is taxes.”
Strauss said he and other mayors would be coming to the Capitol at some point in the next few weeks to bring their concerns to the Legislature. Around the same time, lawmakers will probably be hearing from the Property Tax Working Group. That body, a task force that included senior legislators on the tax issue paired with major stakeholders, issued its final recommendations in late November.

Though the report was published with little fanfare, its proposals, if adopted, would lead to a major overhaul of Minnesota’s property tax system.

The steady rise in property taxes was a central talking point for Democrats on the campaign trail, and the DFL’s victories have seen one working group member, Sen. Rod Skoe, DFL-Clearbook, elevated to the position of Senate Taxes Committee chairman. Skoe expects the working group to present its findings to the Legislature in late January.

Skoe says he and others, including Department of Revenue Commissioner Myron Frans, “all think that property taxes have grown too fast” — though, for his part, Skoe has remained guarded about which solution he prefer to the property tax problem.

Report stresses simplification

Among the working group’s overarching goals was an attempt to simplify the structure of property taxes. Legislators, lobbyists and close observers of the topic consistently use words like “complex” or even “baffling” to describe the current code, which breaks properties down into 55 different classifications.
“It is just unbelievable, frankly, how confusing the system we’ve made is,” said Beth Strinden Kadoun, director of tax and fiscal policy with the Minnesota Chamber of Commerce.

Strinden Kadoun said the Chamber would support an effort to reduce the system’s complexity, citing savings in the administrative costs to oversee the current, multi-layered system.

Under the working group’s plan, those 55 property classes would be collapsed to only four: residential, agricultural, commercial, and “other.”

The complexity of the state’s system, and citizens’ general lack of knowledge about it, is part of the inspiration behind H.F. 2, a bill entered by the newly minted chair of the House Property and Local Tax Division, Rep. Jim Davnie, DFL-Minneapolis. One aspect of Davnie’s bill, which he entered along with more than two dozen DFL co-authors in the House, would put the onus on the Department of Revenue to notify eligible property owners that they qualify for a refund. By present estimates, as many as 40 percent of eligible homeowners do not file for refunds.

Davnie agrees that the current system is complex, but said the working group’s findings would lead to a “dramatic” change that might amount to doing too much at once.

“Their point about there being 55 different classifications — it’s true, it’s a little mind-numbing,” Davnie said. “Can we get down to four? I don’t think so.”

Davnie’s bill would also expand property tax refunds, another point stressed in the working group’s report.
A major theme of the working group’s recommendations is a push to decentralize property taxes — which are, it asserts on numerous occasions, the domain of local governments, rather than the state.

“The property tax is foremost a local revenue system, not a vehicle for state policies,” reads one line in the report’s “guiding principles.”

To that end, the recommendations call for the state to avoid imposing any caps, limits or freezes to local government property tax levies.

The report also proposes an end to the state’s collection of property taxes for the general fund. Though the state only taxes commercial, industrial and cabin properties, those revenues add up to more than three-quarters of a billion dollars annually, which the report says should be delivered back to local governments.

As Davnie reviewed this aspect of the working group’s report, he found himself smiling. He had served as a member on an education financing task force convened by Education Commissioner Brenda Cassellius. As published in late November, the major recommendation to come out of that group was the return to a statewide tax levy — or, as Davnie puts it, “180 degrees” apart from the property tax group’s proposal for getting the state out of the property tax business altogether.

While Davnie said he is “not a purist” on issues like this, and doesn’t fully agree with either idea, he concedes the Legislature will need to move in one direction or the other.

“That’s what the legislative process is for, tussling over these viewpoints on either side,” Davnie said.

LGA not addressed

For all the significant findings within the property tax group’s report, its recommendations are also notable for what’s not included. The topic of local government aid was explicitly left out of the report’s focus, as other groups had already been tasked with addressing that issue. Since peaking at nearly $608 million in 2001, LGA funding from the state has fallen to around $425 million, where it has held steady over the past three years.

One of the groups assigned to study the topic, the Local Government Aid Study Group, met only sparingly after its creation by the Legislature in 2008, according to League of Minnesota Cities lobbyist Gary Carlson. When its report finally came due in December, cities found its recommendations somewhat underwhelming.
“It didn’t really yield much, in the way of reform ideas,” Carlson said.

More promising, he thinks, is the group of 15 mayors Gov. Mark Dayton appointed in January 2012 to study the state-local relationship and make recommendations for LGA reform. That group, co-chaired by Minneapolis Mayor R.T. Rybak and St. Cloud Mayor Dave Kleis, is scheduled to release draft recommendations on Jan. 22, the same day Dayton will release his budget.

Carlson’s clients are optimistic about a “fairly significant overhaul” of LGA. Aside from the fact that the current formula is based on outdated numbers from the 2000 census, cities are also hoping for “additional resource allocation” to appear in Dayton’s budget plan.

Whether that increase fits in with the Legislature’s efforts remains to be seen. But, having campaigned successfully across the state on the issue of ever-rising property taxes, the DFL has pledged to make changes.

“Minnesotans know they’re paying more, and where it hurts them most,” Davnie said. “I think you’ll find that my party is acutely aware of that.”