Questions Beleaguered Property Taxpayers Should Be Asking

December in Minnesota.  Holidazzle.  Vikings angst.  And lots of taxpayer grumbling and anger over projected property tax increases.  ‘Tis the season for trying to figure out just why property tax bills are going up (and to hear lots of pledges from politicians eager to do something about it).

Minnesota’s homeowner property tax burdens are substantially below the national average, and according to the Department of Revenue’s latest Residential Homestead Property Tax Burden Report, property taxes relative to median homestead income are 18% lower in the seven-county metro and 9% lower in Greater Minnesota than they were 10 years ago.  It doesn’t matter.  The volatility and unpredictability of the property tax has long made it the most unpopular tax.  But the icing on the cake of taxpayer frustration is being unable to understand why property taxes are going up – “Truth in Taxation” statements notwithstanding.

There is no lack of detailed information on local government budgets available at your fingertips.  There is often a troubling lack of context for that information, which makes taxpayer oversight and judgment about the efficacy of local levy decisions so difficult.  And occasionally the comments and context local governments provide confuses more than helps.

At the extreme is one example we came across from a county commissioner arguing that the state general levy freeze enacted in 2017 shifted property tax burden onto local homeowners, which is flat out wrong.  A much more common example is the “local tax rate comparison” bar graph which has become a staple of many taxpayer outreach efforts.  They inevitably show a city or county in a highly favorable light compared to selected peers.  The problem is property tax rates aren’t like income and sales tax rates, which directly influence how much revenue government collects.  These rates are just something local governments mathematically derive to allocate their property tax levies among property owners.  Higher property tax rates in one location can collect less property tax revenue than lower rates in another location, depending on the overall amount of value in the community.  At best such comparisons distort perspective; at worst they distract from levy decisions and other changes which really drive changes in how much property tax a government collects.

So what should taxpayers do about this?  Here are three questions we think taxpayers should ask to get to the heart of the issue.

“Just exactly how was the dollar amount of the levy derived?”  Remember when your sixth-grade math teacher never let you get away with just giving the answer?  You always had to “show your work.”  That same principle should absolutely apply to any explanation to taxpayers about property taxes.  One of the property tax’s major advantages is that local officials set the levy amount after determining spending needs, projected changes in state and federal aids, projected changes in non-property tax revenues, and projected use of (or additions to) reserves.  In short, there are (or should be) mathematical calculations behind every levy.  And most importantly, if that mathematical derivation is presented and compared to the previous year, it would be elementary to assign reasons for levy growth to the correct causes.  (In all our years, we’ve never seen a local government present a levy change this way.  If any reader has, please pass it on to our attention.)

“Can you tell me how you are managing government inflation?”  Inflation is a reality for local government budgets but it can be a convenient scapegoat when communicating budget information to taxpayers.  It’s a generic idea used in newsletters and budgets-in-brief to explain higher spending levels that citizens reflexively accept as a legitimate reason for levy growth.  To be sure, fuel, road salt, indemnity insurance, contractual expenses and other procurements can be affected by price increases outside of government’s control.  But, the vast majority of government spending, especially for cities and school districts, are labor costs over which governments themselves have considerable influence and control.  In short, the issue is not the existence of generic “inflation” but how governments are managing inflation and controlling costs especially in their largest expense.

Is the government doing anything it really shouldn’t be doing?  To some extent this will always be in the eye of the beholder, but special government ventures can create undue taxpayer exposure.  The place to look are government “enterprise funds” which are government’s foray into business management and the world of profit and loss.  Such government enterprises are often managed responsibly and successfully but occasionally ambitions exceed sound fiscal judgment – especially when the business operations at issue demand high levels of expertise, operate in a highly competitive and changing environment, and require significant capital investment.  Given that these ventures operate outside the general fund and therefore largely off the budget radar, taxpayers can have a particularly difficult time evaluating them.

The current poster child for projects meeting these criteria is government broadband.  Government certainly has a role to play in making broadband accessible to underserved areas, but mission creep in the form of ventures into government owned retail networks have resulted in spectacular and costly failures around the country, including a couple here in Minnesota.  Prompted by the siren call of economic development and third-party consultants, the push now is to build fiber networks and lease the infrastructure to ISP providers.  Problems arise when such efforts take place where the private sector has a very established presence.  In one Twin Cities community, $600,000 in revenues from utility funds (taxpayer payments for water, sanitary sewer, street lighting, and storm drainage/water quality services) were used to subsidize the creation of a fiber network.  According to budget documents, that network is expected to lose about $270,000 in 2018.  Undeterred, now other communities in the county and the county itself are looking to embrace the same business model.  Put aside the predatory nature of subsidized municipal entry and the danger of unintentionally reducing private sector investment.  In these circumstances government budgets rich in fiber have an excellent chance of creating something taxpayers will have to clean up later.

The property tax is the most untransparent transparent tax.  On the one hand, its “in your face” presence makes it a great way to calibrate people’s expectations of government with their willingness to pay for it.  On the other hand, the complexities of modern government and its ability to control narratives makes it difficult for taxpayers to make independent judgements about how their tax dollars are used.  Investment of effort by both taxpayers and their governments is needed to manage the discord which increasingly threatens this essential revenue source for local government.