January 2005 Minnesota’s Fiscal Disparities Programs Twin Cities Metropolitan Area and Iron Range This publication provides an overview of the state’s two taxbase sharing programs, providing information on their backgrounds, policy rationales, program mechanics, redistributive effects, and tax burden impacts. This report was prepared by Steve Hinze and Karen Baker, legislative analysts in the House Research Department. Questions may be addressed to Steve at 651-296-8956 or Karen at 651-296-8959. Kristie Strum prepared graphics and provided secretarial support. Copies of this publication may be obtained by calling 651-296-6753. This publication can be made available in alternative formats upon request. Please call 651-296-6753 (voice); or the Minnesota State Relay Service at 1-800-627-3529 (TTY) for assistance. Many House Research Department publications are also available on the Internet at: www.house.mn/hrd/hrd.htm. Contents Introduction............................................................................................................................. 1 The Twin Cities Metropolitan Area Fiscal Disparities Program ....................................... 3 Development of the Metropolitan Area............................................................................. 4 Fiscal Disparities Program: What Is Its Purpose? ............................................................ 5 How Does the Fiscal Disparities Program Work?............................................................. 7 Growth in the Fiscal Disparities Program ....................................................................... 15 2001 Property Tax Reform .............................................................................................. 19 Impact of Fiscal Disparities on Tax Burdens .................................................................. 22 Changes in the Fiscal Disparities Program...................................................................... 30 Policy Issues .................................................................................................................... 31 Iron Range Fiscal Disparities Program .............................................................................. 35 Why Iron Range Tax-Base Sharing? ............................................................................... 36 Growth in Program .......................................................................................................... 37 Appendix A: Pictorial Illustration of Fiscal Disparities.................................................... 40 Appendix B: Fiscal Disparities Calculations for a Hypothetical City Without the OneYear Lag .................................................................................................................... 43 Appendix C: Growth of Metro Areawide Tax Base .......................................................... 48 Appendix D: Metro Areawide Tax Rate and Growth in Areawide Tax.......................... 49 Figures and Tables Figures Figure A: Fiscal Disparities Geographic Area: Seven-County Twin Cities Metropolitan Area ... 3 Figure B: Percentage of Total Metro Tax Base and Total Metro C/I Tax Base Comprised by the Areawide Pool, 1974-2004 ......................................................................................... 15 Figure C: Metro Fiscal Disparities Distribution Tax, 1975-2004................................................ 16 Figure D: Payable 1985 and 2004 Metro Contribution and Distribution Values by County ...... 18 Figure E: Boundaries of Iron Range Fiscal Disparities ............................................................... 35 Figure F: Iron Range Contribution and Distribution Net Tax Capacity (NTC) by County for Pay 2000 and Pay 2004..................................................................................................... 39 Tables Table 1: Total Population of Metro Area by Type of Location: 1970 and 2002........................... 4 Table 2: Commercial-Industrial (C/I) Property Tax Base of Metro Area by Type of Location: 1971 and 2003..................................................................................................................... 4 Table 3: Factors Contributing to Tax Impacts if Fiscal Disparities were Eliminated ................. 24 Table 4: Countywide Tax Impacts if Fiscal Disparities were Eliminated (Taxes Payable in 2004) ................................................................................................................................. 25 Table 5: Tax Impacts for Selected Cities if Fiscal Disparities were Eliminated (Taxes Payable in 2004) ............................................................................................................................. 26 Table 6: Total Tax Rate Comparison under Fiscal Disparities (Taxes Payable in 2004)............ 27 Table 7: Tax Rate Impacts for Selected Cities under Fiscal Disparities (Taxes Payable in 2004) ................................................................................................................................. 28 Table 8: LGA Offset of Fiscal Disparities Effect ........................................................................ 29 Table 9: Growth of Areawide Iron Range Tax Base ................................................................... 38 Table 10: Iron Range Areawide Tax Rate and Growth in Areawide Tax ................................... 38 House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 1 Introduction In 1971, the state of Minnesota instituted a program of commercial-industrial tax-base sharing within the Twin Cities metropolitan area. While the program is most often referred to by its nickname, the fiscal disparities program, the official statutory name of the program is the Charles R. Weaver Metropolitan Revenue Distribution Act. Although the concept of tax-base sharing has been discussed in policy and academic circles for many years, Minnesota’s implementation is unique within the United States and may be unique worldwide in terms of the geographic area covered and the amount of tax base that is shared. In 1995, a parallel program was established on the Iron Range of northeastern Minnesota. This report is a primer on Minnesota’s two tax-base sharing programs. It is intended for use by at least two different groups of people: those affected by the programs who would like a better understanding of how the programs work, and those in other parts of the state, elsewhere in the United States, or other places in the world who have heard about Minnesota’s tax-base sharing program and would like to learn more about it. In trying to provide some background to these two diverse audiences, the report briefly covers many topics. The report: • provides some background on the geographic area(s) covered by the program(s), including demographic and economic data; • discusses the policy rationale(s) for the program(s), and even more briefly, aspects of the program currently being debated in the policy arena; • describes in some detail the mechanics of the program; • provides historical and current data on the redistribution that actually takes place under the program (i.e., the “winners” and the “losers”); and • looks at the impact of the program on tax burdens by simulating the property tax system in the absence of fiscal disparities (metro program). Although the report describes the two programs separately, because the Iron Range program is patterned so closely after the metro program, those portions on how the program works are included only in the section describing the Twin Cities metropolitan program, but are applicable to both. House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 3 The Twin Cities Metropolitan Area Fiscal Disparities Program The Twin Cities area fiscal disparities program was enacted in 1971, but court challenges prevented the program’s implementation until 1975. The program is codified in Minnesota Statutes, chapter 473F. The Twin Cities area fiscal disparities program shares 40 percent of the growth in the commercial-industrial (C/I) property tax base of Anoka, Carver, Dakota, Hennepin, Ramsey, Scott, and Washington counties (Figure A). The map shows the various development areas within the seven-county region as they existed in the early 1970s. The tables on the following page show how development has occurred some 30 years later. Figure A: Fiscal Disparities Geographic Area: Seven-County Twin Cities Metropolitan Area House Research Graphics House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 4 Development of the Metropolitan Area The Twin Cities metropolitan area of today is quite different from that of the late 1960s and early 1970s when the fiscal disparities program began. Many of these differences result from demographic and developmental factors predicted by planners; many more are due to unforeseen factors. Table 1: Total Population of Metro Area by Type of Location: 1970 and 2002 Central Cities (Mpls./St. Paul) Inner Ring Developing Ring Outlying Area Total* 1970 Population 744,300 527,200 432,600 168,600 % of Total 39.7 28.2 23.1 9.0 2002 Population 670,700 510,000 1,086,000 438,100 % of Total 24.8 18.9 40.2 16.2 1,872,700 100.0 2,704,800 100.0 * Totals may not add up to 100% due to rounding. Table 2: Commercial-Industrial (C/I) Property Tax Base of Metro Area by Type of Location: 1971 and 2003 Central Cities (Mpls./St. Paul) Inner Ring Developing Ring Outlying Area Total** 1971 C/I Net Tax Capacity* (millions) $38.0 22.2 14.9 4.2 $79.4 * 1971 assessed value converted to net tax capacity. ** Totals may not add up to 100% due to rounding. % of Total 47.9 28.0 18.8 5.3 100.0 2003 C/I Net Tax Capacity (millions) $185.6 167.6 355.1 66.8 $775.2 % of Total 23.9 21.6 45.8 8.6 100.0 House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 5 Fiscal Disparities Program: What Is Its Purpose? As originally enacted, the fiscal disparities statute identifies six objectives that the program seeks to accomplish:1 • To provide a way for local governments to share in the resources generated by the growth of the area, without removing any resources that local governments already have • To increase the likelihood of orderly urban development by reducing the impact of fiscal considerations on the location of business and residential growth and of highways, transit facilities, and airports • To establish incentives for all parts of the area to work for the growth of the area as a whole • To provide a way whereby the area’s resources can be made available within and through the existing system of local governments and local decision making • To help communities in different stages of development by making resources increasingly available to communities at those early stages of development and redevelopment when financial pressures on them are the greatest • To encourage protection of the environment by reducing the impact of fiscal considerations so that flood plains can be protected and land for parks and open space can be preserved Modern-day proponents of the fiscal disparities program have come to focus on two broad goals: • Promoting more orderly regional development • Improving equity in the distribution of fiscal resources The following aspects of the fiscal disparities program contribute toward one or both of these goals: • Tax-base sharing spreads the fiscal benefit of business development attracted by regional facilities, such as large shopping centers, airports, and freeway interchanges, or recreational facilities, such as sports stadiums and arenas. • Communities with low tax bases must impose higher tax rates to deliver the same services as communities with higher tax bases. These high tax rates make poor 1 Minn. Stat. 2004, § 473F.01, subd. 1. The original language included a seventh objective that was eventually repealed because it related to a component of the program that was never enacted. House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 6 communities less attractive places for businesses to locate or expand in, exacerbating the problem. Sharing of C/I tax base can reduce this effect. • Communities generally believe that commercial and industrial properties pay more in taxes than it costs to provide services to them. This encourages communities to compete for these properties by providing tax concessions or special services. Tax-base sharing may reduce this competition, thereby discouraging urban sprawl and reducing the cost of providing regional services, such as sewage and transportation. • Tax-base sharing equalizes the imbalance between some local governments’ public service needs and financial resources. The uneven distribution of property tax base, particularly commercial and industrial property, is a major cause of this imbalance. • Communities may be more willing to accept low tax-yield regional facilities, such as parks, to preserve environmental amenities because they know they will share the benefits of other communities’ commercial development. • Tax-base sharing can provide additional resources to older areas to finance urban redevelopment. House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 7 How Does the Fiscal Disparities Program Work? This section describes how the fiscal disparities program works as part of the property tax system. A simplified pictorial illustration of the fiscal disparities process is shown in Appendix A. Contributions to Areawide Tax Base The fiscal disparities law requires each taxing jurisdiction2 to contribute 40 percent of the growth in its C/I property tax base since the 1971 assessment to an areawide pool. Even though the first year of implementation was 1975, the 1971 assessment remains the benchmark year. C/I property includes all businesses, offices, stores, warehouses, factories, gas stations, parking ramps, and so forth. It also includes public utility property and vacant land which is zoned commercial or industrial. Although both C/I real and personal property are included in the program, most personal property is exempt from taxation. The growth in value considered is the total net change in net tax capacity since 1971, including the effects of new construction, inflation, demolition, revaluation, appreciation, and depreciation. There is no distinction between “new” property and “old” property. Distribution from Areawide Tax Base The distribution of the net tax capacity from the areawide tax base is determined by a distribution index based upon relative fiscal capacity.3 For a given municipality, the index equals the municipality’s population multiplied by a ratio measuring relative fiscal capacity. The ratio is the proportion which the average fiscal capacity of all municipalities for the previous year bears to the fiscal capacity of that particular municipality for the previous year. The equation for the distribution index is as follows: Population of City/Town x Average Fiscal Capacity City/Town Fiscal Capacity = Distribution Index 2 In this report, some references are to “municipalities” (cities or towns) and others are to “governmental units or taxing jurisdictions” (counties, cities, towns, school districts, and special taxing districts). All property is located in a municipality, but pays taxes to all taxing jurisdictions encompassing the property. 3 Fiscal capacity is defined as equalized market value per capita. Equalized market value is market value adjusted by each municipality’s sales ratio, which is a measure of the assessment level within the municipality. House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 8 The formula is based wholly on fiscal capacity, defined as equalized market value per capita. There is no measure of spending need in the distribution formula other than population. This means that: • • • If the municipality’s fiscal capacity is the same as the metropolitan average, its percentage share of the areawide tax base will be the same as its share of the area’s population; If its fiscal capacity is above the metro average, its share will be smaller; If its fiscal capacity is below the metro average, its share will be larger. Taxing Jurisdiction Levies vs. Tax Burdens Tax-base sharing takes place before local jurisdictions levy taxes. The jurisdiction decides what amount it must levy to provide local services. In the absence of tax-base sharing, the levy would simply be spread on the tax base within the jurisdiction. With fiscal disparities, however, the tax burden on taxpayers within the jurisdiction may be more or less than the jurisdiction’s levy. The jurisdiction still receives the full amount that it levied. However, if the jurisdiction is a net contributor (i.e., contributes more than it gets back), the properties within the jurisdiction will pay more tax than the jurisdiction’s levy. If the jurisdiction is a net recipient (of tax base), the jurisdiction’s taxpayers will pay less than the amount levied. Impact on Individual Parcels All property except C/I pays a property tax determined by the local tax rate, which reflects the net effect of fiscal disparities upon each taxing district’s tax base. For C/I property, a ratio is computed in each municipality by dividing that municipality’s contribution net tax capacity by its total C/I net tax capacity. (Since only 40 percent of the growth over the base year is contributed, that rate will never exceed 40 percent.) This ratio represents the portion of each C/I parcel’s net tax capacity that pays a tax determined by the areawide tax rate. The rest of the parcel’s net tax capacity pays a tax determined by the local tax rate. Because a portion of each C/I parcel is taxed at a uniform rate, the tax burden on comparable parcels of C/I property will vary less from jurisdiction to jurisdiction than it would without fiscal disparities. Step-by-step Calculations The step-by-step calculations under fiscal disparities for a hypothetical city are shown on the following pages. An alternative version of the calculations is shown in appendix B. The basic mechanics are easier to understand in the alternative version, which leaves out the one-year lag that was instituted to facilitate administration of the program in light of the complexity of Minnesota’s property tax system. House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 9 Fiscal Disparities Calculations for a Hypothetical City (Payable 2004) Assumptions for City of Minnesota 2002 Population 2002 Equalized Market Value 2002 Fiscal Capacity* 2002 Areawide Average Fiscal Capacity** 20,000 $500,000,000 $25,000 $30,000 2003 Payable 2004 Certified Levy $8,000,000 1971 Commercial-Industrial Net Tax Capacity*** $2,500,000 2002 Payable 2003 Net Tax Capacity Commercial-Industrial*** Residential All Other $8,000,000 10,000,000 +1 ,000,000 Total 2003 Payable 2004 Net Tax Capacity Commercial-Industrial*** Residential All Other $19,000,000 $8,800,000 12,000,000 + 1,400,000 Total $22,200,000 * Fiscal Capacity = Equalized market value of all property in the municipality Population of municipality ** Average Fiscal Capacity = Total equalized market value of all property in all municipalities Total population of the metropolitan area *** Commercial-industrial net tax capacity includes the tax capacity of public utility property. Since net tax capacity was not in use in the 1971 base year, it has been estimated using available market value records. The 1971 base value is adjusted each year that changes are made in C/I class rates. House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 10 Step 1: Determine the City’s Contribution to Areawide Tax Base 2002 Payable 2003 Commercial-Industrial Net Tax Capacity4 Less 1971 Commercial-Industrial Net Tax Capacity $8,000,000 -2,500,000 Net Growth over 1971 Base Value Contribution Rate $5,500,000 x 40% City’s Contribution to Areawide Tax Base $2,200,000 Step 2: Determine the Areawide Tax Base Net Tax Capacity Contributed from City of Minnesota $2,200,000 Net Tax Capacity Contributed from All Other Cities and Towns in the Metro Area $297,800,000 Total Areawide Tax Base $300,000,000 Step 3: Distribution Index for City of Minnesota Population of City/Town x Average Fiscal Capacity City/Town Fiscal Capacity = Distribution Index 20,000 x $30,000 $25,000 = 24,000 Step 4: Sum of Distribution Indices for All Municipalities City of Minnesota (step 3) All Other Metropolitan Cities and Towns Index Percent 24,000 1,976,000 1.2% 98.8% 2,000,000 100.00% The city of Minnesota’s final distribution index is 1.2 percent of 2,000,000; therefore, it receives 1.2 percent of the areawide tax base. 4 Laws 1976, chapter 191, provided that the fiscal disparities contribution and distribution values and tax rates would be based on the previous year. This was done for administrative reasons. Appendix B contains an example of how the program works without the one-year lag (i.e., based on current values and rates). House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 11 Step 5: City of Minnesota’s Distribution Net Tax Capacity The city of Minnesota’s distribution net tax capacity is equal to the share determined in step 4 multiplied by the areawide tax base determined in step 2. 1.2% x $300,000,000 = $3,600,000 This distribution net tax capacity is also taxable by other taxing jurisdictions (i.e., county, school district, special taxing districts) overlapping the city. Step 6: Determine the City of Minnesota’s Tax Base 2003 Payable 2004 Total Net Tax Capacity for City of Minnesota $22,200,000 Less Payable 2004 Contribution to the Areawide Tax Base (step 1) -2,200,000 Total Payable 2004 Taxable Net Tax Capacity for City of Minnesota $20,000,000 Step 7: Determine Areawide Portion of City of Minnesota’s Levy (also called the city’s distribution levy) Distribution Tax Capacity (step 5) x 2002 Payable 2003 City Tax Rate = Areawide Portion of Levy $3,600,000 x 0.35 (35% of net tax capacity) = $1,260,000 Step 8: Determine the Areawide Tax Levy The auditor of the county in which the city of Minnesota is located certifies to the administrative auditor an amount of $1,260,000 as the areawide portion of the city’s levy. This is also done for all other governmental units located within the area. City of Minnesota’s Distribution Levy (step 7) Distribution Levies from All Other Governmental Units in the Metro Area Total Areawide Levy $1,260,000 398,740,000 $400,000,000 House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 12 Step 9: Determine the Areawide Tax Rate The administrative auditor computes the areawide tax rate as follows: Total Areawide Levy (step 8) Total Areawide Tax Base (step 2) x $400,000,000 $300,000,000 = 1.333 (133.3% of net tax capacity) This tax rate is applied to the contribution net tax capacity of all municipalities in the metro area. The areawide tax rate is a composite rate which provides revenues for municipalities, school districts, county governments, and special taxing districts. Step 10: County Auditor Calculates the City of Minnesota’s Tax Rate 2003 Payable 2004 Total Certified Levy $8,000,000 Less Portion Attributable Receivable from Areawide Tax Base (step 7) -1,260,000 2003 Payable 2004 Adjusted Levy for the City (local portion) 6,740,000 2003 Payable 2004 Adjusted Levy Taxable Net Tax Capacity (step 6) $6,740,000 $20,000,000 City Tax Rate 0.337 (33.7% of tax capacity) = 0.337 The city’s tax rate of 0.337 is added to the tax rates for the appropriate county, school district, and special taxing districts. That total rate is applied to all taxable property in the city of Minnesota except the fiscal disparities portion of C/I property (see step 11). Step 11: Property Tax Computation on C/I Parcel The fiscal disparities contribution net tax capacity of $2,200,000 is equal to 25 percent of the total assessment district’s payable 2004 C/I net tax capacity of $8,800,000. Therefore, 25 percent of the net tax capacity of each parcel of C/I property in the city is subject to the areawide tax. The remaining 75 percent of the net tax capacity of each C/I parcel is subject to the local tax rate. The payable 2004 property tax computation for a parcel of C/I property located in the city of Minnesota with a market value of $300,000 (net tax capacity of $5,250) is shown on the following page. House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 13 Areawide Portion of Tax (Contribution Tax) 25% of $5,250 net tax capacity of the C/I parcel is taxed at the areawide rate of 1.333. 0.25 x $5,250 x 1.333 = $1,750 Local Portion of Tax Remaining 75% of net tax capacity of the C/I parcel is subject to local tax rates of all jurisdictions where the parcel of property is located. Local Tax Rates City of Minnesota 0.337 School District 0.256 County 0.433 Special Taxing District 0.074 Total Local Tax Rate 1.100 0.75 x $5,250 x 1.100 = $4,331 Total Payable 2004 Tax of C/I Parcel Areawide Portion of Tax Local Portion of Tax State Property Tax (5.250 x 0.541)5 $1,750 4,331 2,840 Total Tax $8,921 Step 12: Property Tax Settlement of the Areawide Levy The county treasurer collects the $8,921 from the taxpayer of the C/I parcel in step 11 and the C/I tax from all other taxpayers with C/I property within the county. The treasurer compares the sum of the total amount of the contribution levies (e.g., areawide portions of the tax) from all C/I parcels within the county to the sum of the total amount of the distribution levies which all of the taxing districts within the county are entitled to receive from the areawide pool. If the total contribution levy exceeds the total distribution levy, the county treasurer will remit a check to the administrative auditor for the difference (i.e., amount owed). If the total contribution levy is less than the distribution levy, the county treasurer will receive a check from the administrative auditor. 5 The state property tax was enacted in 2001 as part of a major overall property tax reform (see page 19). House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 14 Administrative Aspects of the Program The fiscal disparities program requires additional administrative tasks to be performed annually by property tax administrators. The county officials meet regularly to establish timelines, coordinate data collection and reporting, and to decide how to handle situations brought about by changes in general property tax laws, unique property situations, etc. Department of Revenue staff annually determine the fiscal capacity for each city and town. The administrative auditor (from Anoka County, as elected by the other metropolitan auditors) determines the distribution indices and the areawide tax rate. For counties that are not subject to fiscal disparities, the county auditor simply determines each taxing jurisdiction’s local tax rate by dividing its property tax levy by its total net tax capacity. However, for countries that are subject to fiscal disparities, the county auditor must also do the following: • Determine each taxing district’s taxable net tax capacity, which is the actual tax base located within its boundaries minus its contribution to the areawide base • Apportion the levy of each taxing district into an areawide portion and a local portion (The distribution tax capacity times the previous year’s local tax rate equals the areawide portion of the levy. The remaining amount of the taxing district’s levy is considered its local portion.) • Determine the local tax rate for each jurisdiction by dividing the local portion of the levy by its taxable net tax capacity House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 15 Growth in the Fiscal Disparities Program Areawide Tax Base Growth Figure B shows that the fiscal disparities areawide tax base has increased steadily and significantly relative to the total metro C/I tax base and the total metro tax base over the life of the program. From 1995 to 2004 the percentage of C/I property in the areawide pool has increased steadily from 26 percent to 32 percent—a fairly high number considering that 40 percent is the maximum amount of C/I tax base that could be in the areawide pool. Translating this to the tax burden for a typical parcel of C/I property, roughly 20 percent to 25 percent of the tax is based on the areawide rate, while another 30 percent to 35 percent is based on the state tax rate, leaving roughly 40 percent to 45 percent determined by the local tax rate. This guarantees that the variation in C/I taxes between municipalities will be substantially less than it would be if taxes were based solely on local tax rates. Figure B: Percentage of Total Metro Tax Base and Total Metro C/I Tax Base Comprised by the Areawide Pool, 1974-2004 40% 30 pool as a percent of metro C/I tax base 20 10 pool as a percent of total metro tax base 0 1975 1980 1985 1990 1995 2000 Historical data for growth in the areawide tax base is presented in Appendix C. House Research Graphics House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 16 Growth in Distribution Tax Figure C shows that the total areawide tax has grown significantly since the program began. The program’s growth from 1982 through 1994 was remarkable; in most of the years annual increases in the areawide tax were greater than 10 percent. A slump in C/I real estate values in the early to mid-1990s put a stop to the rapid growth. In the late 1990s the legislature embarked on a program of “class rate compression” to reduce the disparity in effective tax rates between C/I property and other types of property, which dampened growth in that period. Then, in 2001 the legislature initiated a major overhaul of the property tax system. The most significant result of the overhaul was the state takeover of financial responsibility for basic educational expenses, transit, and a portion of voter-approved school levies (see pages 19 to 21). Figure C: Metro Fiscal Disparities Distribution Tax, 1975-2004 (millions) $500 400 $345.8 inflation-adjusted dollars 300 actual dollars 200 100 0 1975 1980 1985 1990 1995 2000 Historical data for growth in the distribution tax amount is presented in Appendix D. House Research Graphics House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 17 Changes in Contribution and Distribution Amounts Over Time The pie charts on the following page show the redistributive effect of the fiscal disparities program by county at two “snapshots” in time, taxes payable in 1985 and 2004. There is nothing particularly significant about 1985; it is just used as an historical reference point. Figure D shows that in 2004, Hennepin County is the only net contributor, contributing 54 percent of the net tax capacity in the areawide pool, and receiving about 39 percent back. By contrast, Anoka County contributes 8 percent and gets back 13 percent; Ramsey County contributes 16 percent and gets back 22 percent. The percentages for 1985 and 2004 are somewhat similar, except that Ramsey County’s net gain increased considerably over the period, while Hennepin County’s net loss also increased considerably. The other five (outlying) counties both contribute and receive higher percentages of the pool in 2004, reflecting their rapid growth over the period. House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 18 Figure D: Payable 1985 and 2004 Metro Contribution and Distribution Values by County 1985 Contribution Assessed Value $1,264 million 1985 Distribution Assessed Value $1,264 million Dakota 9.0% Hennepin 53.7% Dakota 9.8% Carver - 1.1% Anoka - 6.5% Hennepin 41.9% Carver 2.0% Anoka 13.0% Washington - 3.2% Scott - 1.9% Washington 6.2% Scott - 2.2% Ramsey 24.7% Ramsey 24.8% 2004 Contribution Net Tax Capacity $252 million Dakota 12.2% Hennepin 54.0% Carver - 1.6% 2004 Distribution Net Tax Capacity $252 million Hennepin 38.8% Dakota 13.5% Carver 2.4% Anoka - 7.9% Anoka 12.9% Washington - 5.4% Scott - 2.6% Washington 7.0% Scott - 3.1% Ramsey 16.4% Ramsey 22.3% House Research Graphics House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 19 2001 Property Tax Reform In 2001, the state adopted the most comprehensive set of changes in the property tax system since the “Minnesota Miracle” of 1971. The major thrust of the reform was to improve accountability within the property tax system. There were two major aspects to the reform: • A realignment of state-local fiscal relations. For basic education and transit services, state funds were provided to replace local property tax dollars, while for basic municipal services, state aids were reduced allowing local property tax dollars to fill in the gap. • Class rate reform. The contribution of C/I property and multi-family housing to the local tax base was reduced, bringing their shares closer to their proportions of overall property value. Elements of the reform Class rate compression. Class rates, which define the contribution that each type of property’s market value makes to the local tax base, generally varied from 1.0 percent (on the first “tier” of homestead property) to 3.4 percent (on upper-tier C/I property) before the 2001 reform. Within classes, there was also significant variation: rates on homesteads ranged from 1 percent to 1.65 percent, while C/I rates ranged from 2.4 percent to 3.4 percent. The governor and the legislature had been taking steps to reduce the variation, or “compress,” the rates dating back to 1991, when the range had been from 1 percent (on first-tier homestead property) to 5.06 percent (on uppertier C/I property). Under the reformed system, all rates6 were compressed into a range from 1 percent (on most homestead value) to 2 percent (on most C/I value). The purpose of class rate compression was to increase accountability by reducing the ability to “export” the costs of local services to nonresidents, primarily C/I property taxpayers, and to create a more direct link between homeowner taxes and the levies approved by local officials. Besides reducing the differential between C/I property and homesteads, the reform also greatly reduced the tax differential between homesteads and residential rental properties. Education levy takeovers. The state took over the general education levy, providing all of the funding for basic school operating expenses. Before reform, general education was funded through a statewide uniform tax rate on all property in all districts, with state aid making up the difference between each district’s “need” and its ability to fund the need from its own tax base. Besides the general education takeover, the reform also called for the state to take over funding of a portion of each school district’s referendum levy, which had also been funded by an equalization formula based on each district’s relative property wealth. 6 Excluding rates for agricultural property, some of which are below 1 percent. Agricultural property is not discussed here because it represents a small fraction of total property value in the metropolitan area where the fiscal disparities program operates. House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 20 Transit levy takeover. The state took over the portion of the operating costs of the metro transit system that had been funded by a levy on all metro property taxpayers. The takeover was funded through a dedication of revenue from the state sales tax on motor vehicles. Besides the takeover of the metro transit system, a portion of the motor vehicle sales tax was also set aside to replace property tax levies for transit systems in greater Minnesota. State property tax. The class rate changes and the general education takeover would have resulted in considerably lower property taxes on C/I property and seasonal-recreational property. To provide more modest relief to these classes of property and to provide funding for other elements of the reform, a new state property tax was instituted to offset the changes in the composition of the local tax base. About 6 percent of the state property tax is borne by seasonalrecreational property, with the remaining 94 percent borne by C/I property. The state tax constitutes approximately one-third of the total tax burden on C/I and seasonal-recreational properties. State aid changes. State aids to nonschool local governments were reduced and partially reformed, primarily through the elimination of homestead and agricultural credit aid (HACA) for all types of local governments except counties. HACA was generally regarded as untargeted aid when compared to aid programs that consider local service needs and the adequacy of the local tax base to meet those needs. HACA reductions forced towns and special taxing districts to increase levies or reduce spending. But cities, which collectively lost almost $200 million in HACA, were given approximately $140 million in the more targeted program known as local government aid (LGA). Some individual cities, primarily suburbs, were net losers of aid, while some individual cities, primarily larger nonmetro cities, were net gainers. Fiscal Disparities Impact Class rate compression causes the areawide pool to be smaller than it otherwise would have been. Generally speaking, compression causes the C/I share of the total tax base to shrink, so the relative relationship between the areawide pool and the total metro tax base is also shrinking. However, compression does not affect the relationship between the size of the areawide pool and the size of the total metropolitan area C/I tax base. Figure B (page 15) and appendix C show that the areawide pool declined from 11.4 percent of the total metro tax base in 2001 to 10 percent in 2002 directly due to the 2001 tax reform. Moreover, the pool had encompassed roughly 13 percent of the total metro tax base in the early 1990s before the general movement toward compression got underway. However, the pool’s share of the total metro C/I base increased from 28.7 percent in 2001 to 30.1 percent in 2002, and in fact has continued to climb to 32.3 percent in 2004. Eliminating the general education and transit levies, and partially eliminating school referendum levies, caused the overall level of local taxes to be reduced by 21.7 percent in the metro area between pay 2001 and pay 2002. Because of the way fiscal disparities is calculated, this caused House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 21 a corresponding reduction in the overall size of the fiscal disparities levy by 22.7 percent. However, it is misleading to think of this drop as a reduction in the amount of redistribution taking place in the program, because for the most part the portion of the fiscal disparities levy allocated to the general education levy did not result in redistribution. If the fiscal disparities program had not existed, general education aid would have been distributed more heavily to school districts that are beneficiaries under fiscal disparities, making the fiscal disparities redistribution superfluous.7 7 This observation has been written about in previous versions of this report. See for example Minnesota’s Fiscal Disparities Programs: Twin Cities Metropolitan Area and Iron Range, February 2000. House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 22 Impact of Fiscal Disparities on Tax Burdens Most fiscal disparities discussions focus on tax base—on how much is being redistributed and how much tax base equalization is achieved. However, it is possible to go one step further and analyze the actual impact on tax burdens using property tax simulation. The Simulation The question of greatest interest is: how would tax burdens be different if the fiscal disparities program had never been enacted? That question is impossible to answer because even though the fiscal disparities calculations can be “undone,” there is no way to measure, or undo, the effect the fiscal disparities program has had on property values, local government spending and levy decisions, and business location decisions. Setting those issues aside, the premise of the simulation for this exercise is not that the fiscal disparities program never existed, but rather that it is suddenly eliminated. The simulation is based on taxes payable in 2004. At the time of the simulation, final levies for taxes payable in 2004 were not yet available, but all of the fiscal disparities data and most of the other actual data was available. The simulation uses preliminary levies (also known as truth-in-taxation levies), augmented with data on school district referendum levies that passed after certification of preliminary levies. The local government aid (LGA) formula was modeled for aids payable in 2004 under two scenarios. The first scenario used the actual tax capacity measures employed in determining 2004 aid distributions, but the LGA formula was run in its “pure” form, ignoring any phase-in components designed to minimize LGA changes for a given city from one year to the next. The second scenario used tax capacities as they would be without fiscal disparities, also using a pure formula with no phase-in components. The LGA change between the two scenarios was used for the simulation, with levy increases offsetting aid reductions and vice-versa. County program aids were modeled in the same way, even though the formula for county program aid does not come into play until taxes payable in 2005. School aids were modeled under the “no fiscal disparities” alternative as well; however, since the major property tax reform of 2001, most school aids and levies are not related to the size of a district’s tax base,8 so the effect on school levies was fairly minimal. 8 Under the reformed property tax system, school district referendum levies are highly “equalized,” meaning that the levy is tied to the size of a district’s tax base, but school district referendum levies are based on an alternate tax base known as “referendum market value,” and there is no redistribution of this tax base under fiscal disparities. House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 23 Results The simulation shows that property taxes would increase slightly in aggregate throughout the state ($10.2 million, or 0.2 percent) if the fiscal disparities program was eliminated (see Table 3). This impact is the result of three different effects, some of which offset each other. First, some of the tax base in the fiscal disparities pool would be captured by tax increment financing (TIF) in the absence of fiscal disparities. Tax revenues from that tax base would not be available to pay the general government levy, so other property taxpayers would have to pay more. This is the case for any TIF district established after 1979 containing C/I property, if the municipality had elected to have the TIF district make its own fiscal disparities contribution. Approximately $12.5 million of the $254 million of net tax capacity in the fiscal disparities pool would be captured by TIF districts. This means that TIF levies, as well as overall property taxes, would be $17 million higher if the fiscal disparities program did not exist. The second effect contributing to the change in the overall tax burden statewide is $5 million of additional tax payable to the Metropolitan Council’s livable communities program. This program is unique in that it is funded solely from fiscal disparities rather than partly from fiscal disparities and partly from regular property tax levies. The simulation assumes that this levy would not exist in the absence of fiscal disparities, leading to an overall tax reduction of $5 million. Finally, state aid to school districts for capital improvement projects increases by $2 million, causing school levies to be $2 million lower without fiscal disparities. Regional Impacts The TIF phenomenon also leads to another unlikely result, namely that because the metro area as a whole essentially “loses” tax base when the fiscal disparities program is eliminated, metro area cities are in the aggregate slightly needier, as measured by the LGA formula. This result causes LGA to be higher by $9.1 million in the metro area and $9.1 million lower in greater Minnesota, with corresponding effects on levies. This phenomenon also occurs within the new county aid program knows as “County Program Aid,” but here the impact only moves about $400,000 in aid from greater Minnesota to the metro area. House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 24 Table 3: Factors Contributing to Tax Impacts if Fiscal Disparities were Eliminated (in millions) TIF effect Metro livable communities levy School capital improvement aid effect LGA effect County aid/levy effect Miscellaneous effects Total tax change Metro $16.6 -5.0 -2.0 -9.1 -0.4 -0.2 $-0.1 Greater Minnesota $0.7 0 0 9.1 0.4 0.1 $10.3 Statewide $17.4 -5.0 -2.0 0 0 -0.2 $10.2 Overall Impact by Type of Property Probably the most interesting result is that for the metro area as a whole, taxes on C/I property (including public utilities) were reduced by $52.5 million, or 3.7 percent. Average tax burdens on other property types increased from 2 percent to 4 percent; the average increase for residential homesteads was 2.6 percent. In the abstract, this result would not be expected because “moving” C/I tax base around from one jurisdiction to another would not be expected to lower the tax on C/I property in the aggregate, nor would it increase taxes on other classes in the aggregate. There are three factors that contribute to the reduced overall tax burden on C/I property: • The first factor is that in the aggregate, the C/I tax base is redistributed from municipalities where tax rates are lower to municipalities where tax rates are higher, so that the average rate of tax levied against C/I property would decrease without fiscal disparities. • The second factor arises from how the market value tax enters into the equation. For the most part, the market value tax exists outside the realm of fiscal disparities—it is paid by the property physically located in the district levying the tax. However, in 1993 a provision was enacted calling for the tax rates used in fiscal disparities calculations to include the market value tax. This increases the burden on C/I property, since C/I property pays its full share of the market value tax in the jurisdiction where the property is located, but then essentially pays a little more when the levies are also imposed on the fiscal disparities pool. • Third, there is the explicit $5 million levy for the Metropolitan Council’s tax base revitalization account that is borne exclusively by C/I property through the areawide pool. The simulation assumes that this levy would not exist in the absence of fiscal disparities. House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 25 Countywide Average Impacts On a countywide average basis, homestead taxes increase from 3 percent to 10 percent in the counties that are net recipients of fiscal disparities, and are reduced by only 0.3 percent in Hennepin County, the only net contributor (see Table 4). C/I taxes, on the other hand, would be reduced from 1 percent to 8 percent in every county if fiscal disparities were eliminated, even in those counties that are large net recipients. The best example is Anoka County, which sees an average tax rate increase of 9.3 percent and an average homestead tax increase of 9.5 percent, yet sees a 3.1 percent overall reduction in C/I taxes. This result occurs because even though city and county tax rates are increased due to the lost tax base, the areawide tax rate is considerably higher than the local rate, and the areawide rate accounts for roughly one-third of the local portion of the C/I tax. Table 4: Countywide Tax Impacts if Fiscal Disparities were Eliminated (Taxes Payable in 2004) County Anoka Carver Dakota Hennepin Ramsey Scott Washington Average Total Local Tax Rate9 With Fiscal Without Fiscal Tax Rate Disparities Disparities Change 112.5 121.8 9.3 132.2 136.8 4.6 111.5 114.5 3.0 134.1 133.8 (0.3) 127.6 133.6 6.0 118.6 122.0 3.4 112.4 117.4 5.0 Average Tax Change if Fiscal Disparities Eliminated Residential Commercial/ Homestead Industrial 9.5 % (3.1)% 3.6 (1.5) 3.4 (8.2) (0.3) (3.7) 5.2 (1.2) 3.6 (6.3) 4.5 (3.8) The results for property types other than homesteads and C/I (primarily rental housing) are similar to those for homesteads, but generally slightly smaller in magnitude. The percentage effect on homesteads is slightly more pronounced because the market value homestead credit does not change when the gross tax changes, and also because the elimination of fiscal disparities would increase the market value tax relative to the net tax capacity tax, and the market value tax falls more heavily on homes than does the net tax capacity tax. 9 In this table and in other tables throughout the report portraying total tax rates, the market value tax rate has been converted and added to the net tax capacity tax rate to arrive at a single tax rate for each municipality. The conversion is accurate for residential property valued under $500,000. For other types of property, a different conversion rate would be more accurate. House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 26 Effects on Individual Cities Effects are more pronounced when smaller geographic areas are considered. Table 5 shows what the impact would be in Minneapolis and St. Paul, and in the six cities (over 10,000 population) with the greatest impact, in either direction. Homeowners in cities that are major recipients under fiscal disparities would face tax increases between 10 percent and 13 percent; homeowners in cities that are major contributors would see reductions of 2.5 percent to 5 percent. Consistent with the countywide results, C/I properties would face lower taxes in most places, varying from 2 percent to 5 percent in net recipient cities, and from 5 percent to 10 percent in net contributor cities. C/I taxes would actually be higher in municipalities that are currently net recipients, and that would have a relatively high tax rate without fiscal disparities. This effect can be seen for the cities of Minneapolis, St. Paul, and South St. Paul in Table 5. Table 5: Tax Impacts for Selected Cities if Fiscal Disparities were Eliminated (Taxes Payable in 2004) Average Tax Change if Fiscal Disparities Eliminated Average Total Local Tax Rate With Fiscal Disparities Without Fiscal Disparities 158.6 130.4 161.8 140.3 3.2 9.9 Andover South St. Paul Coon Rapids East Bethel Ramsey Anoka 105.5 127.8 109.9 100.3 117.3 121.7 118.2 139.4 120.9 110.8 127.8 132.2 12.7 11.6 11.0 10.5 10.5 10.5 13.1 10.5 11.6 12.0 10.0 9.9 (2.1) 2.7 (2.9) (4.8) (2.0) (0.8) Six largest net contributors: Bloomington Golden Valley Minnetonka Eden Prairie Plymouth Edina 122.4 145.0 125.6 121.1 119.4 113.3 116.2 139.6 120.8 116.5 116.4 110.9 (6.2) (5.4) (4.8) (4.6) (3.0) (2.6) (5.5) (3.2) (3.8) (4.0) (2.4) (2.7) (9.0) (5.3) (9.5) (9.6) (9.7) (9.4) City Minneapolis St. Paul Tax Rate Change Residential Homestead 2.2 % 8.8 Commercial/ Industrial 2.6 % 2.7 Six largest net recipients: House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 27 It is common to assume that a municipality’s net fiscal disparities distribution tax capacity (distribution minus contribution) determines whether or not it is a “winner” or “loser” under fiscal disparities, and by how much. Looking at those net tax capacity changes alone can be misleading. Some cities that lose tax base through fiscal disparities still benefit when total property taxes are considered, and vice-versa. This effect occurs when a city is located in a county whose net tax base impact is opposite that of the city, i.e., the city is a winner and the county is a loser or vice-versa. (Occasionally the school district effect can cause this result as well.) The county effect is just as important as the city effect in terms of tax burdens on individual property owners. An example of this phenomenon is the city of Fridley (not shown in table), which is a net contributor, yet its homeowners’ tax burdens would be 6.2 percent higher, on average, without fiscal disparities. Tax Rate Equalization One interesting question to ask is whether the fiscal disparities program narrows the range of tax rates between communities in the metro area. Using the standard deviation as a measure of the range of distribution, the table below shows that the range of tax rates is not really impacted by fiscal disparities. When looking at all cities there is a slightly lower standard deviation with fiscal disparities, but that difference disappears when the universe is limited to cities over 2,500. [Note: The tables in this tax base equalization section of the report show data for the “without fiscal disparities” scenario first, while data for the “with fiscal disparities” scenario (current law) is shown second. This is opposite from the way the two scenarios are depicted in the other sections of the report. The results are shown this way to more clearly show the direct impact that the fiscal disparities program has on the property tax system absent the program.] Table 6: Total Tax Rate Comparison under Fiscal Disparities (Taxes Payable in 2004) Without Fiscal Disparities All cities* Cities over 2,500 population Cities over 5,000 population Cities over 10,000 population Number of cities 137 97 76 58 Mean 126.69% 127.25 127.78 128.83 Standard deviation 19.36% 15.92 15.52 15.70 With Fiscal Disparities (Current Law) Mean Standard deviation 123.07% 18.46% 123.51 15.75 123.81 15.63 124.81 15.62 * Excluding the cities of Hilltop and Landfall, whose tax rates are well outside of the normal range due to high concentrations of manufactured homes in their respective tax bases. House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 28 Table 7 shows the eight cities (over 10,000 population) with the highest and lowest tax rates without fiscal disparities, and what happens to their tax rates when fiscal disparities enter the picture. Somewhat surprisingly, the fiscal disparities program actually causes tax rates to be lower than they otherwise would be in five of the eight low-tax-rate cities shown in Table 7. Things are more as one would expect at the high end of the range, where seven of the eight hightax-rate cities have lower tax rates with fiscal disparities than they would without, although the differences are fairly modest. Table 7: Tax Rate Impacts for Selected Cities under Fiscal Disparities (Taxes Payable in 2004) Without Fiscal Disparities Cities with lowest tax rates without fiscal disparities: Mendota Heights Eagan Forest Lake West St. Paul Ham Lake Shakopee East Bethel Edina Cities with highest tax rates without fiscal disparities: Brooklyn Center Minneapolis New Hope Robbinsdale Crystal Hopkins Chanhassen Brooklyn Park With Fiscal Disparities (Current Law) Rate Change due to Fiscal Disparities 89.6 103.4 104.0 104.2 108.3 109.6 110.8 110.9 89.8 102.9 100.4 102.7 98.5 110.6 100.3 113.5 0.2 (0.5) (3.6) (1.5) (9.8) 0.9 (10.5) 2.7 168.7 161.8 158.1 154.1 151.5 151.2 147.8 146.8 162.7 158.6 154.8 149.0 147.1 152.2 144.2 141.7 (6.0) (3.2) (3.3) (5.1) (4.4) 1.0 (3.6) (5.0) These results raise some questions about one of the presumed purposes of the program, which is to reduce the range of tax rate disparities across the area. It suggests that some communities that the fiscal disparities program seems to regard as “needy” would have low tax rates even without fiscal disparities. For instance, Ham Lake would have a relatively low tax rate of 108.3 percent without fiscal disparities; its rate with fiscal disparities is an incredibly low 98.5 percent. That may call into question whether redistribution of tax base is necessary to keep tax rates from climbing in low-tax-base areas, and from dropping ever lower in high-tax-base places. House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 29 Local Government Aid Effect One reason that fiscal disparities may not have as large a tax impact as one would expect is the mitigating effect of the LGA formula. Under the new formula adopted in 2001, LGA amounts are now sensitive to the size of a city’s tax base. So cities that would lose tax base if fiscal disparities were eliminated receive more LGA, which can be almost enough to offset the taxbase loss. Conversely, a city that gains tax base through fiscal disparities elimination receives less LGA, thus offsetting somewhat the tax-base gain. The table below shows a few examples of this phenomenon. Table 8: LGA Offset of Fiscal Disparities Effect (in thousands) St. Paul Richfield Columbia Heights Cottage Grove Minneapolis Fridley Tax Revenue Gain/Loss if Fiscal Disparities Eliminated $(8,328) (982) (771) (1,002) LGA Gain/Loss if Fiscal Disparities Eliminated $5,901 680 523 0 Net Revenue Effect if Fiscal Disparities Eliminated $(2,427) (302) (247) (1,002) (1,728) (2,169) (3,897) 226 (222) 4 In the table, the second column is derived by multiplying the net fiscal disparities tax base gain or loss by the city tax rate. In the first three cities shown, the LGA gain offsets a significant portion of the revenue loss. The fourth case, Cottage Grove, has a significant revenue loss of over a million dollars, yet there is no offsetting LGA increase because Cottage Grove has enough tax base to meet its revenue “need,” as measured by the LGA formula, even without fiscal disparities. The city of Minneapolis demonstrates yet another outcome. Although the city would lose tax revenue because it is a net recipient of fiscal disparities tax base, it would actually get less LGA if the program was eliminated because of some other factors at work in the LGA formula.10 Finally, Fridley is the general rule at work in the opposite situation—here a city that gains tax base through elimination of fiscal disparities loses almost enough LGA to offset its revenue gain. It should be noted that most cities that gain tax base under fiscal disparities elimination do not lose LGA to offset the gain, because they receive little or no LGA under current law. 10 It is the same reason that greater Minnesota cities that do not participate in fiscal disparities still lose LGA under this simulation. See page 23. House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 30 Changes in the Fiscal Disparities Program There have been few changes in the fiscal disparities program since its implementation in 1975. This section summarizes the two most significant changes made and also describes a proposed change passed by the 1995 Legislature but vetoed by the governor. Mall of America Surcharge (1986) In 1986, the legislature made a significant change to the fiscal disparities program for development of the Metropolitan Stadium site in Bloomington (now the location of the Mall of America). Laws 1986, chapter 391, provides that for property taxes payable in 1988 through 1999, the city of Bloomington annually receives an amount from the pool in addition to its “normal” fiscal disparity distribution. The supplemental amount is equal to the amount of interest paid on the bonds that were sold by the city for highway improvements for the mall site. The law requires Bloomington to repay the supplemental distributions over the ten-year period from 2006 to 2015.11 Approximately one-tenth of the amount will be repaid in each of those years. The repayments will be achieved by artificially increasing Bloomington’s contribution value by converting the repayment amount into additional contribution value. Livable Communities Fund Surcharge (1995) Laws 1995, chapter 255, article 2, sections 11 to 13, provide that the Metropolitan Council will annually receive a special distribution from the fiscal disparities areawide tax base to finance the tax-base revitalization account within the metropolitan livable communities fund, which is available to municipalities that elect to participate in the local housing incentives program established under the law. This annual “surcharge” on the areawide pool is equal to the amount by which the current level of the Bloomington highway bond interest distribution (see above) is less than the payable 1988 distribution, up to $5 million. This surcharge was $4.3 million in 1996, and is $5 million in each year after that. A Vetoed Provision: Including Certain Residential Property in the Areawide Tax Base (1995) A proposal to expand tax-base sharing was passed in 1995 by the House and Senate but vetoed by the governor. H.F. 431 (sponsored by Rep. Myron Orfield) would have captured the growth in value of all residential homestead property over $200,000 market value and put it into the areawide tax base to be shared by all municipalities in the region. Under the current fiscal disparities law, the areawide tax base is composed solely of C/I value. 11 The 1986 law provided that the repayments would be made from 2000 to 2009, but Laws 1995, chapter 255, article 2, section 10, delayed the start of the repayment period by six years. House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 31 Policy Issues Public debate over fiscal disparities covers many issues: should the program continue to exist; should the areawide tax base be used to fund other programs; should other types of property be added to the areawide tax base; and should the program be extended beyond the seven-county area? There are several narrower issues—changes best described as fine-tuning—that some argue would make the program operate more as originally intended. This section discusses four of these ideas. 1. Adjusting for Assessment Levels In property tax terminology, assessment level refers to the deviation between the assessor’s estimate of market value and “true” market value. Because the size of a jurisdiction’s tax base is a factor in the distribution of aid under state aid programs, assessors’ estimates of market value are usually first “equalized” for differences among assessment levels. Each jurisdiction’s tax base is divided by its sales ratio, which is a statistically determined measure of the assessment level in the jurisdiction. The fiscal disparities program does not adjust for assessment level. The contribution from each taxing jurisdiction is computed using assessors’ estimated values. Therefore, a jurisdiction with a high sales ratio contributes more tax base to the areawide pool than a jurisdiction with a lower sales ratio. This creates an apparent inequity and discourages assessors from raising assessment levels in their jurisdictions. Whether to adjust for assessment levels is complicated by some administrative issues. First, there are multiple measures of assessment levels to choose from. Each has some methodological shortcomings. Second, there would be questions on how to adjust the 1971 base values. Third, there would be questions about which year’s sales ratios to use since current ones aren’t available and having to use older data would then be another source of controversy. 2. Eliminating the Exemptions Two kinds of property are exempt from fiscal disparities contributions: (a) property in certain TIF districts; and (b) property located at the Minneapolis-St. Paul International Airport. (a) Pre-1979 Tax Increment Financing Districts TIF is a public development financing mechanism that uses the increased property taxes resulting from a development’s increased value to pay for a portion of its development costs. In general, the value of C/I property in TIF districts must be included in a municipality’s total C/I House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 32 value to determine its fiscal disparities contribution. When each TIF district is created, municipalities elect either (a) to limit the tax increment to taxes derived from value which is not contributed to fiscal disparities, or (b) to allow the TIF district to receive all taxes derived from the property, thereby requiring that a higher percentage of C/I value in the rest of the municipality be contributed. However, property located in Housing and Redevelopment Authority (HRA) districts established before August 1, 1979, is disregarded in computing fiscal disparities contributions regardless of when the actual development occurs. Some argue this exemption is unfair because it allows some municipalities to experience C/I growth without any portion being contributed to the areawide pool. (b) Minneapolis-St. Paul International Airport Airport property is taxed by the Metropolitan Airports Commission (MAC), Hennepin County, and various special taxing districts. The airport has always been excluded from participation in fiscal disparities. Some question its exclusion because its roughly $4.8 million in C/I net tax capacity would increase the pool by nearly $2 million. While airport property would seem to be an appropriate tax base for regional sharing, its unique circumstances make its inclusion in fiscal disparities problematic. First, its tax rate is not comparable to that of other jurisdictions because the property pays no school district or municipal taxes. Second, under current law, the airport would receive no distribution from the pool because it has no population. If the airport was required to contribute to the pool, it would not get anything back, unless some alternative formula for determining its distribution were established. 3. Eliminating the 1971 Base Value Subtraction Some argue the subtraction of 1971 base C/I value before determining the fiscal disparities contribution itself constitutes an unfair exemption. The charge of unfairness stems from the notion that the fiscal disparities program discriminates against those areas that have experienced most of their development since 1971, compared to those largely developed before 1971. Apparently, this subtraction was a legislative compromise to allow jurisdictions to retain the value they had before the program began. Thirty-four years after initial enactment, some ask if this feature of the program is still appropriate. 4. Need-based Distribution Formula The fiscal disparities distribution formula is based on a single factor: each municipality’s aggregate property value per capita compared to the areawide average property value per capita. Some people regard this formula as “need-based,” since it looks at a municipality’s relative need for tax base to make it more equal to that of other jurisdictions. Others have argued that the distribution formula should try to measure relative needs between jurisdictions more House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 33 thoughtfully than simply looking at property wealth. For instance, they would argue that even though the cites of Minneapolis and Farmington have very similar property value per capita, their spending needs per capita are quite dissimilar. Some have argued for inclusion of demographic factors such as crime rates, poverty rates, age of a municipality’s housing stock, and so forth, in the distribution formula. Proponents of adopting a need-based distribution formula face an uphill battle, since they must first persuade legislators that a need-based formula is a good idea, and then achieve consensus on what the formula should be. Since the fiscal disparities program affects all types of local taxing jurisdictions, from counties to cities to school districts, a further complication is that need might be defined differently for each type of jurisdiction. For instance, crime rates may be a relevant factor for municipal distributions, but are probably not relevant in the distribution of school district tax base. It actually is possible to design different distribution formulas for each level of taxing jurisdiction, but doing so would increase the complexity of the program. House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 35 Iron Range Fiscal Disparities Program In 1996, a new fiscal disparities program was established on the Iron Range in northern Minnesota. The boundaries for the new program are known as the “taconite relief area” (see map, below). Mechanically, the program was set up to work exactly the same way as the program in the metropolitan area, except using 1995 as a base year. The first year of implementation was for taxes payable in 1998. The program is codified in Minnesota Statutes, chapter 276A. Figure E: Boundaries of Iron Range Fiscal Disparities Koochiching St. Louis Cook Ely Lake Grand Marais Chisholm Virginia Itasca Hibbing Eveleth Grand Rapids Two H arbors Duluth Aitkin Aitkin Crow Wing House Research Graphics House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 36 Why Iron Range Tax-Base Sharing? Unlike the metropolitan area program, there is no purpose section in the law governing the Iron Range program, nor was there a “blue ribbon commission” that spelled out the need for the program, so it is somewhat speculative to provide a rationale for sharing C/I tax base within this area. While some of the conditions are similar to those in the metropolitan area, there are more differences than similarities. Differences Between Metropolitan Area and Iron Range Area From a regional growth and development perspective, the situation on the Iron Range is immensely different from the metro area in two ways. • First, the geographic area encompassed does not constitute an integrated regional economic sphere. In fact, the area is not even contiguous, meaning that there is territory between parts of the area that is not a part of the area. And the area excludes the city of Duluth, which is the largest city in northeast Minnesota. • Second, there is no governing agency with authority to plan and implement regional systems such as sewers, transportation, and housing, as there is in the metropolitan area, making it harder to rationalize the program on a regional planning basis. The Arrowhead Regional Development Commission (ARDC) has some responsibility for regional planning, but its planning area encompasses some areas that are outside the taconite tax relief area (most notably, the city of Duluth and its suburbs), and the taconite area encompasses some area that is not within the ARDC’s purview (Aitkin and Crow Wing counties). Apparent Rationale The clearest rationale for sharing tax base within the taconite tax relief area is that there is already some tax sharing occurring within this area in the distribution of taconite tax revenues. The taconite industry is not subject to ad valorem taxation. Rather, taconite mines and processing plants are subject to a production tax based on the tonnage produced. These revenues are then apportioned through a number of different taconite aid programs, each with its own distribution formula. There is little or no relationship between where the taconite is produced and where the revenues are distributed. Because of the sharing of taconite revenues within the area, proponents of Iron Range tax-base sharing argued that it was also appropriate to share C/I property tax revenues. Underlying the proponents’ advocacy was the feeling that C/I development was flourishing in some portions of the region that had little or no taconite activity, and it was fundamentally unfair that these areas got to share in taconite revenues but did not have to share their C/I “wealth.” Conversely, many of the areas most heavily impacted by taconite mining had become fairly stagnant in terms of C/I growth, causing them to look enviously upon their neighbors getting both taconite and C/I revenues. House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 37 Similarities Between Metropolitan Area and Iron Range Some of the purposes underlying the metro area program described on pages 5 and 6 also apply to the Iron Range. The possibility of low-tax base, high-tax rate areas having difficulty attracting C/I development, leading to ever higher local tax rates, applies to both programs. The generally desirable goal of tax-base sharing reducing competition between municipalities for C/I development also applies to both areas equally. The argument that tax-base sharing may make jurisdictions more willing to accept low-tax-yield regional facilities such as parks may also hold true on the Iron Range, even in the absence of strongly coordinated regional planning. Growth in Program Because the program on the Iron Range is so new, not much can be said about growth to date. However, because of the way the program is structured, rapid growth can be expected in the first few years of the program (the areawide tax in the metro program grew by at least 18 percent each year in all but one of the first 11 years of the program’s existence). The rapid growth results from a growing base with a fixed subtraction. The hypothetical example below shows how relatively modest growth in C/I property value of about 5 percent per year results in high growth rates in the size of the areawide pool (33 percent to 100 percent). The example assumes: • base year C/I net tax capacity of $20,000 • C/I net tax capacity increases by $1,000 per year Base year First year Second year Third year Fourth year C/I Net Tax Capacity (NTC) Growth in C/I NTC over base Areawide pool = 40% of growth Pct. change in areawide pool $20,000 21,000 22,000 23,000 24,000 -$1,000 2,000 3,000 4,000 -$400 800 1,200 1,600 --100% 50% 33% House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 38 The Iron Range program first took effect for taxes payable in 1998. Table 9 below shows the growth in the areawide tax base in the first seven years. Table 9: Growth of Areawide Iron Range Tax Base Total Tax Base in Areawide Pool Total Taconite Area C/I Tax Base (thousands) (thousands) 1998 1999 2000 2001 $441 449 853 1,191 $34,961 31,774 32,023 35,504 2002 2003 2004 877 1,413 1,898 22,194 22.171 24,026 Taxes Payable Year % of Total C/I Tax Base in Areawide Pool Total Taconite Area Tax Base (thousands) % of Total Tax Base in Pool 1.26% 1.41 2.66 3.35 $98,078 96,984 100,694 115,355 0.45% 0.46 0.85 1.03 3.95 6.37 7.90 95,020 104,214 117,169 0.92 1.36 1.62 Table 10 shows the growth in the areawide tax and tax rate over the first seven years of the program. Table 10: Iron Range Areawide Tax Rate and Growth in Areawide Tax Payable Year Areawide Tax Rate Total Areawide Tax % Amount Change (thousands) 1998 1999 2000 2001 143.258 150.219 162.710 157.974 $631 675 1,388 1,849 — 6.9% 105.6 33.2 2002 2003 2004 206.418 157.901 161.856 1,824 2,226 3,026 -1.6 22.0 35.9 House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 39 Figure F: Iron Range Contribution and Distribution Net Tax Capacity (NTC) by County12 for Pay 2000 and Pay 2004 2000 Contribution NTC $853,000 Aitkin - 1.5% Cook - 4.2% Crow Wing - 6.3% St. Louis 48.7% 2000 Distribution NTC $853,000 St. Louis 64.5% Aitkin - 3.0% Cook - 0.9% Crow Wing - 4.1% Itasca 21.6% Itasca 19.8% Lake - 6.0% Lake 19.4% 2004 Contribution NTC $1.9 million Aitkin - 3.8% Cook - 5.4% St. Louis 40.8% 2004 Distribution NTC $1.9 million St. Louis 62.5% Aitkin - 3.4% Cook - 1.3% Crow Wing - 4.6% Crow Wing 8.6% Itasca 21.6% Itasca 28.8% Lake - 6.6% Lake 12.6% House Research Graphics 12 Koochiching County contribution and distribution NTCs are less than 0.1 percent of the total. House Research Department Minnesota's Fiscal Disparities Programs January 2005 Page 40 Appendix A: Pictorial Illustration of Fiscal Disparities 1. Actual location of properties CITY A CITY C CITY B House Research Department Minneosota's Fiscal Disparities Programs January 2005 Page 41 2. After fiscal disparities contributions CITY A CITY B CITY C AREAWIDE POOL January 2005 Page 42 House Research Department Minnesota's Fiscal Disparities Programs 3. After fiscal disparities distributions CITY A CITY C CITY B House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 43 Appendix B: Fiscal Disparities Calculations for a Hypothetical City Without the One-Year Lag (Payable 2004) Assumptions for City of Minnesota 2002 Population 2002 Equalized Market Value 2002 Fiscal Capacity* 2002 Areawide Average Fiscal Capacity** 20,000 $500,000,000 $25,000 $30,000 2003 Payable 2004 Certified Levy $8,000,000 1971 Commercial-Industrial Net Tax Capacity*** $2,500,000 2002 Payable 2003 Net Tax Capacity Commercial-Industrial*** Residential All Other $8,800,000 12,000,000 +1,400,000 Total $22,200,000 * Fiscal Capacity = Equalized market value of all property in the municipality Population of municipality ** Average Fiscal Capacity = Total equalized market value of all property in all municipalities Total population of the metropolitan area *** Commercial-industrial net tax capacity includes the tax capacity of public utility property. Since net tax capacity was not in use in the 1971 base year, it has been estimated using available market value records. The 1971 base value is adjusted each year that changes are made in C/I class rates. House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 44 Step 1: Determine the City’s Contribution to Areawide Tax Base 2003 Pay 2004 Commercial-Industrial Net Tax Capacity Less 1971 Commercial-Industrial Net Tax Capacity $8,800,000 -2,500,000 Net Growth over 1971 Base Value Contribution Rate $6,300,000 x 40% City’s Contribution to Areawide Tax Base $2,520,000 Step 2: Determine the Areawide Tax Base Net Tax Capacity Contributed from City of Minnesota (step 1) $2,520,000 Net Tax Capacity Contributed from All Other Cities and Towns in the Metro Area $297,480,000 Total Areawide Tax Base $300,000,000 Step 3: Distribution Index for City of Minnesota Population of City/Town x Average Fiscal Capacity City/Town Fiscal Capacity = Distribution Index 20,000 x $30,000 $25,000 = 24,000 Step 4: Sum of Distribution Indices for All Municipalities City of Minnesota (step 3) All other Metropolitan Cities and Towns Index Percent 24,000 1,976,000 1.2% 98.8% 2,000,000 100.00% The city of Minnesota’s final distribution index is 1.2 percent of 2,000,000; therefore, it receives 1.2 percent of the areawide tax base. House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 45 Step 5: City of Minnesota’s Distribution Net Tax Capacity The city of Minnesota’s distribution net tax capacity is equal to the share determined in step 4 multiplied by the areawide tax base determined in step 2. 1.2% x $300,000,000 = $3,600,000 This distribution net tax capacity is also taxable by other taxing jurisdictions (i.e., county, school district, special taxing districts) overlapping the city. Step 6: Determine the City of Minnesota’s Tax Base 2003 Payable 2004 Total Net Tax Capacity for City of Minnesota $22,200,000 Plus Payable 2004 Distribution from the Areawide Tax Base (step 5) 3,600,000 Less Payable 2004 Contribution to the Areawide Tax Base (step 1) -2,520,000 Total Taxable Net Tax Capacity of City $23,280,000 Step 7: County Auditor Calculates the City of Minnesota’s Tax Rate 2003 Payable 2004 Certified Levy Total Taxable Net Tax Capacity (step 6) $8,000,000 $23,280,000 City Tax Rate 0.3436 (34.36% of tax capacity) The city’s tax rate of 0.3436 is added to the tax rates for the appropriate county, school district, and special taxing districts. The total tax rate is applied to all taxable property in the city of Minnesota except the fiscal disparities portion of C/I property (see step 11). Step 8: Determine Areawide Portion of City of Minnesota’s Levy (also called the city’s distribution levy) Distribution Tax Capacity x 2003 Payable 2004 City Tax Rate = Areawide Portion of Levy $3,600,000 x 0.3436 (34.36% of net tax capacity) = $1,237,000 House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 46 Step 9: Determine the Areawide Tax Levy The auditor of the county in which the city of Minnesota is located certifies to the administrative auditor an amount of $1,237,000 as the areawide portion of the city’s levy. This is also done for all other governmental units located within the area. City of Minnesota’s Distribution Levy (step 8) Distribution Levies from All Other Governmental Units in the Metro Area Total Areawide Levy $1,237,000 398,763,000 $400,000,000 Step 10: Determine the Areawide Tax Rate The administrative auditor computes the areawide tax rate as follows: Total Areawide Levy (step 9) Total Areawide Tax Base (step 2) x $400,000,000 $300,000,000 = 1.333 (133.3% of net tax capacity) This tax rate is applied to the contribution net tax capacity of all municipalities in the metro area. The areawide tax rate is a composite rate which provides revenues for municipalities, school districts, county governments, and special taxing districts. Step 11: Property Tax Computation on C/I Parcel The fiscal disparities contribution net tax capacity of $2,520,000 is equal to 28.6 percent of the total assessment district’s payable 2004 C/I net tax capacity of $8,800,000. Therefore, 28.6 percent of the net tax capacity of each parcel of C/I property in the city is subject to the areawide tax. The remaining 71.4 percent of the net tax capacity of each C/I parcel is subject to the local tax rate. The payable 2004 property tax computation for a parcel of C/I property located in the city of Minnesota with a market value of $300,000 (net tax capacity of $4,000) is shown on the following page. House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 47 Areawide Portion of Tax (Contribution Tax) 28.6% of $5,250 net tax capacity of the C/I parcel is taxed at the areawide rate of 1.333. $5,250 x .286 x 1.333 = $2,001 Local Portion of Tax Remaining 71.4% of net tax capacity of the C/I parcel is subject to local tax rates of all jurisdictions where the parcel of property is located. Local Tax Rates City of Minnesota 0.3436 School District A 0.2562 County A 0.4332 Special Taxing District 0.0740 Total Local Tax Rate 1.1070 0.714 x $5,250 x 1.1070 = $4,150 Total Payable 2004 Tax of C/I Parcel Areawide Portion of Tax Local Portion of Tax State Property Tax ($5,250 x 0.541) $2,001 4,150 2,840 Total Tax $8,991 Step 12: Property Tax Settlement of the Areawide Levy The county treasurer collects the $8,991 from the taxpayer of the C/I parcel in step 11 and the C/I tax from all other taxpayers with C/I property within the county. The treasurer compares the sum of the total amount of the contribution levies (e.g., areawide portions of the tax) from all C/I parcels within the county to the sum of the total amount of the distribution levies which all of the taxing districts within the county are entitled to receive from the areawide pool. If the total contribution levy exceeds the total distribution levy, the county treasurer will remit a check to the administrative auditor for the difference (i.e., amount owed). If the total contribution levy is less than the distribution levy, the county treasurer will receive a check from the administrative auditor. House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 48 Appendix C: Growth of Metro Areawide Tax Base Growth of Metro Areawide Tax Base Taxes Payable Year 1975-1988: Assessed Value* 1975 1980 1985 1990-2004: Net Tax Capacity 1990 1991 1992 1993 1994 Total Tax Base in Areawide Pool (millions) Total Metro C/I Tax Base (millions) % of Total C/I Tax Base in Areawide Pool Total Metro Tax Base (millions) % of Total Tax Base in Pool (A) (B) (C) = (A)/(B) (D) (E) = (A)/(D) $137 328 1,264 $2,044 2,930 5,394 6.7 11.2 23.4 $6,403 9,363 15,710 2.1 3.5 8.0 265 291 293 289 277 1,019 1,052 1,007 984 923 26.0 27.7 29.1 29.4 30.0 2,097 2,185 2,103 2,039 2,004 12.6 13.3 13.9 14.2 13.8 1995 1996 1997 1998 1999 241 260 275 264 253 917 941 1,015 941 917 26.3 27.6 27.1 28.1 27.6 2,065 2,184 2,351 2,286 2,273 11.7 11.9 11.7 11.5 11.1 2000 2001 2002** 2003 2004 278 314 214 232 252 980 1,094 710 757 781 28.4 28.7 30.1 30.6 32.3 2,439 2,745 2,130 2,337 2,569 11.4 11.4 10.0 9.9 9.8 * ** The property tax system was restructured in 1988; 1989 was a transition year between the old and new system. Under the old system, tax base was assessed value. Under the current system, tax base is net tax capacity. The fact that net tax capacities are significantly smaller than assessed values does not affect the overall level of tax burdens. Because of property tax reform enacted in 2001, net tax capacity data for payable 2002 and thereafter is not necessarily comparable to 1990-2001. House Research Department Minnesota’s Fiscal Disparities Programs January 2005 Page 49 Appendix D: Metro Areawide Tax Rate and Growth in Areawide Tax Metro Areawide Tax Rate and Growth in Areawide Tax Payable Year 1975 1980 1985 Areawide Tax Rate* 121.490 110.552 108.743 Total Areawide Tax Amount (in 000’s) % Change $16,666 NA 36,266 ** 137,396 ** 1990 1991 1992 1993 1994 104.578 104.970 116.127 123.488 133.229 277,106 304,946 340,004 356,998 369,072 ** 10.0 11.5 5.0 3.3 1995 1996 1997 1998 1999 134.799 141.441 139.376 155.082 157.373 325,284 367,122 383,388 409,697 397,438 -11.9 12.9 4.4 6.9 -3.0 2000 2001 2002 2003 2004 146.134 137.987 156.497 132.885 137.107 406,882 433,572 335,329 307,915 345,835 2.4 6.6 -22.7 -8.2 12.3 * ** Areawide tax rates prior to 1990 are expressed in mills. Beginning with 1990, tax rates are expressed as percentages of net tax capacity. Not computed since the table contains five-year time periods through 1990. For more information about fiscal disparities, visit the property taxes area of our web site, www.house.mn/hrd/issinfo/tx_prop.htm. To see a simulation that shows how property tax burdens would change in each city and town in the metro area if the fiscal disparities program were eliminated, go to www.house.mn/hrd/issinfo/csim4B1.pdf. (Note: This is a 1,158 KB PDF file; it is 189 pages long).