A movement is again afoot in Minnesota to allow anti-tax voters to create new hurdles to local levy increases. Under the moniker of “taxpayer empowerment,” this initiative would allow voters as few as ten percent of the number voting in the last general election to trigger a referendum to reverse any levy increase in a county or city with a population greater than 500. In fact, this initiative is an attempt to provide anti-tax voters influence in the local budget setting process that would be denied to other voters seeking to maintain or enhance the level of public investment in their communities.
Local elected officials are already held accountable to taxpayers through the ballot box and an open budget setting process. In addition, counties and cities with populations over 500 (as well as school districts and selected metropolitan taxing jurisdictions) are subject to Minnesota’s “truth-in-taxation” process, which requires them to set a proposed levy, send out parcel specific notices to each individual taxpayer informing them of the impact of the proposed levy on the property taxes they will pay, and hold hearings to receive additional public input beyond what was already received in the ordinary budget setting process. After this, local elected officials must set a final levy which can be less than or equal to—but not greater than—the original proposed levy.
The state elected officials who endorse reverse referenda for counties and cities refrain from applying the same requirement to their own tax decisions, despite the fact that the state tax and budget setting process is less open to the public (for example, there is no “truth-in-taxation” process for the state) and state elected officials are generally in less frequent and direct contact with constituents than their local counterparts.
There are, of course, good reasons why state officials are reticent to apply reverse referendum requirements to state tax decisions—and for these same reasons they should not seek to apply them to local governments. The mere calling of a reverse referendum would require public officials to devote time and resources to prevent reversal of the levy increase that could have otherwise been devoted to serving local residents. In addition, in the environment of uncertainty created by potential reverse referenda, the orderly administration of government—including the undertaking of long-term projects and contractual obligations—would be problematic.
The push to establish a reverse referendum option is borne out of frustration over growing property taxes. According to annual reports on county and city finances from the Office of the State Auditor (OSA), real (i.e., inflation-adjusted) per capita county and city taxes—which consist primarily of the property taxes—have increased by 14.5 percent and 3.8 percent, respectively, from 2006 to 2015. The growth in county and city property and other taxes, however, is not the result of growing local spending. Real per capita county and city current (i.e., operating) and total expenditures have declined over the same period.*
The decline in real per capita county spending has been less than the decline in city spending, possibly because counties have been hit harder by increasing human service costs driven by the aging state population and other factors. Nonetheless, both levels of government have seen a significant decline in real per capita spending over the last decade. The decline is even greater if we extend the analysis back to 2002—the year that major changes to the property tax system and state-local fiscal relationship were implemented.
If real per capita county and city spending are declining, why are real per capita property taxes increasing? The major reason is a large reduction in state assistance. Based on OSA data, real per capita state assistance to counties and cities has declined by 18.5 percent and 21.0 percent, respectively, from 2006 to 2015.* The decline in state aid is approximately double these percentages if we extend the analysis back to 2002. Reverse referendum requirements will not address the primary cause of growing county and city property taxes: declining state aid. Rather, they could compel counties and cities to cut spending—which has already declined in real per capita dollars over the last decade.
Some versions of the reverse referendum proposal make no adjustment for inflation, increases in population, increases in state or federal mandates that could require counties and cities to perform new functions, or reductions in state or federal aid, which would leave a hole in county and city budgets. Consequently, these proposals would allow a small minority of voters to call for a reverse referendum even when the county or city levy is declining in real per capita dollars or when the increase was necessary to cover the cost of new mandates or the loss of state, federal, or other revenues.
The reverse referendum proposals currently being discussed by state policymakers are actually something of a misnomer, since they do not reverse the levy increase that triggered the referendum, since that levy would have been fully collected and nearly entirely spent before the petition for a referendum could be filed and the referendum actually held. What taxpayers would be voting on is not a reversal of the levy increase, but a limit on the levy in the subsequent year equal to what was levied two years prior.
Because of this little understood feature, a reverse referendum would not necessarily lead to lower local levies. For example, in year one an inventive county board or city council could authorize a larger levy increase than is strictly necessary in anticipation of the fact that the increase would be reversed via referendum. If it was “reversed,” the year one levy increase that triggered the referendum would still be in force, since the levy restrictions would not apply until year two—and would only apply to year two. In year three, the governing body could again propose a substantial levy increase, in anticipation that another reverse referendum would restrict city levy authority in year four. In this way, the reverse referendum proposal could trigger a series of alternating levy increases and decreases, but would not necessarily do anything to curtail long-term levy growth. It would succeed, however, in complicating the local budget setting process.
The reverse referendum requirement also raises questions of fairness. If some voters are allowed to call for a reverse referendum because they are upset about a levy increase, should not other voters who are upset with a levy reduction or a levy increase insufficient to maintain a constant level of county or city services also be allowed to call for a referendum to increase the levy? Current reverse referendum proposals would skew the levy-setting process in favor of anti-tax voters by giving them a mechanism by which to influence levy decisions in a way denied to voters who want to maintain or increase public investments.
Citizens already have control over county and city tax and spending policy through the election of local officials, an open budget setting process, and the “truth-in-taxation” process. The public interest is served by having this kind of citizen involvement in an orderly budget setting process—not by causing a train wreck at the end of a process through a confusing reverse referendum procedure that is skewed in ways that give anti-tax voters power within the budget process that is denied to other voters.
*This information is derived from annual county finance and city finance reports prepared by the OSA. The most current reports cover county and city finances in 2015. These reports include information on inflation-adjusted county and city taxes, state aid, and current and total expenditures during the period from 2006 to 2015. The inflation-adjusted change was further adjusted for population growth (i.e., converted to per capita amounts) using annual population estimates provided by the OSA.