Aids & Credits Down, Property Taxes Up

Homeowners’ property tax effort is feeble and property tax aids and credits provided by the state of Minnesota are adequate—if not robust—according to a recent article from the Minnesota Center for Fiscal Excellence (MCFE), formerly the Minnesota Taxpayers Association. This conclusion, however, is based on property tax and state aid information that is selectively presented or misinterpreted. Property taxes in general—including homeowner property taxes—have increased significantly over the last fifteen years, thanks in large part to a decline in state aid to local governments.

Among the sources that MCFE cites is a recent report from the Office of the State Auditor (OSA) on 2015 city revenue and expenditures, which includes a ten-year (2006 to 2015) overview of city revenues and expenditures. Over this period, the MCFE notes a 6.0 percent increase in city intergovernmental revenues, which consists primarily of state aid, but if we use inflation-adjusted totals that the OSA report conveniently provides, city intergovernmental revenues declined by 14.7 percent.* If we further adjust for city population growth over this period, real (i.e., inflation-adjusted) per capita city intergovernmental revenues declined by 20.3 percent.

Over the same period, real per capita total city property taxes increased by 12.3 percent. The city property tax increase was sufficient to offset only a portion of the decline real per capita intergovernmental revenues and other city revenues. During the entire period from 2006 to 2015, total real per capita city revenue declined by 12.3 percent.

Using data from earlier OSA city finance reports, it is possible to track trends in city finances since 2002, when dramatic changes to the property tax system and state-local fiscal relationship enacted in 2001 were implemented. From 2002 to 2015, real per capita city intergovernmental revenues fell by 36.9 percent, city property taxes increased by 28.6 percent, and total city revenue declined by 16.5 percent. An examination of OSA data on county finances covering the same period reveals a similar pattern.

MCFE points to the fact that property tax aids and credits are the third largest category of state general fund expenditures as proof of the robustness of state spending in this area; however, missing from this analysis is the fact that property tax aids and credits are about one-fourth the size of the largest category (E-12 education) and one-fifth the size the next largest (health and human services). Further omitted is the longitudinal perspective that MCFE takes when examining data from the OSA and the Department of Revenue’s Residential Homestead Property Tax Report. Property aids and credits as a percent of total general fund spending have declined from 10.6 percent in FY 2003 to a projected 7.8 percent in the current fiscal year and will ultimately decline to a projected 7.4 percent by FY 2021, assuming no changes to current law.

With the state general fund under increased spending pressure due to demographic factors—such as the aging of the state’s population—it might be unrealistic to expect property tax aids and credits to keep pace with other areas of state spending (e.g., health care), so property tax aids and credits could be expected to decline as a share of all general fund spending. However, even in real (i.e., inflation-adjusted) dollars per capita, property tax aids and credits have fallen by over 30 percent from FY 2003 (the state fiscal year most closely corresponding to tax payable year 2002) to FY 2017, and are projected to fall by another eight percent by FY 2021, assuming no changes to current law. This time frame includes the state aid and property tax refund increases enacted in 2013 (and implemented in FY 2015), which certainly boosted state spending on property tax aids and credits, but not by enough to replace the sharp real per capita funding cuts in previous years.

In another attempt to portray recent property tax aid and credit increases as adequate, the MCFE article compares growth in city Local Government Aid (LGA) to growth in homeowner property taxes. The point here appears to be that while increases in city LGA were slight, homeowner taxes increases in most regions of the state were even slighter—and thus increases in LGA must have been adequate. This is a conclusion based on a troubled comparison. For example:

  • The comparison between aggregate state aid amounts and median tax levels is statistically problematic, since growth in medians is affected by changes in the population in ways that aggregate values are not.‡ It would be more proper to compare changes in aggregate LGA to changes in aggregate taxes.
  • It is probably not realistic to expect a tight relationship between changes in city LGA and changes in total homestead property taxes, since LGA is only one of several factors that impact homestead property taxes; others include changes in county and school district aid and changes in homestead value relative to other types of property. An examination of the relationship between total city property taxes—not just those paid by homeowners—would be more appropriate.

From 2007 to 2015, the aggregate 6.7 percent increase in city LGA cited by MCFE translates into an inflation-adjusted decline of 9.7 percent; over the same period, inflation-adjusted city property taxes increased by 10.4 percent. (Factoring in a crude adjustment for property tax refunds, the increase in net city property taxes would be about two percent less than this.) Over the longer period from 2002 to 2015, inflation-adjusted LGA declined by 39.0 percent, while city property taxes increased by 26.5 percent. (Factoring in the same crude property tax refund adjustment, the net city property tax increase would be about five percent less than this.) Thus, a more careful analysis indicates that there is indeed a link between declining LGA and growing city property taxes.

Based on the tone of its recent article, MCFE is both befuddled and irritated at calls from local elected officials for an increase in state aid. They needn’t be. Given the double whammy of increasing real per capita property taxes and decreasing revenue—driven largely by declining state aid—the response of local officials is understandable.

Based on information from the Residential Homestead Property Tax Report—also known as the Voss Report—MCFE argues that local governments should simply increase property taxes if they need more revenue, since the typical homeowner’s property tax payment as a percentage of income has actually declined since 2007. This is a conclusion not necessarily warranted by the Voss data, for reasons described in part two of this series.

 

*The OSA city finances report uses the state and local government implicit price deflator to adjust city revenues and expenditures for the effects of inflation. All inflation adjustments in this article are based on the same index, as it is the appropriate index when considering the impact of inflation on state and local government revenues and expenditures.

 The spike in property tax aids and credits as a percent of total general fund spending in FY 2010 was partially due to a significant one-time increase in aids and credits. However, most of this spike was due to a sharp decline in state general fund spending in that year, as dollars from the American Recovery and Reinvestment Act were used to temporarily reduce state Medical Assistance, K-12 education, higher education, human services, and corrections spending. The temporary decline in general fund spending for these programs caused total general fund spending to decline and caused other categories—such as property tax aids and credits—to increase as a percentage of remaining general fund spending.

 An examination of changes in median homeowner property taxes during the period from 2007 to 2015 is further complicated by the fact that the number of Minnesota owner-occupied housing units declined over this period in ways that likely have significant repercussions for median homeowner property taxes. The nature of the decline in owner-occupied households will be discussed in more detail in the second part of this series.