Wednesday, February 27, 2013

Home Rule Charter Cities in MN - Taxation and Assessment Powers

As addressed in the first week of class this semester, and in the League of Minnesota Cities’ Local Government Handbook (, there two “types” of cities in Minnesota: statutory cities and home rule charter (HRC) cities. Of the 854 incorporated places within the state, 107 are HRC cities. In short, the HRC is an alternative form of governance that allows cities more flexibility in the structure of the mayor/city council/city administrator, as well as other issues, such as the ability to propose amendments to the city charter (statutory cities need a state statute passed for similar changes). This flexibility and localized set of rules (the charter) doesn’t come without extra work and administrative time and cost, though, and many cities seem to have steered clear of this structure because of these reasons.

So, what’s the deal with the non-statutory 13 percent of incorporated local governments, and exactly how do the charters of these cities relate to property taxes? (Before we get to the answers, check out this map to see just which 107 cities I’m talking about. Any familiar faces?)

As it turns out, the impact of home rule charters on local governments, including property taxes, is very minimally researched. In my efforts to dig into this, I found this brief about HRCs in Midwestern states by researchers at Indiana University (go Gophers!). So, at least on fiscal issues, the fiscal independence of Home Rule cities is limited.

Although I’ve always had an interest in local government power, and especially in terms of its role in economic development, land use, and transportation systems, my awareness to HRC cities peaked as I started working on my capstone project this semester. So, with the “limited independence” tag from the IU summary, I kept digging.

Here are a couple of things I found:

The City of Minnetonka’s Economic Development Authority discussion of special service districts (SSD), which can be created through an ordinance in HRC cities (currently extended through June 30, 2013), instead of through a state statute process. SSDs are an additional fee structure on top of property taxes that are frequently used for additional maintenance, streetscaping, and other roadway improvements in a business district.

Here’s a really interesting one, and I have yet to find it applicable to other charter cities: Minnetonka is able to defer the assessment of development fees, such as those related to a parking ramp to be used at a future LRT station, until the time that the development actually occurs. Statutory cities are only allowed to do so on a greenfield (non-developed) site, which can make assessments for redevelopment projects into much more of an upfront barrier.

Interesting…they don’t teach you these things in school!

Property Tax Circuit Breaker

The Institute on Taxation and Economic Policy revealed that the poorest 20% of Americans paid 3.6% of their income in property taxes, compared to 2.7% of income for middle-income and 0.7% of income for the wealthiest 1% of Americans. State lawmakers wanting to enact residential property tax relief have two broad options. The first is across-the-board tax cuts for taxpayers of all income levels, such as tax cap or homestead exemption, and targeted tax breaks, such as a property tax circuit breaker.

What is a property tax circuit breaker?

A property tax circuit breaker is a tax relief program that aims to reduce the property tax burden for certain individuals. Its name is derived from an electrical circuit breaker, which shuts off the electrical current when a system is overloaded. Likewise, a circuit breaker programs kicks in when a taxpayer pays a high proportion of his her income on property taxes. Property tax breakers can be used to increase tax equity as they reduce the property tax burden, measured in relation to income.  

Which states have property tax circuit breakers and for whom?

As can be seen in the figures above, eligibility varies by state, but most circuit tax breaker programs are state property tax exemptions or credits for the elderly. The eligibility measures vary by state. Some states employ income brackets or income and wealth ceilings. The complexity of the tax circuit breakers also vary by states. For example, while some states have simple eligibility features, such as Massachusetts, others like Minnesota have very complex systems with multiple thresholds varying by income, and other characteristics such number of dependents.

Are there possible changes to Minnesota’s tax circuit breaker?  

In 2011, the legislative tax conference committee proposed cutting the state’s renter’s credit by $186 million a year. Under this proposal, the Minnesota Budget Project estimated that on average seniors and people with disabilities would see a decrease in their credit of $190, while other families would see a decrease of $335. In fact, it was estimated that 72,500 households would lose their refunds entirely. Governor Dayton vetoed this proposal. 

Despite Governor Dayton vetoing the 2011 bills, in this 2013 Legislative Session there are new bills that may affect the property tax circuit breaker. For example, Bill H.F 2 attempts to raise the percentage of rent constituting property tax for the renter property tax refund from 17% to 18%. We will have to wait and see if this bill is passed. One thing is for certain, if Minnesota wants to continue lessening the tax burden on low-income, and elderly households, then it should maintain its property tax circuit breaker or look into other tax relief programs, as tax circuit breakers are only one tool in the property tax relief toolbox.     

Note: All images are from the Lincoln Institute of Land Policy

Tuesday, February 26, 2013

Inequity in Property Tax

As a recent Natural State resident, I was surprised when I found out that Arkansas is frequently amongst the states with the lowest property tax in the nation.  I immediately began pondering the implications upon the largest portion of property tax expenditure, k-12 public schooling.  Yet, as a delved deeper into the causation upon the low taxes, I found that many states are utilizing similar tactics and in many cases generating more money is not making the school systems more effective.

Here are a few common rationales for discounting the system and to consider like North Dakota, Kansas, Oklahoma, and Missouri to eliminate property taxes.

1.  Business owners facing the burden with competitive neighbors
Small businesses are heavily hit with the fluctuating property tax assessments due to changing developments.  In this New York Times article, one property owner describes the potential raise in property taxes due to investment within the neighborhood that could push his business into financial distress.  Development creates positive economic benefits for some, but pushes the neighborhood in a new direction that could alter how property taxes are assessed.

Similarly, residential property owners face poorly assessed property taxes.  Many county entities do not have the capacity to assess properties on an annual basis allowing rising property taxes but falling property values.  Having effective, accurately assessed properties is essential to making sure that property taxes are equitable in nature.

2.  The burden of the tax
Secondly, property taxes are considered regressive in nature making them worse off for low-income residents.  Renters claim an unfortunately large share of property taxes.  Typically, when property tax values rise, landlords unload the burden of the tax within the rent.  Property taxes show extreme injustices upon the poor, lower classes.

Also, the share of property base is not equally distributed causing many residential areas to become homogeneous.  Property owners look to move into areas where they are assessed at lower rates than their neighbors to get more added value from their taxes.  These homogeneous areas again cause a disproportionate share of property tax to be burdened on the poor.

3.  Unique property situations
Finally, there are many unique property situations that are not capitalized upon.  Across the United States, empty school buildings are drawing money from governments and property bases.  Detroit's decline has failed to keep up with the changing tax base and many residents flee to avoid the failing economy.  As tax bases change, due to unique geographic and economic areas, the government needs to be able to adapt quicker to create equitable resources.  Property taxes do not react to changing circumstances as effectively as other types of taxation.

In Chicago, many people are wondering if neighborhoods are worthy of the high property tax?  The demand and supply of a neighborhood is constantly evolving and property taxes need to be able to respond to these unique property situations.

What do we need to do?
Property Taxes make up the largest portion of state and local revenues (see Figure 2 below).  It would take a huge jump fiscally, like North Dakota considered, to truly abandon property taxes.  Strides need to be taken to help make the property tax more equitable for all residents, but elimination may not be possible with current states taking in above 30% of their revenues from property taxes.  Currently, states are choosing to collect the taxation and then re-distribute through primarily health and education services.  The effectiveness of these programs is in question making it easier to consider abandoning or lowering property taxes.

We Have Reached Cruising Altitude: The PILOT Agreement and the Local Government

Generally speaking, the objective of most nonprofit organizations in the United States is to help fill a societal void; making available those goods not otherwise provided by the open market or delivered by the government. Whether they provide animal care and treatment, help newly immigrated small business owners locate funding, or offer environmentally-conscious gardening advice, nonprofit organizations produce many positive benefits to the surrounding community.  Because of the apparent public benefit that a nonprofit delivers to a local community, charitable nonprofits are exempt from paying property taxes in most states.  However, this fact can be problematic to local governments, which derives an increasing percentage of revenue from local property taxes.  The slide below is a demonstration of the increasing reliance on the property tax for a local suburb.  

In municipalities where a large number of non-profits are located, simply losing property tax revenue is not palatable. In 2009 for instance, Boston, Massachusetts had approximately $345 million dollars from lost property tax revenue due to the presence of non-profits. (page 44 and 45 of the report) On top of that, charitable nonprofits still utilize many of the resources and infrastructure provided by the local government without compensation.  Partly as a result of this pressure, local governments look for ways to offset the property tax loss. Larger cities have more flexibility in terms of tax reform, like the property tax model that the City of Saint Paul uses, which was discussed in class. However, smaller cities and towns often lack the necessary tax base to make up for the loss.
One method that local governments use to collect additional funds in order to offset the loss of property taxes from charitable nonprofits is from an agreement called a “Payment in Lieu of Taxes” (or PILOT) agreement.  From Kenyon and Langley, “(PILOTS) are usually negotiated between a municipality and individual nonprofits… PILOTs can be one-time payments, but negotiations sometimes lead to contracts stipulating continued payments for many years.”  (Kenyon and Langley of the Lincoln Institute of Land Policy produced a comprehensive report on PILOT agreements in 2010, found here.) Since these agreements are voluntary and are negotiated between the municipality and the nonprofit, the amount of money that is involved in the transaction can be highly variable and almost never reflects the full amount of property tax lost.  

The PILOT agreement can aid the local government in collecting additional revenue to be sure, but requiring such an agreement for all non-profits would undoubtedly meet opposition.  In the following paragraphs, I would like to offer a few suggestions for the planning staffs of local municipalities to consider before entering into a PILOT agreement.

 1. Educate the elected officials in a workshop setting.  Informing the elected officials on what a PILOT agreement is, what it can be used for, and explaining where these agreements have been successful can be paramount in helping the officials understand this revenue tool.  The possible negatives and limitations of these agreements must also be discussed in great detail.  Ideally, this informational session would happen in an informal setting, so as to encourage unrestrained discussion.  This session would also be done before a nonprofit has made an application for development or filed tax exempt status.  

 2. Set parameters for investigating whether or not a PILOT agreement is a viable option.  Acreage of tax-exempt property or location of the property in terms of zoning and estimated land value are parameters that could be useful in determining whether or not a municipality should pursue a PILOT agreement.  Any condition that draws the public benefit of a particular nonprofit or addresses the nonprofit’s ability to pay should not be added into the parameters. Because the agreements themselves are negotiated and ad hoc in nature, the parameters serve as a guide as to whether or not a municipality should PURSUE an agreement, not that it demand one.  

As Kenyon and Langley noted, PILOT agreements are becoming increasingly popular and with possible sequestration on the horizon, the importance of such agreements may also be on the rise. 

For more recent information about the future of PILOT agreements, click here.  

Property Tax Caps

Lisa Elliott
Blog Post 2/27

                                                Property Tax Caps

Budgetary enforcement tools inevitably will involve tradeoffs that will result in winners and losers.  Property tax caps restrict the amount that property tax can increase from year to year to a low fixed percentage, a formula based on inflation rate, or a combination of the two. Evidence suggest that property tax caps o nothing to change the rising costs municipalities face leading to suffering provisions of public services.  However they are currently used, even in our current budget crisis.

They are designed to hold down property taxes but are likely to impair the local revenue system, and the local government’s ability to provide education, public safety, and other public service programs.  They are criticized as a tool that does nothing to change the main drivers behind higher expenditures, or the pressures outside of local control that drive up cost (cost of health care, benefit packages. They also don’t change the demand for local public services, quality education, public safety, and good roads.

Proposed mitigations to replace lost revenue from tax caps  include:

·      Increased state aid- this may not be reliable or sustainable over time, especially in economic downturns.

·      Most caps include provisions permitting unhappy citizens to override the limit. However, evidence suggests that wealthier communities successfully attempt more overrides, which can exacerbate disparities in education and services throughout the state.

·      Localities under property tax caps often shift to other revenue sources such as sales taxes and fees, if permitted under state law. However this can have a similar effect, placing greater burdens on low income residents.

The Center on Budget Policy and Priorities cites evidence from California , “For example, K-12 spending per pupil in California fell dramatically under Proposition 13, dropping from more than $600 above the national average in 1978 (when Proposition 13 was passed) to more than $600 below the national average in 2000.[3] School districts in the state have been forced to cut programs such as music, physical education, and art; reduce class offerings; and cut positions, such as librarians and counselors ‘’.

Similar negative effects were realized in Massachusetts, where the town has had to lay off school , fire and police, and municipal employees, freeze wages, close the library, close the senior center, and stop funding infrastructure projects to comply with the state’s property tax cap.

While I only have surface level knowledge of this complex issue and budgetary reforms in general, I have to ask why in our 2012/2013 budgetary crisis would these tools continue to be used when property tax is a major source of local revenue? Property tax caps are currently cited as the “hallmark of New York State Governor Andrew Cuomo’s tenure” signed into law in 2011, which limits growth in property taxes to two percent a year.  Cuomo states that the cap limits taxes in a state with some of the highest property taxes in the nation, and that ninety five percent of the districts stayed with the cap last year. This has lead to a recent filing of a law suite by the largest teachers union in the state, New York State United Teachers.

The teachers union has rallied against the cap, stating that it creates inequalities within the school districts, as wealthy communities are more likely to override the cap. 

Governor Cuomo responded to the filing by saying, ““People have a right to go to court. God bless America. God bless our system,” Cuomo said Wednesday. “I think the property-tax cap has been one of the best things that we’ve done in the state of New York.”
Senate Majority Leader Dean Skelos, R-Nassau County, also rejected the lawsuit.
“While it’s clear that this lawsuit has no merit, Senate Republicans are determined to protect the property tax cap for New Yorkers and their families,” he said in a statement.”

This is clearly a complex issue, as most budgetary issues are. However with our surface knowledge of the property tax cap and the budget crisis I ask:

Is making a small “investment of sorts” in a property tax cap protecting people from rising property taxes or is it a “people pleasing” political move?

How will this effect economic development? Surely more predictable property taxes would be a valued amenity to attract new talent and businesses to an area. But how a faltering school system and lack of public service will definitely turn people away.


Property tax revenue crisis in New Jersey since Hurricane Sandy

The municipalities in the state of New Jersey expect to undergo a magnificent decline in property tax revenue. Hurricane Sandy destroyed a tremendous number of houses and other commercial properties. Therefore, the municipalities cannot collect same amount of property tax as before the storm wiped off the region. The reduced property tax revenue will inevitably result in deep cut in spending on schools, police, fire fighting and other services. In fact, Cowan explains that dozens of municipalities in the state of New Jersey could face loss of at least 5 percent of their tax bases. Borough of Tuckerton lost about 20 percent of its property tax base. Moreover, almost half of houses are now inhabitable in Sea Bright. In this circumstance, it is difficult for the municipal governments to raise tax rates to reduce deficit, because the homeowners are already facing critical economic loss after Sandy destroyed their homes and businesses.
On February 26, New Jersey governor Chris Christie proposed budget partly as resolution of recovery after the catastrophe. However, property tax relief is deferred maintaining the tax increases to 1.4 percent this year. One of notable decisions is that the residents whose homes survived are expected to pay higher property tax according to the budget. However, Mulvihill and Rahman point out that the residents in the state are already paying the highest property tax in the country that is $7,870 per household on average. Instead, the state counts billions of dollars from the federal Sandy relief fund to restore damaged economy and help municipalities that lost property tax base. Budget Officer Declan O’Scanlon says the priority will be closing the gaps in property tax.
I understand the state government faces in a tough situation to deal with massive revenue loss and still fund to rebuild infrastructure that were destroyed. Therefore, it totally make sense Mr.Christie do not want to lose further revenue so he is reluctant to provide property tax rebate for the residents . But, his plan to impose higher property tax on the residents whose homes survived from Sandy could double the burden for the residents who are already suffering from huge loss. First, it is possible that some of them whose homes are not completely destroyed are low income households because hurricane does not selectively damage poor neighborhoods. Thus, if this is the case, charging higher property tax on the low income families could violate equity in taxation. Moreover, although the damage may not be severe, most of residents may still need to cost substantial dollars on repairing partial damages. Therefore, imposing higher tax would be adding more burdens over what they already have to pay. Last, the economic cycle in the region would have been critically compromised because of Sandy. According to Cowan’s article, many businesses have been closed down. It is still possible that the some of the victims are ones who pay higher property tax since their houses avoided destruction from Sandy.
I think the governor should still contemplate other ways to recover revenue from deficit.  For example, the state could supplement the revenue from high income tax from high performing economic groups. I can speculate that the damage may not be as catastrophic as lower income groups. Then, the state government can provide income tax rebate after New Jerseyan communities recover from the disaster to a reasonable level. Furthermore, the state government could also request aid from other states, not only from the federal government until recovery. The solutions may not be feasible, but I believe at least the g state government must find a way to strengthen its budget without hurting the residents.

Wednesday, February 20, 2013

Tax Pyramiding

Governor Mark Dayton recently released his budget proposal for the new budget cycle. Governor Dayton’s current plan will reduce the state sales tax from 6.875% to 5.5%, which puts Minnesota closer to the sales taxes of its neighboring states:
North Dakota: 4.0%
South Dakota: 5.0%
Iowa: 6.0%
Wisconsin: 5.0%

While the proposal will reduce the tax, it will also widen the tax base to include clothing items over $100, digital goods and e-sales, accounting services, and a wide array of consumer services estimating an additional $2.1 billion in tax revenue for the state. This proposal would also cause Minnesota to drop from having the seventh highest sales tax rate to the twenty-seventh highest in the country. Revenue Commissioner Myron Frans has said this will create a fairer and more sustainable tax plan.

According to Governor Dayton most of these increases will not affect 98% of Minnesotans, but some say that they will have a trickle-down effect or “tax pyramid”. A recent article on Minnpost looked at the sales tax proposal, and for the most part the tax experts agree that cutting and broadening the tax base will create a more modern tax code and will reduce inequities. However, extending the tax base to business-to-business services such as accounting, architecture, design, consulting services, and engineering services will produce inequitable effects on consumers.

The business community argues that it will make business in Minnesota less competitive and cause them (and jobs) to leave the state. Commissioner Frans argues that this creates fairness for businesses, because business-to-business transactions haven’t had to pay the same taxes that a consumer pays to the business. Some say this will create that effect of “tax pyramiding” because the taxes accrue, businesses have to raise prices, and then pass that cost of the tax onto the consumer – sometimes turning a progressive tax into a regressive tax. This would create the opposite effect of tax fairness it intended to have.

To sum up the rest of the article, the tax experts create several hypotheticals and end by saying it would be difficult for the state to even collect on such a tax. But this article really just left me with more questions than it answered. I don’t doubt that all these tax experts know what they are talking about, but this really just made me wonder if they were fear-mongering with hypothetical situations of jobs leaving the state, creating an inequitable cost to consumers, and overall hurting business or are these legitimate concerns? They don’t seem to offer any valid evidence of this happening or give an example where such a problem has occurred which is why I question the severity of this concern. This may in fact be a regressive tax, but one has to question how plausible the trickle down effects will be.

Dayton's Proposed LGA Formula Changes

In January, Minnesota Governor, Mark Dayton, announced his biennial budget proposal for 2014-2015. In the budget proposal, there are a number of components aimed towards reversing the deep cuts in services that has occurred in the recent past. The target is to raise $2.0 billion in new revenues to address the state’s $1.1 billion deficit.  One interesting component to Dayton’s proposed budget is an increase in Local Government Aid (LGA) to cities by $80 million in FY 2015 and an increase in County Program Aid by $40 million in FY 2015.1

Dayton has also recommended an entirely new formula for calculating LGA. The current formula has been in place since 2003 and was modified in 2008.  The current appropriation for city LGA is $426.4 million. About $26 million of the appropriation is distributed to certain cities, while the remaining $400 million is determined by the current LGA formula.  The current LGA formula pays a percentage of “unmet need” for cities that is based on the difference between 1) measures of the city’s need (depending on population) and 2) the city’s net tax capacity multiplied by an average city tax rate. To mitigate yearly volatility, the LGA program uses data over two years to calculate a city’s aid. Also, there are limits (varying by the size of the city) on the amount that aid to an individual city can increase or decrease in a given year. 2

Much of this current LGA formula would be discarded under the Governor’s proposal. One element that will not change is how a city’s “capacity” is calculated. It will still be the city’s adjusted net tax capacity (tax base) multiplied by the statewide average city tax rate. However, each city’s need would be calculated using an entirely new formula, using three need factors:
  •  Public safety/streets need based on population.
  •   Percentage of housing built before 1970.
  •   Percentage of parcels that are tax-exempt.

Each city would start with a foundation need base of $200 per capita, based on a statistical analysis of the average city spending per capita on public safety and streets. A city will get additional aid above this based on population size, the percentage of housing built pre-1970 times $1.30 (up to $130 per capita), and percentage of parcels that are tax exempt (not city-owned and contains at least one structure) times $65 (up to $130 per capita). 3

The Governor’s main goal with these proposed changes is to enhance stability, by only having one factor (population) that is variable from year-to-year included in the calculation. The new formula would also simplify LGA allocations, by eliminating multiple aid bases (e.g., small cities aid base, jobs aid base, regional center aid base).3

One point of potential controversy with this proposal is that it has been reported that the cities that will benefit the most form the $80 million increase under the new formula, are metropolitan. However, greater Minnesota cities do and still will receive more LGA per capita than metropolitan areas.4  (See House Research graph:

Some points for debate or further research over this new proposal include: is the new formula fair? Why should Minnesota switch to a formula that favors metropolitan cities? What implications will this increase in LGA have for service delivery?





Tuesday, February 19, 2013

State Deficit and Surplus

The three-week Minnesota government shutdown in 2011 caused huge disruption and lost revenue to the state and its employees. I know that the shutdown has been discussed at length over the past year and a half, but it occurred just before I moved to Minnesota so as a new resident of the state I was shocked and fascinated by what was happening at the capitol.

As we know, the Minnesota government shutdown because the legislature and the governor were unable to agree on a budget to address a $5 billion shortfall. The elected officials were finally able to reopen government after agreeing to cover the deficit by delaying payments to Minnesota Public Schools and borrowing against future revenue from a tobacco settlement.

What interests me now is the fact that this budget deficit actually turned into a surplus in 2011 and 2012, allowing the state to refill the cash flow account, restore the budget reserve and begin to pay back the schools. The surplus was caused by reduced spending and lower than expected costs for the Medical Assistance program that provides health care coverage for low-income adults without children. But that there is still a projected deficit for the 2014-2015 biennium: $1.1 billion, or over $2 billion if inflation is included.

As Nick covered in his post on the Governor’s proposed budget, Dayton wants to increase income tax on the wealthiest 2% of Minnesotans, provide property tax relief for all homeowners, and reduce the sales tax percentage but expand services that are taxed. This approach seems to be an effort to tackle the deficit with multiple solutions in a balanced way, but with the backlash to the proposal I wonder if the budget will be adopted in its entirety or if only pieces will be agreed on. If only pieces are adopted and no comprehensive plan is put in place, it seems that the deficit will continue to be a problem for the state and I wonder how long Minnesota can delay coming up with an actual solution.

Here are some more interesting articles about the shutdown: