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2001 Omnibus Tax Bill Frequently Asked Questions the League of Minnesota Cities What happened: The 2001 omnibus tax bill enacted several sweeping reforms to the Minnesota state/local finance system. The combined impact of these changes will mean that school property taxes will drop markedly while city property taxes will generally increase-in some cases dramatically. The governor proposed and the Legislature ultimately enacted a state takeover of the general education property taxes for school districts to fulfill what the governor saw as a huge state mandate on local school boards. Under the old education finance system, schools were required by the state to levy property taxes at a state-determined rate to fund education costs in that school district. If the tax rate did not generate enough revenue to fund the education costs for each pupil, the education finance formula would automatically allocate additional state resources to make up the difference. Although this state takeover will not entirely eliminate school property taxes, it will significantly reduce the school share of the typical taxpayer's bill. To fund the state takeover of general education costs, the Legislature enacted a number of other changes to the state's budget including eliminating the homestead and agricultural credit aid (HACA), enacting a state property tax and class rate reductions, and changing Local Government Aid appropriations and disbursements. Why was HACA eliminated and how are cities affected? There isn't a single, clear answer to this question. HACA was viewed by many legislators as an undefined state aid that had little purpose because the distributions were based on what cities had historically received, rather than on an active formula. Secondly, the elimination of HAC A gave the state more money to pay for some of the other property tax reforms that were enacted. Had it not been eliminated, HACA would have provided $200 million in state aid to cities in 2002. Wasn't LGA increased to make up for some loss of aid? Why do some cities receive more (or less) LGA in 2002 even though the appropriation was increased by $140 million? An additional $140 million was appropriated for Local Government Aid; however, this money was not evenly distributed among all cities. Some cities will receive a large enough increase in their LGA to completely make up for the loss of HACA. Still others will lose all of their HACA and receive less LGA than they did last year. Can cities increase their levies to cover their loss of aid? Yes. Even with levy limits, cities will be able to make up for lost state aids through the property tax. However, doing so will result in significant increases in a city's property tax levy.