Friday, February 19, 2010

Property Tax Cap Troubles

In the last several years the house my wife and I own in north Minneapolis has steadily declined in value. Surprisingly, for the last 3 years even though estimated market value of our home has declined (due to comparable sales and foreclosures), our property taxes have remained the same or increased.

This is troubling to us, but the Governor’s solution to cap the rate of increase from year to year of property taxes is a flawed solution. It is a flawed solution because it is a passing of the “blame buck” from the Governor to local politicians whose State aid has been cut every year for several years. Local city officials need to make up the difference in lost state aid and one if their few options is to increase property taxes. By cutting state aid to local governments (for 2011 as much as 250 million!) as well as limiting property tax increases, the Governor is essentially placing local leaders in a Catch-22 situation. Prior to the concept of capping property tax increases, local governments were already at a disadvantage, because while property taxes have increased they haven’t increased as fast as state aid has decreased, leaving local governments with fewer real dollars to spend on police and fire protection, transportation, and other public services. According to, state government revenue has increased rapidly and local government revenue has declined since 2003. This makes the Governor’s foray into capping property taxes inappropriate due to the negative affects this reduction will have on local governments. Looking at the graph below we can see how much local governments rely on property taxes and state aid. Capping property taxes would obviously cause many problems for local governments especially with the massive reductions in state aid in the last few years.

"The preceding graph counts as "state aid" $500 million in federal recovery dollars that was used to replace a one-time $500 million cut in state general education aid in 2009 (FY 2010). The actual cut in state aid to all Minnesota local governments from 2002 to 2009 was actually $2.9 billion."[2]

The negative effects of a property tax cap and state aid reduction include the reduction in the quality K-12 education, public safety, and good roads all while not reducing the demand for these local services.

What are some solutions to the property tax cap that increase or maintain local revenues?

· Increase state aid. The drawback of this option is that state aid can fluctuate from year to year and can’t be counted on as a steady revenue source.

· The Center on Budget and Policy Priorities suggests that citizens should work to vote to override the cap on a local level. The organization suggests that this is usually attempted more by wealthier communities and passed more often by wealthier communities thus creating an issue of equity and could intensify disparities across a state. Creating wealthier communities whose services are adequate and lower-income communities whose important services are lacking and thus creating an underserved population who needs local services the most.

· Local sales tax, local developer fees. This is an option to mitigate the potential revenue loss from a property tax cap but can be a burden on lower-income individuals who have a smaller expendable income for the good being taxed.

Ultimately the reduction in revenue caused by a property tax cap and reduction in state aid will lead to a reduction in services. While as a property owner I do not want to see my property taxes continually increase regardless of the estimated market value, a property tax cap is shortsighted and an inequitable solution.

1 comment:

  1. Erik, nice arguments.

    Could you add some more detail about the "property tax cap"?

    My understanding is that Minnesota's cities and counties won't be allowed to raise property taxes by more than 3.9 percent a year. But I failed to locate a reliable and complete information source for this levy limit.

    All best,