Affluent suburbs challenge Twin Cities’ unique tax-base sharing law

The lower, blue line shows the percent of the total metro tax base in the shared pool. The upper, red line shows the percent of the total metro commercial-industrial tax base in the pool.
Courtesy of the Metropolitan Council
The lower, blue line shows the percent of the total metro tax base in the shared pool. The upper, red line shows the percent of the total metro commercial-industrial tax base in the pool.

In the 40 years since the Fiscal Disparities Act was passed by the Minnesota Legislature, the Twin Cities’ unique tax-base sharing law has survived multiple court challenges and repeal efforts. Evidently some people don’t like to share!

The law is undergoing scrutiny once again, as a result of a legislative directive approved at the request of the curiously named Municipal Legislative Commission, a coalition of 16 of the region’s more affluent suburbs.

The Fiscal Disparities Act, which took effect in 1975 after being upheld by the courts, requires all communities in seven-county area to share 40 percent of the annual growth in their commercial-industrial tax base. The tax base is redistributed to communities under a formula based on their fiscal capacity to provide urban services.

The idea was to reduce the disparities between the “haves” and the “have-nots” — communities with a lot of commercial-industrial property and those lacking in such development.

The legislation grew out of a study completed in 1969 by the Citizens League, a nonpartisan public policy research organization. The idea was quickly embraced by Rep. Charles Weaver Sr., R-Anoka, and enacted into law in 1971.

Rep. Charles Weaver Sr.
Rep. Charles Weaver Sr.

Son Charlie, who succeeded his late father in the Legislature and now heads the Minnesota Business Partnership, recalls his father as a passionate advocate for the concept, traveling “all over the country talking about it. Lots and lots of places wanted to do something similar.”

“The essence of Fiscal Disparities was that as a region, we’re all in this together and that regional decisions about where highways go, where airports go, where shopping centers go — they all influence where growth [and therefore tax base] goes,” he says.

Annexation battle
The law’s passage was fueled in part by a bitter annexation battle in the 1960s between Bloomington and Burnsville, with Bloomington attempting to grab Blackdog power plant and the tax base that it represented.

Another precipitating factor was the decision of officials in Washington County to allow the construction of a new power plant near the St. Croix River, which was on its way to being designated under federal law as a “wild and scenic river.” Again, the desire for tax base appeared to influence local decision-making.

Proponents of the fiscal disparities law argued that it was about more than just sharing the wealth among the “haves” and “have-nots.” They said it also was intended to:
•    Reduce the competition among metro communities for economic development, just for the sake of development.
•    Protect the environment by discouraging development on unsuitable land for tax reasons.
•    Provide a mechanism for sharing the benefits of major regional facilities — such as power plants and shopping malls — that have a regional customer base.
•    Reduce the fiscal impact of regional decisions such as where highways and transit lines are located.
•    Reduce the obstacles to siting regional parks and other tax-exempt facilities.

However, Paul Gilje, former research director for the Citizens League, recalls one of the most effective sales pitches was this: “No matter where a business locates in the metropolitan area, and no matter where you live, you will get some of the benefit.”

Impact of the law
Over the years, the Citizens League, the Metropolitan Council and other groups have tracked the impact of the law. The most recent studies indicate that among all communities in the program, the net gainers outnumber the net losers by more than 2 to 1 (120 to 60) for taxes payable 2011.

These studies indicate that the disparities in commercial-industrial tax base per capita among communities with population over 10,000 are now 3 to 1. In the absence of the law, the disparities would be 10 to 1.

Currently, the regional tax-base pool represents about 39 percent of the region’s total C/I tax base and 12 percent of its entire tax base (residential included).

The city of St. Paul historically has been the largest single beneficiary. In 2011, the next largest gainers were Brooklyn Park, Brooklyn Center, Coon Rapids and Andover. Minneapolis switched to being a net loser in 2011 after being a net gainer from 2002 through 2010.

In 2010, the aforementioned Municipal Legislative Commission convinced the Legislature to order a new study of the Fiscal Disparities Act and its impact. Not coincidently, 10 members of the group are among the 20 largest net losers under the law. They include Bloomington, Burnsville, Eden Prairie, Edina, Maple Grove, Minnetonka, Plymouth and Woodbury.

Call for study
Among the questions the group raised: Do contributions to the pool prevent local communities from generating enough revenues from large developments such as the Mall of America to cover the cost of providing services to those developments?

“A lot has happened in the last 40 years,” says Bill Schreiber, lobbyist for the group. He says the law should be examined in the context of current school aid, local government aid and other laws that also attempt to address fiscal disparities.

Sen. Ann Rest, DFL-New Hope, the chief Senate sponsor of the legislation calling for the study, says she wants “to see if it is still producing the desired effects” or whether it needs to be modified.

Some years ago, Rest says, she introduced a bill that would have reduced the contribution of every community from 40 percent of its annual C/I growth to 20 percent. One of her questions, she says, was whether the law was “capturing the inflationary growth rather than the real growth.”

To analyze the Fiscal Disparities Act, the Minnesota Revenue Department has contracted with TischlerBise, a fiscal, economic and planning consulting firm based in Bethesda, Md.

Eric Willette, property tax research director for the Revenue Department, says one of the firm’s specialties is analyzing the cost of growth to local governments. Among other things, the firm will attempt to determine whether communities are giving up more tax revenue from C/I development than it costs to service that development. The legislative deadline for completion of the study is Feb. 1.

Myron Orfield, a University of Minnesota law professor, a former state senator and author of three books on metropolitan growth, is a strong supporter of the Fiscal Disparities law.

Myron Orfield
Myron Orfield

In a 2007 law review article, Orfield and Nicholas Wallace argued: “The Twin Cities metropolitan region has benefited from tax-base sharing by reducing incentives for fiscal zoning and tax-base competition and associated negative outcomes. The program ensures that all residents enjoy a minimum standard of service for important local services like public safety.

“By reducing the need for local governments to ‘steal’ revenue-generating land uses from each other, such policies allow them to engage in more thoughtful and beneficial land-use planning.”

As for the more affluent communities who are net losers under the law, Orfield says, “They are still retaining 60 percent of pretty massive growth.”

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Comments (18)

  1. Submitted by Bob Spaulding on 09/22/2011 - 10:40 am.

    Few policies do as much to ensure that we remain a stable region, retain a functional real estate marketplace, and don’t segregate ourselves in the way that (in its most extreme form) we’ve seen in places like St. Louis or Detroit. In comparison, Local Government Aid (LGA) – which has been at the center of a long-term game of political volleyball, piled up with special twists, turns and exemptions – is a comparatively very poor substitute to the keenly targeted impact the Fiscal Disparities program has.

    The issues raised by the study probably cannot be answered definitively by a single study. I’m concerned, hopefully wrongly, that the effect of this study might be to open up a counter-productive debate over one of the most effective programs for regional stability anywhere in the nation. Especially in this political climate, we might be better-advised to leave well enough alone, and find other places to focus our attention.

    By comparison, one doesn’t need a study to get your head around the positive impacts of the fiscal disparities program. Those are very clear; a quick look at the numbers behind the program clearly shows the stabilizing impact it has had in ensuring that we all can enjoy a basic level of city services, schools and libraries, whether we live in a city rich or poor in tax base.

    Since the article brings it up, it’s worth taking a look at the example of the Mall of America. When the Mall was built in Bloomington, the retail analysts I’ve talked with note that retail dramatically shrank in the two central cities, and there was a direct connection. It should not be the role of public policy to continually incentivize new development that has the effect of sucks away investment from more established (and often more efficient) centers elsewhere in the metropolitan area. If anything, public policy should provide a marginal disincentive to produce an oversupply of any one land use within the same region. When we oversubsidize the creation of office, retail or residential space in one part of the metro area just to grow that one city, we tend to produce an oversupply in the overall marketplace regionally. In economic terms, we reduce the efficiency and equilibrium within the marketplace, which basically means we’re wasting both private capital and public tax dollars.

    More problematic than any concern raised by the study’s proponents is the very real threat of deeply uneven patterns of development that plague so many American metropolitan areas. Those dynamics waste so much human and civic potential, leave past public and private investment to be wasted. And as census numbers have shown, those dynamics seem to increasingly pose a threat here in the Twin Cities.

  2. Submitted by Rich Crose on 09/22/2011 - 11:51 am.

    Cities are scrambling to balance their budgets as the value of their real-estate declines and state aid dries up.

    As their ships sink, instead of shouting, “Women and children first!” these leaders are shouting, “Every man for himself!”

  3. Submitted by Jackson Cage on 09/22/2011 - 12:00 pm.

    “attempt to determine whether communities are giving up more tax revenue from C/I development than it costs to service that development.” So this wasn’t part of any analysis BEFORE these developments were built?

    “sharing the wealth among the “haves” and “have-nots”….wow, who would have thought the father of the Minnesota Biz Partnership CEO would have been the leading proponent for “class warfare”. 🙂

  4. Submitted by Bernice Vetsch on 09/22/2011 - 12:09 pm.

    The suburbs need to recall that St.Paul, Minneapolis and Duluth maintain an infrastructure they need as they commute to their jobs and entertainment and specialized medical care.

    These cities also need to spend millions of dollars to provide large immigrant and low-income populations with social services and education. They also provide public services to entities who pay no property taxes: hundreds of churches and private schools, public schools, public and private universities and colleges, state, county and city governmental offices, not to mention inspecting and maintaining the restaurants and parks and other amenities suburbanites come into the city to enjoy.

    Those who believe they have no obligation to help maintain what are the cores of our state — without which the suburbs would just be small towns on the prairie — are mistaken.

  5. Submitted by M Zacharias on 09/22/2011 - 12:17 pm.

    Hmmm. I suppose that “fairness” is a consensus thing, guided not by my having succeeded by fair (not treacherous, deceitful, or unlawful) practice but by the vanity fare, those who by sheer number can succeed by treachery, deceit, and what they deem lawful; by vote, they can determine that the “greater good” outweighs what natural law defines as “good”–that which is right and just.

    Shame on Edina, Eden Prairie, Woodbury, (et al) for disliking the thuggery of governmental agencies poking a shiv in their sides! Even though the U.S. was formed as a Representative Republic, who says that mob rule can’t make sway and have their united way? Oboy!

  6. Submitted by Greg Kapphahn on 09/22/2011 - 01:08 pm.

    I can only hope that the results of the fall, 2012 election, wherein the public will take their revenge on the Republican Party of Minnesota for their demonstrated dysfunctions and their rank subservience to Grover Norquist in the last legislative session, will prevent my worst fears from being realized:…

    that no matter what the results of this study of the current effects of the Fiscal Disparities Act, our dysfonic “conservative” friends will find something in the study’s findings that they will “spin” faster and harder than the flywheel in a gyroscope in order to claim that the study supports their usual immoral stance;…

    that “greed is good,” selfishness is a virtue, sharing is evil, and the only problem with America is that the rich are not rich enough, labor is not yet cheap enough, the poor and middle class are not yet reduced to abject poverty, nor is the environment yet completely destroyed.

    Although they’ll try to masque it with much prettier rhetoric about “market freedom,” “job creators,” “business climate,” etc., the devastation of everyone not already fabulously rich and the destruction of the planet on which we live will, of course, be their message. It’s always their message. It’s their only message.

  7. Submitted by Steve Elkins on 09/22/2011 - 01:26 pm.

    Fiscal Disparities is the price that residents of affluent communities pay to live in a region without slums.

    When I talk to local elected officials in states like Ohio and Michigan, the conversation invariably turns to topics like the problem of “home abandonment” in their first ring suburbs. Residents of first tier suburbs in the Twin Cities don’t walk away from their homes, voluntarily, because of declining public services and soaring property taxes like they do in Ohio and Michigan. There but for the grace of Fiscal Disparities we would be, ourselves.

    Note: The compression of property tax class rates on C/I property in 2001 has also helped tamp down the inter-city competition for C/I tax base.

  8. Submitted by craig furguson on 09/22/2011 - 01:53 pm.

    I’ve heard that Bloomington is St. Paul’s largest taxpayer.

  9. Submitted by Steve Sundberg on 09/22/2011 - 02:41 pm.

    I wonder if this would be the same Act that allows Brainerd to remain a viable community in the face of rapid commercial development in next-door Baxter? Brainerd has lost a lot of its retail and manufacturing base the past 30 years — not helped by sizable employment reductions at BNSF and Potlatch — while Baxter has seen the arrival of Walmart, Target, Home Depot, Kohl’s, etc., and recent, rapid development along its Hwy. 371 corridor.

  10. Submitted by chuck holtman on 09/22/2011 - 03:22 pm.

    Fiscal disparities has another benefit that I do not see mentioned here. There are a variety of public benefits (positive externalities) that come from people of reasonable means living in the urban core, and public policy should encourage it. When the high social service costs that are the responsibility of the community as a whole are concentrated at the municipal taxation level, they fall disproportionately on those residents of reasonable means that live in the urban core, creating an incentive for them to emigrate. This of course further increases the financial burden on remaining residents of reasonable means living in the core, increasing the financial pressure for their exodus, and so on. In other words, this is one other way in which weakening fiscal disparities contributes to hollowing of the urban core.

  11. Submitted by Joe Musich on 09/22/2011 - 04:14 pm.

    What are the property taxes of the suing burbs not bringing in enough dollars to build the kinds of amenities that bring people to live there and be taxed at a relatively lower rate? Die Southdale Die! And there will be no tax money to build a multimillion dollar fake snow park in Bloomington. And the city that so many come to work in cannot even repair it’s neighborhood streets? Something is asunder!

  12. Submitted by Thomas Swift on 09/22/2011 - 04:39 pm.

    “As their ships sink, instead of shouting, “Women and children first!” these leaders are shouting, “Every man for himself!”

    That’s one way to look at it.

    Of course one might also say that while that same ship is sinking, leaders on the port side don’t let anyone into a life boat until the entire ship’s company is weighed, measured and catalogued by race, gender and sexual appetites; bike racks are installed; assurance is received that the wood used to make the boats was harvested according to sustainable farming methods and the shipwrights were paid union wages.

    Then as all their boats go under, they all rush to starboard and demand seats.

  13. Submitted by David Greene on 09/22/2011 - 04:58 pm.

    Sen. Rest is one of the most ill-informed state senators on urban issues. Somehow she thinks that New Hope is in the same league as Eden Prairie and Edina.

    She has long been dead weight, if not an outright opponent on questions of regional stability, public transit and all sort of equity issues.

    We really need someone else to step up to the plate in her district.

  14. Submitted by Ron Gotzman on 09/22/2011 - 06:27 pm.

    “The tax base is redistributed to communities under a formula based on their fiscal capacity to provide urban services.”

    Anytime the words “redistribute” and “communities” are used in the same sentence, the DFL get ecstatic.

  15. Submitted by Ray Schoch on 09/22/2011 - 08:02 pm.

    I came here from an area that doesn’t have a Fiscal Disparities Act, or anything like it. The result is genuinely cutthroat competition between and among municipalities – often self-destructive competition – to acquire commercial and industrial development. Businesses, being not stupid and sociopathic simultaneously, take advantage of the competition, and, much as children do their best to play one parent against the other, do their best to play one community against another until the business gets what it wants.

    Often that takes the form of tax breaks in such profusion and amount that the city or area that acquired the business is itself a net loser financially, having given away so much to acquire the business that it costs more in services to keep it there than the city or area gains in tax base. Equally stupid is the too-frequent result wherein municipalities end up with competing, duplicate developments, neither of which do particularly well. It’s truly a lunatic environment, and Minnesota is smart to have avoided going down that road.

    So far.

    Based on what I saw and experienced as a minor municipal functionary for 6 years, eliminating the Fiscal Disparities Act, or watering it down significantly, would be a huge mistake, with no net gain for the metro area, whether suburb or one of the Twin Cities. Indeed, suburbs hate to share with central cities – unless the central city happens to get a new and thriving company, in which case sharing becomes a great idea.

    We’re better off keeping the law, and if tweaking is genuinely necessary – that is, a broad spectrum of both political parties agree that some change would benefit the entire area – then go ahead and tweak it, but significant change ought to be off the table. As is, the law represents a great idea, well ahead of its time, that automatically makes inter-city and inter-agency cooperation much more collegial and productive, thus more cost effective and efficient for taxpayers.

  16. Submitted by Alec Timmerman on 09/22/2011 - 10:01 pm.

    Invariably, whenever practical government programs work, and work well, conservatives will cry socialism. Ideology and faith based economics always trumps the pragmatic. None of these municipalities are in it by themselves. What hurts your neighbor hurts you. Understanding that is the real American way.

  17. Submitted by Victoria Wilson on 09/23/2011 - 10:19 am.

    The Fiscal Disparities Act illuminates an interesting aspect of group structure in the production and consumption of public services, or what I like to call public goods: goods that a community agrees to provide to everyone in a that community (public education is a public good, so is our transportation system-we all contribute to it and we all can use it).

    The Fiscal Disparities Act denotes that groups (employees, vendors, suppliers, subcontractors, customers) associated with commercial enterprises consume public services which lie outside the boundaries of the city, or tax collection area, in which the commercial entities are located. So the education level of the recent high school graduates they hire from across town is a tribute to that school district; and the roads over which their delivery trucks bump and thump are maintained by other cities; and the public health programs provided in yonder communities keep their employees showing up to work instead of staying home with sick kids.

    I commend senator Ann Rest-who happens to represent my district-for seeking to better understand the impact and outcome of the act. A legitimate system is the best system, as the public will freely participate instead of trying to circumnavigate. And I mean the whole public not particular political parties. In my mind none of this is about redistribution of income or the haves and the haves not. It is simply about the rational allocation of resources over a community so our capitalist system is productive.

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