Tuesday, February 15, 2011

State Budget Crunch Affects Property Taxes

State budget cuts can affect property taxes at the local level. Minnesota's complex system of state aid (known as Local Government Aid, or LGA) is allocated to local governments on a complicated need-based formula, and local governments plan for and budget these funds as revenue sources. In recent years, state legislators and governors have reduced the amount of LGA that is distributed to solve budget problems at the state level; this can create budget problems for local governments, who have planned to receive certified amounts of LGA. (You can see how much cities are certified to receive in 2011 here) .

The Minnesota Department of Revenue has estimated that "every dollar the state cuts in LGA causes a 67 cent increase in local property taxes" . It seems that local governments make up some of the lost revenue by raising property taxes, which makes sense - citizens demand certain services, so it would be very challenging for local governments to completely absorb the LGA cut without some additional revenue.

Today, Governor Dayton released his budget proposal for the next biennium. In his proposal, Governor Dayton proposes no cuts to LGA and other aids to local governments. Since the governor ran on a platform of "tax the rich," it may not be surprising that he proposed a new income tax bracket for the state's top earners. However, there's another interesting element to his proposed changes to the Minnesota tax structure: a statewide property tax on homes valued at more than $1,000,000. Currently, Minnesota has a statewide property tax on business properties and recreational properties like cabins; adding a statewide property tax on homes over $1,000,000 would be a significant change.

A press release from Governor Dayton notes that his "budget represents [his] values and priorities," and also claims that property taxes are "the most regressive and unfair of all state and local taxes." We've talked about considering taxes based on four concepts: efficiency, equity, adequacy, and feasibility. In his press release, Governor Dayton seems to argue that the property tax fails on several of these main criteria. An argument could be made that property taxes may not be efficient or equitable, but that they do score points on the adequacy and feasibility measures. For example, property taxes can raise sufficient revenue, addressing the adequacy measure, and property taxes are currently in place in many local governments and are probably not extremely difficult to administer, addressing the feasibility measure. What do you think?

1 comment:

  1. Economically, property taxes are actually very efficient. Because real estate property has less mobility, property taxes cause less behavior distortion than sales taxes or incomes taxes.

    Personally, I think Dayton's proposal of a state property tax is worth consideration. It is more efficient than income tax increase.