"He will put the sheep on his right and the goats on his left."
Matthew 25:33

Sunday, July 15, 2007

Commentary: Watching the dog chase its tail

By Phil Krinkie

For more than a quarter century, state legislators have been attempting to control increases in local property taxes. What they can’t clearly communicate to their constituents is that the state doesn’t determine local property-tax rates. Those rates are set and controlled by local elected officials.

While the state Legislature determines the process of collection of local property taxes, it is still the purview of city councils and county boards to decide property-tax revenues.

Simply put, watching state legislators trying to control property taxes is like watching a dog chase its tail; regardless of how hard they try, it is still an unproductive exercise.

To help understand the mess we’re in today, a short history of state aid to local governments is helpful. We will start in 1971, when the state Legislature replaced a variety of special aids and shared tax programs with a program of general-purpose aid to all local units of government. The creation of Local Government Aid (LGA) had two primary objectives: First, to provide property-tax relief, and second, to help all local governments provide a similar level of government services.

Immediately, some legislators realized that trying to reduce property taxes with state grants to local governments was like trying to fill a barrel with water from a leaky bucket. As Ronald Reagan was fond of saying, “The nine most terrifying words in the English language are: I’m from the government and I’m here to help.” This certainly was no exception.

Within 15 years – from 1972 to 1986 – state aid to local governments had more than tripled from $99 million to over $311 million. But as the state aid program dollars grew, so did the debate about the method of distribution. By 2002, the program had changed from grants to all local government units to payments to cities only.

What is even more staggering, however, is the way LGA distribution has evolved over time. In 1972, when total aid equaled only $99 million, it reached all of the state’s local units of government. Despite the fact that total aid payments now equal a whopping $485 million, LGA is only distributed to about half the state’s population. A program that was intended to reduce property taxes for all Minnesotans now costs state taxpayers almost $500 million yet is distributed to only half the people in the state.

But as Paul Harvey says, “and now, the rest of the story…” The rest of the story is that with the expenditure of $485 million of state resources to “reduce property taxes,” there is little evidence that it does anything of the sort.
In a recent analysis of Minnesota’s state-aid programs, Nathan Anderson, a professor at the University of Illinois at Chicago, wrote, “It has long been recognized that giving more state aid to a local government does not necessarily cause that government to collect less property-tax revenue.” Anderson’s study indicates what most other scholarly works show: that increases or decreases in general aid to cities don’t result in direct increases or reductions in local property taxes.

Another analysis of Minnesota’s state-aid program by the Minnesota House Research Department in 2006 concluded that “on average, about 25 cents on the dollar of LGA increases translated into levy decreases in 2006.” These are only two studies of Minnesota’s property taxes, but virtually every economic analysis underscores the fact that there is no direct correlation between general state aid to local governments and reduced property taxes.

Despite this, state-aid payments in Minnesota have grown by almost 500 percent while distribution has shrunk to only half the people. In addition, only a small fraction of the total aid payments can be attributed to reductions in property taxes. Still, many legislators perpetuate the myth, including backers of this year’s House and Senate tax bills, that increased state aid will reduce property taxes. The facts show just the opposite.

In 1972, when state-aid payments began, total non-school property taxes amounted to $398 million. Today, non-school property taxes total over $5 billion.

The simple truth is that no matter what state legislators do to “buy down” property taxes, it doesn’t work. Property taxes will continue to rise unless cities and counties can control their growth in spending.

Phil Krinkie, a former Republican state representative from Shoreview, is president of the Taxpayers League of Minnesota.

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