Upon returning from Easter-Passover break, House Democrats wasted no time in unveiling their 2014-15 property tax plan.
In keeping with a signature theme for the DFL during the 2012 campaign, the omnibus bill introduced by House Property and Local Division Chair Jim Davnie, DFL-Minneapolis, offers a mixture of direct property tax relief to homeowners and renters, as well as increased state aid to local governments.
The biggest ticket item in the $250 million omnibus bill is $157 million in tax relief for homeowners, a proposal that’s been dubbed the Homestead Credit Refund. The name evokes memories of the Market Value Homestead Credit (MVHC) program that Gov. Mark Dayton and the Republican Legislature eliminated in 2011. Criticism of that move became a central plank in House DFLers’ 2012 campaign charge that Republican policies increased property taxes.
According to Davnie, the proposed refund is an attempt to make up for the loss of the MVHC while also discarding some of its problems. The MVHC consisted of payments to local governments, which state lawmakers never fully funded. A direct tax refund would be more effective, Davnie said.
“Local governments didn’t like the market value homestead credit because it was unreliable,” he noted. “We instead prioritized direct property tax relief to property taxpayers.” According to DFL estimates, some 300,000 homeowners would see their refunds increase.
In moving away from the defunct homestead credit, Davnie is proposing to increase the degree to which household income is taken into account in providing property tax relief. The bill would lower the threshold that people need to reach in terms of property taxes paid as a percent of their income in order to qualify for the refund. Davnie said that move would leave more low- and middle-income people in a position to receive the refund. The bill also contains increased funding for the renter’s credit, adding $15.5 million for the biennium and changing the income threshold for renters to make it closer to the threshold for homeowners.
“What we found is that aligning the thresholds between renters and homeowners is what makes sense,” Davnie said. “Why should you have a higher income as a renter to have property tax relief? What we also found was at the lower income levels for renters, a lot of people were maxing out their refunds. In a tight rental market where rents are going up, reaching down into those lower income thresholds would provide them with a larger refund, because they are going to be more stressed given the rising rents.”
Another portion of property tax relief is based on state Department of Revenue calculations that many thousands of Minnesota homeowners don’t claim the refunds for which they are eligible. Under the bill’s notification provision, it’s estimated that an additional 100,000 homeowners could receive refunds.
LGA formula revamped
In addition to direct relief to homeowners and renters, the property tax bill contains an increase in funding to counties and cities with comparatively poor tax bases. The bill includes a measure that was originally sponsored by Rep. Ben Lien, DFL-Moorhead, that represents a complete overhaul in the way the state calculates a city’s need for local government aid (LGA). The changes in the formula, which will have the result of increasing the amount of LGA that goes to aging inner-ring suburbs in the Twin Cities, are the product of negotiations that led to an accord between the state’s biggest city lobbying associations.
“The idea is that this bill targets a city’s unmet need much more specifically than the old formula,” Lien said.
The new elements of the LGA formula were regarded as a precondition for cities’ receiving an increase in LGA funding for the next biennium. To that end, the bill increases LGA by $60 million for the biennium, which is $20 million less than Dayton proposed in his budget back in January. The corresponding aid to counties, known as county program aid (CPA), receives a $28 million increase for the biennium, which is $12 million less than Dayton’s proposal.
The House now awaits a property tax proposal from the Senate. Since the Senate lacks a property tax division akin to the House’s, it’s unclear whether property tax provisions will be offered in a separate bill or rolled into the chamber’s omnibus tax bill. One thing that Capitol lobbyists who work on local government issues are eagerly wondering about is speculation the Senate will move to reinstate the MVHC. “I would not be surprised to see [MVHC] in the Senate bill,” one lobbyist said.
While property tax refunds and local government funding are the bulk of the $250 million in the House property tax bill, Davnie has included several other provisions that cover a wide array of issues ranging from pensions to frac sand mining.
Frac sand mining
The House property tax bill includes a key component of this session’s overall policy debate on frac sand mining. Lawmakers have entertained several different bills that would form the state’s response to the sand mining boom in southeastern Minnesota. The region’s silica sand has become highly sought after by oil and natural gas companies that use massive quantities of it as part of the hydraulic fracturing process.
The property tax bill enters the equation as a source of revenue for dealing with the costs associated with the industry, such as road maintenance and ground water issues. The bill sets up an extraction tax for silica sand mining, a measure originally contained in a bill introduced by Rep. Rick Hansen, DFL-South St. Paul. Mining companies would pay $1 per ton of sand that’s already been washed. Processors would also be assessed 3 percent of the market value of washed sand. The taxes would create $8.9 million for the general fund and allocate another $4.7 million to a special revenue fund. Earlier in the session, Hansen’s bill was given a hearing in the full Taxes Committee. It was opposed by mining company lobbyists, who noted that the state charges an extraction tax of 15 cents per ton and claimed that the new processing tax would drive business to other states.
Mall of America
A subsidy proposal to expand the Mall of America was shot down in 2012 when Dayton vetoed two GOP omnibus tax bills. The MOA has returned in the House property tax bill, but with a different approach to providing funding for the mall’s Phase 2 project. The bill’s target for the funding is the long-standing metro commercial real estate subsidy program known as Fiscal Disparities. Fiscal Disparities collects a portion of the overall value of commercial and industrial property in the metro area into a pool and redistributes the money to local governments in a way that’s designed to equalize the property tax wealth throughout the region.
The MOA proposal was introduced by House Taxes Chair Ann Lenczewski, DFL-Bloomington, who opposed the 2012 MOA subsidy proposal that used tax increment financing (TIF) that would have fallen on the backs of Bloomington taxpayers. Using Fiscal Disparities, she notes, would remove the property tax burden from Bloomington residents.
“Bloomington has been the biggest giver since the inception of Fiscal Disparities in 1971,” Lenczewski said. “Every single year, Bloomington pays in more to all these other cities and doesn’t get anything back from it. Since [the MOA] is one of the biggest employers in the state and the revenue goes to the state, not the city of Bloomington, it seems fair to me.”
Lenczewski said that due to the growth of property values in Bloomington, the city will pay more into the Fiscal Disparities pool than last year even without the contribution from the Mall of America.
The Mall of America project is conditioned on funding for the nearby Old Cedar Avenue bridge across the Minnesota River, which has been barricaded since 2002. For several years Lenczewski has been pursuing bonding money to restore or replace the bridge for pedestrian and bicycle traffic.
Davnie said the Mall of America provision in the bill is a “placeholder” that will continue to be worked on as the session progresses. “It’s an acknowledgement that a major public investment at that site makes a lot of sense,” he said. “Exactly what and how remains to be determined.”
Some state legislators are concerned that St. Paul’s Xcel Energy Center and Minneapolis’s Target Center are undercutting each other as they try to attract big-name entertainment bookings. The property tax bill tries to bring together the two cities and the various interests tied to the arenas. By Jan. 1, 2015, the two cities are called upon to create a “joint governing structure” that would handle “marketing, promotion, and scheduling of conventions and events at the Target Center and the Xcel Energy Center.”
The proposal calls for a study to be completed by Feb. 1, 2014, that would, among other things, consider whether the two arenas and possibly other venues should join the Minnesota Sports Facilities Authority, which was created in the 2012 Minnesota Vikings legislation.
One of the marquee pieces of pension legislation this session has found its way into the House’s property tax bill. Lawmakers are mulling ways to shore the police and fire pension funds that are part of the state’s Public Employee Retirement Association (PERA). One of the more controversial proposals concerning those pensions would place a $5 surcharge on homeowner and automobile insurance policies to help keep the pensions fully funded. The amount of state aid for police and fire pensions generated by the current tax on homeowner and automobile policies has declined in recent years, and property taxpayers have had to fill the gap. The insurance surcharge proposal would raise $34.5 million for the biennium.
Minneapolis street cars
The bill creates a so-called value capture district that would generate revenue to create a streetcar line in Minneapolis. The route for street cars has yet to be designed, but it would be located in the downtown area. The money would be generated from increased taxes on five downtown Minneapolis blocks.