In 2014, Minnesota counties saw a significant increase in state aid, which contributed to a decline in real per capita county property taxes and a modest increase in revenues. However, even after that aid increase, county aid is dramatically less today than it was in 2002, while county property taxes are much higher, even after adjusting for inflation and population growth. Don’t blame the property tax increase on profligate county officials. The cause of the real per capita county property increases since 2002 is the reduction in state aid.
In 2001, the Legislature enacted major revisions to the property tax system, which were implemented in 2002. Consequently, 2002 will serve as the baseline year for this analysis. In addition to a large reduction in school property taxes, the changes implemented in 2002 included major revisions to property classification rates that shifted a larger share of local property taxes onto homeowners and the creation of three new “market value credits” (the residential homestead market value credit, the agricultural homestead market value credit, and the agricultural land market value credit). For the purposes of this analysis, these market value credits will be included with state aids, since—like aids—they provide general purpose dollars to local governments to fund services and reduce property taxes.
In 2002, state assistance to Minnesota counties was delivered through a variety of programs. The largest of these by far was Homestead and Agricultural Credit Aid (HACA); in 2002, the county share of HACA was $205 million statewide. In addition, Criminal Justice Aid (CJA), Family Preservation Aid (FPA), Manufactured Home HACA, Attached Machinery Aid (AMA), and other programs distributed approximately $80 million in additional property tax relief aid to counties. Finally, the newly instituted market value credits distributed another $152 million to counties in 2002 in order to reduce property taxes.
In 2002, total state aid to Minnesota counties—including the market value credits—was approximately $436 million. However, for purposes of this analysis, this total will be reduced by $30 million due to the state takeover of court administration costs. Beginning in 2003, county HACA was reduced by $30 million in order to pay for this takeover. Insofar as this reduction was associated with the state takeover of what previously had been a county responsibility and led to a corresponding reduction in county costs, it is necessary to reduce 2002 county aids by this amount to provide comparability to aid totals from subsequent years. After subtracting the $30 million associated the state takeover of court costs, total state aid to counties in 2002 was approximately $406 million.
In 2003, state aid to counties began a steep—and arguably precipitous—decline, as the state could not afford to maintain the property tax relief and other commitments implemented in the preceding year. Given that the “no new tax” fiscal mentality prevalent at the time precluded a tax increase, the only alternative (other than a variety of short-term accounting gimmicks) was to reduce state spending. State aid to counties was among the state expenditures that were cut.
For example, in 2003, county HACA was reduced by $62 million below the amount that was originally certified to counties—not including the $30 million reduction associated with the state takeover of court administration costs. In 2004, HACA, CJA, FPA, Manufactured Home HACA, and AMA were eliminated and folded into a single new program: County Program Aid (CPA). The consolidation of these five programs into a single program made sense from a policy perspective; however, the consolidation was accompanied by a sharp decline in overall state funding. In 2002, the five programs that preceded CPA provided approximately $265 million in state aid to counties; in 2004, the amount of aid provided through CPA was $112 million.
In subsequent years, funding for CPA was temporarily restored, only to be reduced again. Another mechanism that the state used to deal with recurring budget problems was to reduce market value credit payments to counties and other local governments. Homeowners would continue to receive the property tax relief associated with the full credit amount, but only a portion of the dollars associated with this state-paid relief were actually delivered to counties, thereby creating a hole in county budgets. The net effect of these cuts was similar to cuts in general purpose state aid: less dollars available to fund county services and infrastructure.
Ultimately, the homestead market value credits were eliminated in 2012 and replaced with a homestead value exclusion. However, the exclusion did not replace the property tax relief dollars provided by the credit, but merely distributed the resulting tax increase among all property owners, including homeowners.
The net result of all of these was a sharp decline in state aid to counties—from $406 million in 2002 to $198 million in 2012. And this analysis does not take into account the effects of inflation and population growth on the real per capita purchasing power of these dollars. In real (i.e., inflation-adjusted) dollars* per capita, total state aid to counties fell by over two-thirds (68.4 percent). The result was a sharp rise in county property taxes and reduced real per capita funding for county services and infrastructure.
In constant 2016 dollars, county property taxes increased by $60 per capita (13 percent) from 2002 to 2012. (Without adjusting for inflation, the per capita increase in county property taxes was 62 percent.) The increase in real per capita property taxes was clearly caused by state aid reductions and not by an increase in county budgets. Total county levies plus state aids (a proxy measure for county budgets) in constant 2016 dollars decline by $25 (four percent) per capita from 2002 to 2012. (The spike in real per capita levy plus aids in 2009 was due to a temporary restoration of CPA funding and significant property tax increases—the effects of which were magnified in real dollars by negative inflation in 2009.)
As part of the 2013 tax reforms, the Legislature enacted a significant increase in County Program Aid effective in 2014. This—along with a restoration of the sales tax exemption for county purchases—contributed to a significant real per capita property tax reduction in 2014, although property taxes subsequently increased in 2015 and 2016. However, even after these increases, total real per capita levies plus state aid of Minnesota counties remain significantly below the 2002 level.
The bottom line is that the increase in real per capita county property taxes since 2002 is primarily the result of a sharp reduction in state aid. Property tax increases were sufficient to replace only a portion of this aid loss, with the net effect that total real per capita levy plus aid revenue available to fund county services and infrastructure has declined over this period. The 2014 county aid increase—while definitely helpful from the perspective of county finance—only undid a portion of the effects of the aid cuts that occurred over the preceding decade. More on this in the second and final part of this series.
*The conversion from nominal (i.e., unadjusted for inflation) to constant 2016 dollars in this article is based on the implicit price deflator for state and local government purchases. The use of this implicit price deflator was the subject of a recent North Star article.