Metro Tax Base Sharing Reduces Disparities


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The metropolitan tax base sharing program—more commonly referred to as the fiscal disparity program—was designed to meet various tax policy goals, as noted in part one of this series. The success of the program in meeting some these goals—such as fostering “more orderly regional development”—is difficult or impossible to measure. However, other goals—such as reducing tax disparities between high and low tax base communities—can be measured.

The nuts and bolts of the fiscal disparity program were described in part one. The following analysis will place metro communities into three groups, each containing equal numbers of communities. The first group consists of the 59 communities that are the largest net contributors of tax base to the fiscal disparity program, as measured by the net contribution (i.e., the amount by which the community’s contribution tax capacity* exceeds its distribution tax capacity) as a percent of local tax capacity (i.e., total local tax capacity excluding captured tax increment financing tax capacity). The next group consists of the 59 communities that are relatively small net contributors or net recipients of tax base through the fiscal disparity program. The third group consists of the 59 communities that are the largest net recipients of tax base through the program.

The table below shows various characteristics of these three groups, including their population, taxable market value (TMV), TMV per capita, adjusted net tax capacity (ANTC, which equals total tax capacity adjusted for differences in assessment practices between communities), and ANTC per capita.

Not surprisingly, the 59 communities that are the largest net contributors have the largest per capita tax bases—measured both in terms of TMV and ANTC—while the communities that are the largest net recipients have the smallest per capita tax bases. For example, TMV per capita among the largest net contributors is nearly double that of largest net recipients, with the middle third of communities falling approximately halfway between the largest contributors and largest recipients.

The following analysis will examine aggregate property tax rates and amounts for tax payable year 2016 with the fiscal disparities program (i.e., current law) and without the program for each of the three fiscal disparity groups, assuming no change in local spending. This analysis is limited to the extent that it does not factor in interactions with various state aid programs, which would serve to mitigate some of the tax changes resulting from the elimination of the fiscal disparity program. The impact of the program’s elimination upon county and city aids should be small, although the impact of school aids will be more significant. The elimination of the metro fiscal disparity program should result in a small shift of aid into the seven-county metro area and away from Greater Minnesota.

With the fiscal disparity program, composite property tax rates† among the largest net recipients are in aggregate 16.8 percent greater than among the largest net contributors. If the program was eliminated, the composite rate of the largest contributors falls and that of the net recipients increases; as a result, the tax rate disparity between these two groups would more than double—to 35.8 percent. The aggregate composite rate among the middle third of communities is roughly the same both with and without the fiscal disparity program. However, the composite rate is only 2.8 percent greater than that of the largest contributors with the fiscal disparity program and 9.7 percent greater without the program.

Clearly, tax rate disparities within the metropolitan area would increase significantly in the absence of the fiscal disparity program. As might be expected, tax disparities between similarly valued properties would also increase if the fiscal disparity program were eliminated. Using aggregate tax capacity and referendum market value tax rates for each of the three fiscal disparity groups, it is possible to measure the impact of the program upon specific properties within each group.

For a $200,000 homestead, the typical property tax based on these aggregate tax rates in the largest net contributor communities is currently $43 (1.6 percent) less than in the middle third communities and $265 (9.4 percent) less than in the largest net recipient communities. After the elimination of the fiscal disparity program, the $200,000 homestead tax disparity between the largest net contributors and the middle third increases to $156 (5.8 percent), while the disparity between the largest net contributors and the largest net recipients increases to $597 (19.2 percent).

For a $200,000 residential homestead, the typical tax based on these aggregate rates in the largest net contributor communities decreases by 1.8 percent as a result of eliminating the fiscal disparity program, while they increase by 2.6 percent in the middle third and by 10.1 percent among the largest net recipients.

From this we can conclude that the metro fiscal disparity program is indeed effective in reducing tax disparities between homesteads of comparable value across the metro area. Eliminating the fiscal disparity program would reduce tax rates and homestead property taxes primarily within communities in which they are already low and increase them primarily within communities in which they are already high.

However, the primary target of the framers of the metro fiscal disparity law was not to equalize homestead property taxes, but business property taxes. The impact of the fiscal disparity program upon business property tax disparities within the seven-county metropolitan area will be examined in the concluding installment of this series.

 

*“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.

 Composite property tax rates are equal to the sum of local tax capacity and referendum market value levies divided by local tax capacity. They represent an effort to show the combined effects of tax capacity and referendum market value tax rates (which are not directly comparable because they are levied against different tax bases) in a single tax rate.