Municipal Revenue & Taxation Committee
I-A State and Local Fiscal Relationship
Metro Cities supports a strong state and local fiscal partnership that emphasizes the following principles:
Metro Cities strongly opposes levy limits and urges the Legislature to repeal them. Levy limits undermine local budgeting processes and the relationship between locally elected officials and their residents by allowing the state to decide the appropriate level of local taxation and services.
Metro Cities also opposes the imposition of artificial mechanisms such as valuation freezes, payroll freezes, reverse referenda, super majority requirements for levy, or other limitations to the local government budget and taxing process.
I-C Local Government Aid (LGA)
Local Government Aid (LGA), the only remaining form of general purpose state aid to Minnesota cities, was modified by previous legislatures, at a significant cost to most metropolitan area communities. As a result, many of the metropolitan area’s 183 cities no longer receive LGA. LGA formula changes and the appropriation increase passed by the 2008 Legislature were supported by Metro Cities and will allow for a slightly higher distribution of LGA dollars to the metropolitan area. However, the LGA formula continues to be geographically disparate and volatile, and warrants further analysis and improvement. Metro Cities supports:
I-D State Property Tax Relief Programs
Metro Cities supports state funded property tax relief programs for homestead property taxpayers such as the circuit breaker and enhanced targeting for special circumstances. Metro Cities supports the update of the Department of Revenue’s “Voss” database to link income and property values, and the consideration of income relative to property taxes paid in determining eligibility for state property tax relief programs.
Metro Cities supports an analysis of the State’s property tax relief programs to determine their effectiveness in providing property tax relief to individuals and families.
I-E Market Value Homestead Credit
Metro Cities supports the Market Value Homestead Credit Program, a state aid to individual homestead property taxpayers, as a direct credit to the taxpayer, rather than a reimbursement to local units of government. The current MVHC reimbursement structure undermines accountability in a number of ways, most directly by enabling the state to reduce or even eliminate the reimbursement to local units of government while preserving the benefit of the credit to the homeowner. Further, any savings to the state resulting from reductions in the MVHC should be spread proportionally to all benefiting taxpayers.
Metro Cities strongly opposes extension of artificial limits in valuing property at market for taxation purposes to additional property classes since such limitations shift tax burdens to other classes of property and create disparities between properties of equal value. The Legislature should monitor the effects of the Limited Market Value (LMV) phase-out to avoid excessive tax burden increases to currently benefiting properties. Metro Cities believes that enhanced targeting for special circumstances better serves the tax system.
I-G Fiscal Disparity Fund Distribution
Metro Cities opposes the use of fiscal disparities to fund social or physical metropolitan programs since it results in a metropolitan-wide property tax increase hidden from the public.
Metro Cities supports the continuation of the fiscal disparities program until such time as an appropriate replacement is developed. Metro Cities supports a state conducted analysis of the Fiscal Disparities Program to determine whether the program is meeting its original goals and objectives, and whether changes to the program should be considered to better meet those objectives.
I-H Constitutional Tax and Expenditure Limits
Metro Cities strongly opposes including tax and expenditure limits in the state constitution. This would eliminate any flexibility on the part of the Legislature or local governments to respond to unanticipated critical needs, emergencies, or fluctuating economic situations. When services such as education, public safety and health care require increased funding beyond the overall limit, experiences in at least one other state indicate that other publicly funded services receive less than adequate resources. Constitutional limits result in a reduced base during times of economic downturn and the inability to recover to previous service levels when economic prosperity returns.
I-I State Property Tax: Oppose Extension to Other Property
The 2001 Property Tax Reform Act shifted general education funding to the state, and funded it, in part, with a state property tax on commercial/industrial and cabin property. Since cities’ only source of general funds is the property tax, Metro Cities strongly opposes extension of a state-levied property tax to additional classes of property.
Metro Cities opposes elimination of the class rate tax system, or applying future levy increases to market value, since this would further complicate the property tax system.
I-K Personal Property Taxation: Electric Utility
The Minnesota Department of Revenue has revised its regulations for calculating the taxable market value of electric and natural gas utility property. This affects property taxes paid by investor-owned utilities (IOUs) not only to the state, but also to local governments. Provisions in the previous regulations, such as depreciation limits and prescribed weights for the cost and income approaches to value, helped to preserve the taxable value of this property over the many decades it is in service.
IOUs enjoy a guaranteed rate of return on their capital investments, but host cities experience the costs of environmental damage, nuisance and lost economic development as the result of this property. IOUs argued that their property is over-valued and that depreciation limits should be removed. However, changes to the utility property valuation rules will drastically reduce the taxable market value that helps compensate host cities for hosting base load electric generation facilities.
Metro Cities opposes changes to the utility property valuation rules that result in a significant decline in the taxable market value of utility property. Metro Cities supports state appropriated aid to cities to keep them financially whole and to compensate for the economic and environmental costs of hosting base load electric generation facilities, rather than through increases in property class rates or other mechanisms.
I-L Sales Tax on Local Government Purchases
The Legislature should reinstate the sales tax exemption for all local government purchases without requiring a reduction in other aids.
I-M City Revenue Stability and Fund Balance
Metro Cities opposes state attempts to control or restrict city fund balances. These funds are necessary to maintain fiscal viability, meet unexpected or emergency resource needs, purchase capital goods and infrastructure, provide adequate cash flow and maintain high level bond ratings.
I-N Public Employees’ Retirement Association (PERA)
Metro Cities supports employees and cities sharing equally in the cost of necessary contribution increases. Metro Cities also supports state assistance to local governments to cover any additional contribution burdens placed on cities over and above contribution increases required by employees. Cities should receive sufficient notice of these increases so that they may take them into account for budgeting purposes. Further, Metro Cities will monitor legislative proposals and when necessary and appropriate, respond in a manner that supports this policy and provides for the fair treatment of employees and the protection of municipalities’ interests.
In order to provide an incentive for the extraction of local aggregate resources prior to urbanized development, and in order to help offset the negative impacts of aggregate mining on local communities, the state should authorize cities and townships to collect a per ton host community fee from the operators of aggregate mines with the fee proceeds to be deposited in the municipality’s general fund.
The 2008 Legislature adopted an Aggregate Resource Preservation Act as an incentive for the extraction of local aggregate resources prior to urbanized development, as well as a modified tax structure that requires 42.5% of the aggregate tax to be distributed to host cities and townships. Metro Cities supports legislative efforts to assist aggregate host cities in offsetting the negative impacts of aggregate mining on local communities. Metro Cities would prefer that cities and townships be allowed to collect a per ton host community fee from the operators of aggregate mines with the fee proceeds to be deposited in the municipality’s general fund. The Legislature may wish to consider an examination of the negative impacts of aggregate mining on cities adjacent to host cities.
I-P State Program Revenue Sources
Metro Cities opposes any attempt by the state to finance programs of statewide value and significance with local revenue sources such as municipal utilities or property tax mechanisms. These local revenue sources are created to finance local government services. Statewide programs, such as the Clean Water Legacy Act, serve important state goals and objectives, and should be financed through traditional state revenue sources such as the income or sales tax.
Metro Cities supports statutory authority allowing local governments to establish trusts from which to fund post-employment health and life insurance benefits for public employees, with participation by cities on a strictly voluntary basis, in recognition that cities have differing local needs and circumstances. Cities should also retain the ability to determine the level of post employment benefits to be provided to employees.
Metro Cities supports a study of the fiscal impacts to both cities and retirees of pooling retirees separately from active employees.
I-R State Budget Stability
In the last several years, the State has experienced budget deficits and increased volatility in state revenues. To address state budget shortfalls, the Legislature and Governor have focused their efforts on reductions in expenditures, shifting of costs to other units of government, and drawing down the state budget reserve.
In 2007, the Legislature and Governor created the State Budget Trends Study Commission to study the implications of state demographic trends on the state’s tax base and revenue collections, as well as trends in spending for state programs. The Commission is charged with examining the state budget with regard to budget stability and flexibility and may make recommendations for state tax and budget changes that include changes in the tax base, mix of tax types, state and local finance relationships, entitlements and the budget structure.
Metro Cities supports the work of the State Budget Trends Study Commission to examine our state’s budget and revenue structures and to provide recommendations to the Legislature. Metro Cities urges the Legislature to consider changes that enhance and improve stability, flexibility and adequacy in our state’s revenue system. As part of this study, Metro Cities supports an examination of the property tax system and the relationships between state and local tax bases.