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Bracing for the next round of LGA cuts and property tax hikes

Four days after Gov. Mark Dayton and Republican legislative leaders announced they had agreed upon the "framework" of a deal to end the shutdown, few details have emerged to fill out that framework. We know there is wrangling among Republicans behind closed doors and we know it is not pretty, even if Dayton and Republicans insist publicly, as they did Sunday night, that "work on the detailed budget bills continues to move in a positive direction."

The unanswered questions on the size and shape of the budget bills that will eventually emerge are enough to fill a shuttered state park. Chief among them: What cuts will be made to Local Government Aid, and how might those cuts affect property taxes for home and business owners?

In a bill vetoed by Dayton in the last weeks of the session, Local Government Aid, or LGA, would have been cut by more than $100 million, with aid to Minneapolis, St. Paul and Duluth phased out altogether over a four-year period.

But that bill is dead and gone, so what can we expect when the new budget bills emerge? That's a question Gary Carlson, a lobbyist for the League of Minnesota Cities, is working feverishly to answer. I spoke to him on Friday and he knew nothing, but said he had canceled a trip out of town to be at his office in St. Paul, close to the action.

By the end of Sunday, after a weekend of reaching out to the Department of Revenue and contacts inside the Capitol, he knew little more than what he told me at the onset, that the cuts would be "somewhere between zero and House File 130."

He was referring to the first version of the LGA cuts to emerge. Next came House File 42, then a conference committee compromise, and finally a spirited veto.

In a letter explaining the veto, Dayton protested that the bill "would increase property taxes by $89 million in 2012" and that some cuts were "unnecessary and geographically imbalanced" and finally that such cuts, and the property tax hikes that would follow, would be a burden falling "disproportionately on low and middle income Minnesotans."

LGA cuts coming back from the dead
Why do LGA cuts have to lead to property tax hikes? We'll get to that in a minute.

First, what should cities expect to emerge on LGA from the ongoing closed-door sessions? It's unlikely that Republicans would try again for a phasing out of payments to Minneapolis, St. Paul and Duluth. More likely is a plan that removes an equal percentage of LGA money from each city's budget.

For many cities, that will mean LGA is stripped completely from cities that receive little aid relative to their overall budget. For the state, this would mean less significant savings than cutting the money that goes to the big cities.

However, it may only be a short-term defeat for advocates of larger cuts. As Carlson explains, "The more LGA is eroded statewide, and we've seen quite a bit of that happen already in recent years, it becomes more vulnerable as legislators begin to argue that their cities don't get the money," and lose any incentive to fight on behalf of the program. "Fewer people benefiting means less general support for the program."

Bracing for property tax hikes
For most cities, property taxes are the chief form of revenue. In the three years leading up to the 2011 session, Local Government Aid to Minneapolis alone was cut by $54 million, according to the city. The result? Many Minneapolis homeowners received notices of property tax hikes in the double-digits. At heated public hearings after the notices went out, city officials insisted they had undertaken a painful belt-tightening process before turning to property taxes.

Anticipating this next round of LGA cuts and likely property tax hikes, David Wheeler, president of the Minneapolis Board of Estimate and Taxation, is empathetic: "People are tapped out, particularly seniors. Property taxes are very regressive and hit the people least able to afford it."

But the regressive nature of property taxes doesn't fully explain the disproportionate effect on lower and middle-income homeowners.

There is also the dramatic shift of the property tax burden from commercial and industrial property owners to homeowners. In 1997 homeowners paid 33 percent of the property tax pie while commercial and industrial property owners paid 56 percent. Today that number has flipped, thanks to decisions made along the way by lawmakers. With a Legislature dominated by lawmakers preaching the gospel of business-friendly government, this imbalance isn't likely to change anytime soon.

Alternatives to property tax hikes
In an economic climate like this, what's the alternative to raising property taxes? "The bottom line," says Wheeler, "is we need the economy to improve." Failing that, he says, "We need to ask taxpayers, 'What is it you can live without? What would you cut?'"

Carlson suggests a third way: "St. Paul has used some fairly aggressive techniques, including all sorts of assessments and user charges for things like street lightning and alley maintenance. They've been trying to come up with revenues that are tied more directly to the benefits that a resident or business may receive."

This sort of thing can be applied quite broadly. Upkeep of local streets could be funded in part by a fee charged to the businesses responsible for the traffic. It is a pipe dream in this era of business-first governance, perhaps, but tying local services more directly to beneficiaries opens up all sorts of revenue potential.

More controversial than shifting costs to businesses would be a shift to nonprofits. Property taxes can't be levied against church and government properties, but fees for local services could be.

"Cities like Minneapolis or St. Paul have many tax exempt properties that may generate a lot of demand for police and fire department protections, among other things." Says Carlson, "Citizens are tired of getting nickeled and dimed. Some of these user charges could help distribute costs more broadly to those properties as well."

Another alternative: local sales taxes. Several cities, including Cloquet, Fergus Falls, Hutchinson, and Marshall came to St. Paul this session asking for the authority to create local sales taxes (Minneapolis already has this).

What alternatives would you support?
Talk of alternatives will no doubt heat up once approved LGA cuts are finally approved, and again when property tax notices go out in April 2012. There is time to make critical decisions that will affect struggling homeowners — and time for citizens to lobby local leaders for those changes.

Would you support any of these alternative revenue moves? What moves not discussed here would you propose? Meet me in the comments.

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Comments (15)

"Upkeep of local streets could be funded in part by a fee charged to the businesses responsible for the traffic" This is an interesting statement in the context of the proposed Vikings Stadium in Arden Hills. Road improvements, presumably to be paid for by te state, is the main sticking point. My observation is that a subsidy is a subsidy is a subsidy. That doesn't change for ethanol, a homeowners mortgage deduction, or city services for business and non-profits. We'll need to get rid of some of these subsidies/deductions to have an honest accounting of costs to the public. We have to be much more careful about picking winners and losers in this economic climate.

It won't be long before, when your house is on fire, the firemen will be forced to ask you to swipe your card before they put it out. (But I guess it's better that your house burn down than chasing away business with any sort of tax!)

The other day Kurt Zellers was reminded that the "deal he was signing on to is another hit to schools. His reply? "Yes, they're being led onto the ice. But they won't break through."

Matt Dean's take on the deal? "But the most important thing is that it doesn't raise taxes."

Zellers and his crowd have been kissing off education for years. Now we're bracing for another round of property tax INCREASES (pay attention, Dean)

Cynicism beyond words. Protect those rich friends at all costs.

Dayton's approach was the BEST one, all along.

It's too bad such a sizable minority of our state's citizens have had their thinking so warped by listening to conservative media that they are now incapable of comprehending what the income tax structure of Minnesota was back when we led the Upper Midwest in job creation and generally saw ourselves less affected by recessions and first to climb out of them.

(Here's a clue, "the rich" paid a great deal more back then, and didn't leave the state because of it, except for poor, sad, impoverished Bill Cooper, who found out the grass wasn't nearly as green in Florida as he expected it to be and came back to Minnesota.)

The same warped thinking leaves them incapable of connecting the dots between the past 10+ years' efforts to "improve the business climate" and the stagnation (or even moving backward) of middle class incomes, the fact that far fewer well-paying jobs with benefits are available and our state government lurches from one budget crisis to the next.

If our senior citizens, retiring baby boomers, and the entire health care industry (including doctors who are about to see massive cuts in their incomes and their political clout) don't realize that, the "conservatives" who have largely succeeded in undoing the "Minnesota Miracle,"...

have placed a target on their backs,...

fully intend to take possession of their homes by forcing raises in their property taxes sufficient that they will have NO CHOICE but to give them up,...

and are planning to refuse to provide even the most basic levels of healthcare (because, as they love to pontificate, the costs are "unsustainable").

Unless those folks are willing to turn off TV News (since EVERYONE on TV now seems able to do nothing but repeat, ad nauseum, the same bogus "conservative" talking points),...

seek better information elsewhere,...

and vote to protect their own interests, it will undoubtedly be the case that the "boomers" will find themselves living in abject poverty, in substandard housing, without health care, for their retirement years,...

doctors will find themselves keeping busy providing a great deal of "charity care" (at the same time that many rural hospitals and nursing homes evaporate),...

many doctors may even "offshore" themselves, seeking to find areas to practice where their patients and/or the government can dependably afford to pay them,...

while "the rich" continue to see their incomes skyrocket and their taxes remain artificially (and unconscionably) low.

See the Carlson/Mondale solution--a road that no one seems to want to go down, but an adult solution. Problem is we have a bunch of firebrands, not statesmen, and they got voted in on their "no new taxes, and I want to pass a lot of social agenda legislation" platforms. We need to revisit the whole tax code, eliminate loopholes and regressive provisions, and make it "fair and balanced" for everyone.

Allowing widespread municipal sales taxes would be a calamity. In states where local governments rely on sales taxes as an important part of their revenue mix, cities chase big box retail and car dealerships with local tax rebates and the effects on regional land use patterns are awful -- landscapes littered with abandoned big box retail stores as retailers move from city to city in search of ever bigger tax breaks. Municipal revenues (and employment) fluctuate wildly with the economy.

There is an elephant in the room. That elephant is the amount of money that Minneapolis spends each year funding retirement benefits of police and fire fighters. Something like a third of the annual budget funds pension/medical plans for retirees. This system was setup years ago when people didn't live as long. Now if someone retires at 55, they have another 30+ years ahead of them, funded at near their ending salary plus a generous healthcare benefit. It's time to look at this system, and adjust it something more sustainable.

No need to hack these away to nothing, but it's long past time for compromise.

As a city resident, I wonder what the property tax rate is and its hike will be in the out-state towns and farms. Are they immune. Are the big cuts in LGA to the three major cities being distributed to the out-staters? Then charge them folks a bundle when they come to the city. Like when the Owatonna heliocopter brings a patient to Henn Cty Medical Center let the admission fee be $10,000 just to get in the door. Let the city issue parking stickers to residents, so when the Rochester Twins fan comes to park anywhere in town he has to go to a special high price ramp - the $10 per minute rate paid up front in 5 hour blocks and a 5 hours+1 minute the Denver boot goes on. The country folks put in their guys to screw us, so lets have the get-even-ski.

It something of a misnomer to call this "aid" to local government, since it is our money.

When counties bill annual real estate taxes, they should retain from their receipts the amounts needed to maintain city and county services, the replacement or improvement of infrastructure, and services provided to the huge number of properties occupied by state government on which no taxes or fees are paid to local governments.

There is no reason county and city residents, especially large numbers of poor or homeless, elderly or disabled, or new immigrants, should be cheated by the state out of what we pay taxes for.

And there is no reason that small towns needing, for instance, a water treatment plant can't apply to the state for aid. And get it.

It's time we all grew up and understood that fairness is what government is supposed to be about--fairness in taxation, in delivery of services, and in the way citizens are treated. Fairness in taxation should be based on ability to pay--the progressive income tax. Fairness in delivery of services means you can come to town or go out-state and not have to carry a passport or pay extra taxes or fees when you cross a municipal boundary because there is something called LGA--local government aid, financed at least in part by income taxes. If you are a MN resident or property owner, you benefit from this state and owe it some dues--called taxes.

And fairness when you hold public office is that you think about --and represent--all Minnesotans, not just those in your district you believe agree with you. Finally, fairness is about understanding not everybody agrees with you or me but we should respect each other and be willing to compromise--and pay our fair share.

I appreciate Arvonne Fraser's analysis.... And I gulp hard as I write a check to my mortgage company and watch my monthly payment rise again due to property taxes while I am essentially on a fixed income. I hope the legislature re-visits the Carlson/Mondale commission recommendations because this situation and this "solution" are not sustainable.

Does anyone know the status of the Mpls pension negotiations? If LGA is again going to be cut, I am quite concerned about what my property tax bill will look like if the pension mess is not worked out. Updates?

I support more fees for businesses (but not for nonprofits) in lieu of property or sales tax increases.

I disagree with Wheeler about cutting services if cities don't somehow recoup lost LGA. Governments need to become more productive which must include some small cities merging or at least sharing services.

I also disagree that LGA cuts necessarily lead to property tax hikes. Property taxes go up for cities where there is no LGA to cut. Since 2000, my city of Roseville has had yearly property tax increases but we received **$0 LGA** in the last 11 years.

# 12) The Mpls Pension "fix" (transfering into the state pension system) was included in the special session. BTW: This had no increase in costs to the state (try to alay any tolls coments about the state bailing out minneapolis- again- yada, yada, yada).

I used to live in Philadelphia. When the hundreds of year old buildings, still being used, were built, the city did not have a fire department. Insurance companies hired their own firefighters. If you bought fire insurance, which was important due to use of gas lights etc, you got a plaque to place on the front of your house. If you had a fire, the firefighters from your insurance company had to put it out. If another crew came and saw the wrong firemarker, they letr the house burn. This system evolved into a centralized fire fighting system for cleaer reasons. I would hate to see city services start becoming more like this time period hundreds of years ago. Services need to be accessible to all and paid for in fair and reasonable ways.