Friday, April 1, 2011

The Road Less Traveled: Increasing the Tax Base

When examining the overall structure of a revenue system, it is important to determine the appropriate balance of sales, property, and income taxes in addition to the role of federal, state, and local funds. However, as public needs continue to evolve, it is important to further explore another dimension of the revenue structure: the tax base. Some movement regarding the tax base is being seen in Minnesota with regard to the scope of sales taxes. However, many municipalities are exploring similar strategies with respect to property taxes.

This alternative route to raising more revenue can be seen locally. Over the next 20 years, over 600,000 new residents will be living in the Twin Cities and The City of Minneapolis hopes to attract a significant portion of that growth. This is a policy that that has been repeatedly stressed by Mayor R.T. Rybak as a solution to the City’s financial woes and long-term health. Focusing on building more affordable housing, increasing density, and encouraging growth around new transit projects are just some of the strategies promoted by Rybak. This may be a smart approach given the lack of political feasibility of taking more straight-forward routes.

However, when the public is generally more concerned with closing short-term budget gaps, selling a long-term vision can be challenging. In addition to taking significantly longer than increasing the tax rate or decreasing expenditures, an approach like Rybak’s can be speculative. Attracting new residents to a community requires existing investment such as new housing, new infrastructure, and improvements to the city’s quality of life. These measures require funding for investments that are difficult to justify when the demand is not yet present. Rybak's approach appears sustainable, but it will be several decades before his strategy can be fully evaluated.

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