From the time we are toddlers, we are told that sharing is good. However, it is often not easy—and it can be complicated. A case in point is the metropolitan tax base sharing program, known more commonly as the fiscal disparity program.* For over four decades, the fiscal disparity program has been used to redistribute business tax base within Minnesota’s seven-county metropolitan area in order to achieve various public policy goals. As with many types of sharing, tax base sharing leads to discussions of who is “winning” and who is “losing.”
In a nutshell, the fiscal disparity program requires metro cities and towns to share a portion of their business tax base with other communities in the region. Each community contributes 40 percent of their post-1971 growth in business tax base to an area-wide pool. Communities receive tax base back from the pool in proportion to their per capita tax base wealth, with low tax base communities receiving larger per capita distributions from the pool than high tax base communities. Each taxing jurisdiction is allowed to tax the tax base that is distributed back to it from the pool at the local rate they levied in the preceding year; the resulting amount is referred to as the “distribution levy.” The sum of all distribution levies for all metro taxing jurisdictions is divided by the tax base that is contributed to the fiscal disparity pool to determine the area-wide fiscal disparity tax rate. Tax base contributed to this pool is taxed at this area-wide rate, rather than the local rate.
This system—which has been in place since 1975—has two major goals, according to information prepared by the Minnesota House of Representatives Research Department:
- To promote “more orderly regional development” and
- Improve “equity in the distribution of fiscal resources.”
In order to achieve these goals, the fiscal disparity program attempts to:
- “Spread the fiscal benefit of business development attracted by regional facilities.” For example, regional investments in transportation infrastructure might spur commercial development in a particular city. Rather than allow that city to benefit exclusively from the increased tax base resulting from these regional investments, the fiscal disparity program requires that the city share a portion of the tax base growth with other communities in the region.
- “Make communities more willing to accept low tax-yield regional facilities, such as parks.” Business developments typically yield a larger increase in tax base than other uses, such housing (which for tax purposes is assessed at a lower rate than business property) and parks (which are tax exempt and thus make no direct contribution to local tax base). In order to mitigate the extent to which local governments are incentivized to prefer business development over other uses, the fiscal disparity program requires that a portion of business tax base growth be shared with other communities in the region.
- “Equalize the imbalance between some local governments’ public service needs and financial resources.” A limited tax base can restrict a local government’s ability to satisfy local service and infrastructure requirements. By redistributing business tax base from high-tax base communities to low-tax base communities, the fiscal disparity program helps to equalize the ability of communities to generate adequate resources from their local tax base.
- “Reduce incentive for businesses to relocate to areas with lowest tax rates.” Communities with a large business tax base generally have lower local property tax rates than communities with a smaller tax base. This creates a further incentive for business to locate in communities that already have a large business tax base, since—all other things being equal—businesses prefer low tax rates to high tax rates. By sharing tax base among communities, the fiscal disparity program mitigates the advantage that high tax base communities have over low tax base communities in terms of attracting new business by reducing the disparity in tax base and tax rates.
For tax payable year 2016, $370 million of business tax base was contributed to the fiscal disparity pool. Needless to say, some communities contribute more to the fiscal disparity pool than they get back, while for others the reverse is true. In the map below, the counties with the largest net fiscal disparity contribution (the net loss of tax base through the fiscal disparity program as a percent of total local tax base) are shaded darker red, while counties that are the largest net recipients are shaded lighter red.
Hennepin is the largest county in the seven-county metro area, comprising 40.7 percent of the region’s population and 56.5 percent of its tax capacity.† Currently, Hennepin is also the largest—and only—net contributor of tax base through the fiscal disparity program. For tax payable year 2016, Hennepin will contribute $188.9 million of business tax capacity to the pool and will receive back $136.3 million, for a net contribution of $52.6 million. (Hennepin is also the only net contributor of tax base in 2017; the following analysis will focus on 2016 data, since total levy and tax capacity data for 2017 are not yet final.) This net loss of tax base through the fiscal disparity program represents 3.2 percent of Hennepin’s local tax capacity.‡
Carver, Dakota, Scott, and Washington counties are each small net recipients of tax base through the fiscal disparity program, with 2016 increases in local tax capacity due to fiscal disparities ranging from 0.3 percent (Dakota County) to 1.5 percent (Washington). Anoka and Ramsey counties are the largest net gainers of tax capacity through the fiscal disparity program, with Ramsey County experiencing a 5.1 percent increase in local tax capacity and Anoka County an 8.0 percent increase.
The table below shows the 2016 contribution and distribution tax capacity for all seven metro counties, as well as the net gain (or loss) in tax capacity as a percent of local tax capacity. (The contribution from the State of Minnesota is the result of legislation that requires the state to pay a portion of the debt resulting from developments associated with the Mall of America through 2018; these payments had previously been borne by the City of Bloomington.)
The fact that a county is a net contributor (or recipient) of tax capacity through the fiscal disparity program does not necessarily mean that all communities within the county are net contributors (or recipients). For example, the City of Fridley and Columbus Township in Anoka County are net contributors of tax base to the fiscal disparity program, despite being located in a county that is a significant net recipient. Meanwhile, 16 of the 42 cities in Hennepin County—comprising 22 percent of the county’s population—are net recipients of tax base through the program.
Furthermore, a community or county that is a net contributor of tax base is not necessarily a net contributor of tax dollars through the fiscal disparity program and vice versa. For example, a city that is a net contributor of tax base could be located within a county and school district that are net recipients of tax capacity and, as a result, the amount of total property taxes levied within the city by all taxing jurisdictions could be reduced as a result of the fiscal disparity program. In addition, a city that is a net contributor of tax base that has relatively high local tax rates could be generating more revenue from the tax capacity it is receiving from the pool than it is paying on tax capacity contributed to the pool.
Even more complicated than the question of which communities are net recipients and which are net contributors is the question of whether the fiscal disparity program is successful in meeting its stated goals. The second article in this series will examine the extent to which one of these goals—property tax equalization—has been achieved.
*Since tax payable year 1998, a similarly structured tax base program has been in effect on Minnesota’s Iron Range. This series of articles will focus exclusively on the seven-county metro tax base sharing program; the seven counties participating in the metro fiscal disparity program are Anoka, Carver, Dakota, Hennepin, Ramsey, Scott, and Washington.
†”Tax capacity” is the principle form of property tax base in Minnesota. Tax capacity is equal to a property’s taxable market value times the property’s “class rate” (different classes of property have different class rates, with business properties having the highest class rates). Most property taxes in Minnesota are levied on tax capacity.
‡Here and in the next paragraph and in the table below, the net fiscal disparity contribution or distribution is measured as a percentage of local tax capacity, defined as total local tax capacity excluding captured tax increment financing tax capacity.