MCFE Submission to LGA Study Group

 Recommendations of the MCFE to the LGA Study Group

December 28, 2011

1. The public policy goal of LGA should be to assure that all Minnesotans, regardless of where they live, have access to important local public services at affordable tax prices.  Importantly, it should not be to equalize tax bases – that confuses tactics with policy purpose.

• “Important” local services should be defined as essential to the general health and welfare of local citizens.  One of the important features of local government is its ability to calibrate local citizens’ expectations of the type and level of public services with their willingness to pay for them.  The state should not use LGA to “equalize” access to all public amenities and services across communities.
• “Affordable” tax prices should be evaluated on the basis of effective property tax rates expressed as a percentage of taxpayer income.  Effective tax rates expressed as a percentage of property value is an inferior and often misleading measure of ability to pay taxes.

2. MCFE believes it is also critical to place LGA in its appropriate context.  LGA is just one part of a very large property tax aids and credits system.  In light of projected future budget circumstances, achieving the policy goal stated above in the most cost effective and efficient way possible is essential.  Income-based refund programs that allow cities full freedom to levy based on citizens’ needs but targets relief based on ability to pay is the most direct and efficient way to achieve this policy objective.  Therefore, MCFE believes the circuit breaker program should be the primary avenue for addressing this policy goal.  The state should consider LGA a supplemental strategy attending to policy aspects that income-based refund programs address either insufficiently or inadequately.

• Inability to accurately assess the “neediness” of cities.  Distribution formulas heavily influence whether LGA is an economically justifiable program or an inefficient use of taxpayer dollars.  Any justifiable formula must reasonably assess a city’s need as well as its revenue raising ability.  However, Minnesota doesn’t currently assess city need well, and the state has never done this well.  Most importantly, both politics and empirical challenges functionally prevent us from ever doing this well.
• Distortion of local tax prices and cost structures.  LGA can distort local tax prices resulting in public acceptance of local cost structures that citizens would otherwise find objectionable.  Department of Revenue data and national studies both show Minnesota homeowners often have very affordable property tax burdens in both absolute and relative terms.  Juxtaposing this finding with the recurring claim that Minnesotans are at the tolerable threshold of property taxation suggests another legacy of LGA may be that many Minnesotans have been conditioned to believe local services should be offered to them below reasonable cost.

• First, State Auditor data suggests that capital spending is where the primary need actually exists.  Aggregate current operating expenditures for city government are up over the last decade in both nominal and inflation-adjusted dollars.  Inflation-adjusted spending in public safety, housing and economic development, and parks and recreation are up robustly (over 20%) in a decade featuring two major recessions.  Capital spending, however, has declined substantially suggesting essential infrastructure investments are being squeezed by higher operating expenditures.  Frequent testimony by local officials before the Legislature on LGA underscores the need for state assistance supporting essential infrastructure.
• Second, the state can deliver capital equalization aid on a simple tax capacity basis and extricate itself from incomprehensible and flawed regression-based models attempting to measure “city neediness.”
• Third, no significant spending tails or unsustainable cost structures are created by this type of aid.  Rather, capital aid -- much of which is likely to address maintenance or replacement needs -- offers the prospect of some local savings.