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.