The Property Tax Refund and LGA

There is an implicit agreement between the State of Minnesota and its cities and counties. They (cities and counties) will use property taxes to gather revenue, so that the State can use sales and income taxes. There are some exceptions, where cities have to get permission from the legislature in the form of a bill, to levy a sales tax to pay for capital improvements. Two examples are: 1) the percentage tax in downtown bars in Minneapolis to cover expenses on the Metrodome, which is still being levied almost thirty years later, and 2) the Hennepin County sales tax to pay for the Twins Stadium.

Cities have only been able to increase property taxes to make up for the reduction in aid. The restrictions on taxation, based on initial agreements between cities/counties and state governments has made the LGA cuts even worse for low income, property owning citizens. LGA is meant to equal disparities between cities and counties across Minnesota. If LGA did not exist, the tendency would be higher for people to live in areas with lower taxes near those with higher services and taxes, such as Dr. Zhao's Ypsilanti/Ann Arbor example.

If cities such as Saint Paul and Minneapolis raised revenue from sales and income taxes it would cause an imbalance in the funds available to the places where people tend to live, such as the suburbs, but the cities would have a larger operating budget. Alternatively, cities such as New York Mills, South Haven, or Glencoe might have lower property values and a small enough population that they can't raise the minimum funds from that tax base to provide basic services.

Besides LGA, the property tax refund (PTR) has the greatest benefit reducing disparities to low income residents, especially where taxes are higher, such as the metro regions across Minnesota. However, the property tax refund has been significantly reduced over the past ten years. This has only compounded disparities in taxation, and exacerbated the foreclosure crisis by reducing help to property owners most likely to need tax reductions to help pay their mortgages.

The graph to the left shows the growth in both residential homestead property taxes and a lower trending homeowner property tax refund (primarily meant to offset income disparities) from 1975 to 2008. The scale for taxes illustrated is ten times that shown for property tax refunds. Total refunds have decreased in real terms since 1975, when total refunds of $82.6 million equaled $330.5 million in 2008 dollars after adjusting for inflation. The graph below shows how property tax aids and credits from the State’s General Fund have generally been reduced over the past 10 years.
Source: 2010 MN House Research Department