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Tax-base sharing law gets a closer look in Twin Cities

The first comprehensive study of the law is likely to trigger new efforts by affluent suburbs to make changes or even repeal the unique tax-base sharing arrangement.

The first comprehensive study of Fiscal Disparities Act is likely to trigger new efforts by some of the more affluent suburbs to make changes or even repeal the Twin Cities’ unique tax-base sharing law.

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The 234-page study was completed at the direction of the Legislature by TischlerBise, a fiscal, economic and planning consulting firm based in Bethesda, Md. It was posted last week on the Minnesota Revenue Department’s website and will be the subject of legislative hearings next week.

The Fiscal Disparities Act, which was enacted in 1971, 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 — with the goal of helping have-not communities provide adequate public services.

In addition to reducing disparities, the measure 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.

Target of attacks

The law took effect in 1975 after surviving two court challenges. However, it has been the target of periodic legislative attacks in the years since.

Past studies by the Metropolitan Council 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).
Source: House Research and MN Dept. of RevenueCurrently, 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).

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 of the law. 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.

The TischlerBise study was ordered by the Legislature at the urging of the Municipal Legislative Commission, a lobbying group representing 16 of the region’s larger and more affluent cities. Ten of its members are among the 20 largest net losers under the law. They include Bloomington, Burnsville, Eden Prairie, Edina, Maple Grove, Minnetonka, Plymouth and Woodbury.

The study doesn’t draw a lot of conclusions. However, it contains a wealth of numbers that could be used by critics of the law.

One problem with the study is that many of the numbers it provides offer comparisons among counties rather than municipalities, masking the true impact of the law.

For example, if the law were repealed, the study indicates that the average tax rates in Hennepin County would fall by1.5 percent while rising in every other county — with Anoka County experiencing the largest increase, a hefty 16 percent.

However, there would be huge variations within counties depending upon the composition of the tax base within each of them. In Hennepin County, for example, the tax rate in Bloomington would decline by 14.7 percent while rising by 15.3 percent in Brooklyn Center, which is nobody’s idea of a wealthy community.

Costs for various developments

The study includes an interesting effort to examine the costs of various types of development and whether that development generates sufficient revenue to pay for the public services it requires.

The report indicates, in general, that office, industrial and higher-valued homes generate more than enough revenue to pay for the public services they require, while retail development, public institutions and all other types of housing (lower-value homes, apartments and condominiums) do not.

These findings could generate calls for changes in the law from Bloomington and other cities that now are required to share tax base from large retail centers located within their boundaries.

Julie Herlandsand  L. Carson Bise of TischlerBise will testify before the House and Senate Tax Committees Feb. 15 and 16 to discuss the study.

In a newsletter last week to her members, Patricia Nauman, executive director of Metro Cities, said she does not expect major changes to the Fiscal Disparities Act this session.

“The session is on a fast track, with a slated late April adjournment, and the program study … is chock full of complex analysis and detail,” Nauman said. Metro Cities, which supports the Fiscal Disparities law, represents 79 cities that encompass 90 percent of the metro area’s total population.