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March 2001 FISCAL FOCUS Vol.XXVII,No.2 The real reform of the Governor's plan is seen at the local .7(6. Traffic-intensive properties could pay optional new transpor- level. When the statewide property tax is excluded, the C/I to tation utility fee. Neither this provision or number 5 is likely omestead effective tax ratio falls to 1.82 in 2001. This means to go very far,as numerous non-profit agencies testified before that, on average, city or county property taxes on business prop- tax committees how severely this will curtail their services to erty will be only 1.82 times higher than taxes on residential prop constituents. MTA originally proposed a similar idea but as a erty of the same value,located in the same city or county,instead 1% of tax capacity fee on non-profit owned property for city services(not specifically transportation). of 3 times as high. The proposed relationship is below the na- 7. Pollution control exemption extended to include properties tional average found in our latest 50-state comparison study and used to abate or control air, water, or land pollution. This lower than any seen in Minnesota in recent decades. can be a very significant tax break for industries required to The rest of this article describes the main points of the Gov- install this equipment,such as the utility industry.The taxation error's plan and presents additional fiscal information about its of these mandated purchases has been a sore point for these industries. affects on taxpayers and classes of property. 8. Property tax classification rates significantly compressed, • new market value credit introduced for homestead proper- The Gn,Lrnnr�c pjnn ties. State classification rates are compressed more than many Asexpected, including the business community, which has been a review, we present the 14 features of the Governor's working on property tax reform for years.See Table 3 on page plan we included in our last newsletter, with more detailed corn- 4 for a complete look at the new classification rates,and Table ments in most cases. 4 below that for an example of how to calculate a home- 1. Full state takeover of basic education expenses. The Gover- owner's property tax liability. nor's plan replaces the mandated general education levy 9. Resealing of class rates to bring Minnesota property tax (currently set at 32.38% of tax capacity) with a direct state rates on comparable basis to other states. The Governor's appropriation for the entire $3,964 per pupil unit that is guar- plan replaces the terms"tax capacity"and"tax capacity rates" anteed to school districts levying the state's full general educa- with more standard words such as"assessed values"and"mill tion rate. As we said in our last newsletter:"by funding a ma- rates". jor state property tax mandate,it makes remaining property tax '` 10. State aid to cities ("Local Government Aid" or "LGA") is bills more closely related to the cost of locally determined ser- eliminated, and replaced with a larger need-capacity pro- vices to property." gram. Other existing general aid to all taxing jurisdictions 2. New statewide property tax on "non-voting" properties to (HACA) is redirected to pay for schools and county man- help pay for school levy takeover. A new statewide levy of dates. Four new city aid formulas distribute $470 million in ill $470 million will fall on commercial and industrial property new LGA,an increase of$48 million above current law.They "(class 3),resort and cabin properties(4c),golf courses(4c(2)), provide aid-based on the difference between a new standard of and un-mined iron ore (5(1)). Concerns about singling out "need" for each group and by the amount of property tax reve- business property for K-12 funding increases have been some- nue per capita that would be raised by a standard levy of 17% what allayed by the fact that, though the state levy will be in- of their tax capacity. If 17% of tax capacity falls short of the creased annually for inflation, further increases will require a need amount the state fills in the gap with LGA appropria- super-majority(three-fifths)vote.If values increase faster than tions. Existing HACA (Homestead and Agricultural Credit inflation, the tax rate will go down, something rarely seen at Aid) is diverted to schools in the form of targeted categorical the local level. See Table 4 on page 4 for an example of how aid. the property tax on a$1 million business would be calculated. 11. Increase the maximum homeowner property tax refund 3. Properties subject to the statewide property tax will be totally (circuit-breaker). Currently 215,000 homeowners get circuit- exempt from paying school operating levies but will continue breaker refunds which are based on their property tax bills and to pay school debt levies. The issue of so-called"non-voting" their income. However 38%of those homeowners are receiv- properties paying for school operating levies has been a thorny ing maximum allowable amounts of$520. Under the plan the one, especially in districts where such properties pay the ma- maximum is increased to$1,190•the current renter maximum. jority of such levies.Referenda are notoriously easy to pass in 12. Limited Market Value provision phased-out. MTA has con- such districts,because those voting will directly pay so little of sistently spoken against the de facto creation of additional the cost. classes that result from limited market value. As some proper- 4. New equalization formula for school referenda levies. Cur- ties' values are limited because they are increasing rapidly,tax rently, the state equalizes school referendum levies of up to burdens are shifted onto properties whose values aren't grow- $415 per pupil. Levies over that amount are fully locally ing as rapidly.We believe it is time to end this provision. funded. The Governor's new equalization formula preserves 13. Metropolitan Council transit levy increase. Significant levy the average homestead tax price of existing referendum levies, reductions in other parts of the plan provide room for property Beginning in fiscal year 2003,new leyies are equalized using a tax funding for transit. Past efforts to fund transit from the two-tier formula which equalizes the first $600 per pupil at property tax and other sources have not been particularly suc- one rate($6,400 per pupil),and amounts over$600 but under cessful. $1,115 per pupil,at a lower rate ($4,265).Certain districts are 14. $65 million in new tax increment district grants.When com- exempt from the $1,115 cap. According to the Department of mercial/industrial tax burdens are reduced increments from Revenue the tax price of the equalized portion of referendum 1'lh districts are also reduced; this necessitates some kind of levies is reduced in most districts,but the tax price of the un- mechanism to ease the transition to the new system so that S equalized portion generally increases because properties sub there is enough revenue to pay off bonds purchased before the sub- ject to the new statewide property tax are exempt from new tax cut. referendum levies. 5. Exempt properties could pay optional city service fee for roads. See comment under 6. (Continued on page 5) • 3