Impact of State Aid on 2016 Property Taxes

Total property taxes in Minnesota increased by 4.7 percent from 2015 to 2016, exceeding the combined rate of inflation and population growth, with county property taxes increasing by 3.4 percent, city property taxes increasing by 4.5 percent, and school property taxes increasing by 7.0 percent. However, before leaping to the conclusion that these local governments have been profligate, Minnesotans should consider how past and present changes in state aid impact 2016 property taxes.

Uncovering the cause of property tax increases in each of Minnesota’s approximately 3,400 local governments is beyond the scope of this research. The following analysis will focus on the impact of changes in the level of state aid upon property taxes levied by the three largest levels of local government in Minnesota: counties, cities, and school districts. These three levels of local government levy 93 percent of all local property taxes in Minnesota. Unless otherwise noted, revenue data for counties and cities is derived from Minnesota Department of Revenue sources, while school revenue information is from the Minnesota Department of Education.

Property taxes are not the only source of revenue for Minnesota local governments. Another large source is aid from state government. To some extent, growth in county and city property taxes in 2016 were driven by the absence of any significant growth in general purpose state aid.* When aid levels stay flat from year to year, the real purchasing power of that aid declines due inflation.† In addition, population growth creates demand for additional public services and hence contributes to increased expenditures. When aid levels are flat, any increase spending pressure resulting from inflation and population growth is typically borne by an increase in property taxes.

However, the absence of significant county and city aid increases do not entirely explain why county and city property taxes exceeded the rate of inflation and population growth. For example, total city levies plus state aid (occasionally referred to as “revenue base”) increased by 3.8 percent from 2015 to 2016—significantly greater than the two percent growth needed to keep pace with the anticipated effects of inflation and city population growth. Other factors are clearly at work.

One of these other factors is undoubtedly the effects of aid cuts that occurred prior to 2013. While state aid to counties, cities, and school districts has increased since 2013, real (i.e., inflation-adjusted) per capita and per pupil aid levels are still significantly below what they were in the early years of the century.‡ The following analysis will focus on property tax and aid levels relative to 2002 (corresponding to state and school fiscal year 2003); in that year, the state’s property tax system underwent extensive changes, including a substantial reduction in local property taxes made possible through a large infusion of aid to local governments (primarily school districts), a large reduction in the share of local taxes borne by businesses and seasonal recreational properties, and the imposition of a new state property tax on these same two classes of property.

Real per capita and per pupil property taxes in Minnesota are significantly higher in 2016 than they were in 2002. However, real per capita county and city property tax and state aid revenue and real per pupil school district operating revenues are lower, as illustrated in the following graph.

Local rev chg graph

Since 2002, the increase in real per capita county and city property taxes and real per pupil school property taxes have not been sufficient to offset the decline in real per capita and per pupil state aid. As a result, real per capita county and city levy plus aid and real per pupil school operating revenue are less today than they were in 2002. (The lower level of revenue decline among counties and school districts relative to cities is to a significant extent the result of growth in services that are paid for by counties and school districts since 2002.) Property tax increases in 2016 are to some extent the result of past reductions in state aid, as local jurisdictions increase expenditures on infrastructure and other investments that were shortchanged in leaner budget years.

The precise reasons for changes in the level of property taxes vary from one local government to the next and no attempt is being made here to explain all 2016 property tax increases. However, flat levels of state aid to some levels of local government and the need to make up for past state aid cuts are certainly factors that contributed to the aggregate rise in Minnesota property taxes from 2015 to 2016.

 

*The primary source of general purpose city aid is Local Government Aid. The primary source of general purpose county aid is County Program Aid.

Inflation adjustments referenced in this article are based on the Implicit Price Deflator for State & Local Government Purchases. The rationale for using the S&L IPD to adjust state and local government revenues and expenditures for the effects of inflation was discussed in a February 29 North Star article.

 The decline in school district operating aid since 2002 (fiscal 2003) was the subject of a May 2 North Star article and report. Fluctuations in state aid to cities over time—including the decline in real aid per capita since 2002—was the subject of an April 7 North Star article.