New state tool could boost Property Tax Refund participation

April 27, 2010

Minnesota Department of Revenue has a new tool that could help more homeowners get property tax refunds.

The Property Tax Refund for homeowners – commonly called the Circuit Breaker – provided a property tax refund for over 342,000 households in 2008. The average refund was $683. Nearly 38 percent of households receiving the Circuit Breaker include seniors or people with severe disabilities. This year, homeowners can qualify with incomes up to $98,290 (no dependents) or $120,190 (with five or more dependents), as along as their property taxes exceed a certain share of their income.

Revenue estimates that one-third of homeowners who qualify for a property tax refund don’t apply. Both the Department and legislators have put an emphasis on increasing participation through a range of outreach methods.

The latest tool is called the Voss database, which links information on homeowners’ incomes to their property value and property taxes. (See our earlier blog for more details). Revenue Commissioner Ward Einess said once the Voss database gets refined, his department could use it to do targeted mailings to people who appear to be eligible for a Property Tax Refund but have not applied.

Preliminary numbers from the Voss database show that while 89 percent of homeowners with annual incomes between $10,000 and $30,000 appear to be eligible for a Property Tax Refund, only 49 percent of people in that income bracket apply.

Einess envisioned the day when people wouldn’t even have to file to receive their Property Tax Refund. The state would be able to pull information off the tax returns and do automatic refunds. “That is our goal: full participation,” he said.

Full participation would put $100 million to $150 million more into the hands of Minnesota homeowners.

Einess made his comments in an interview following the April 14 meeting of the House Property and Local Sales Tax Division. The meeting included a birthday party to celebrate the 35th anniversary of the Property Tax Refund (PTR). The Property Tax Refund includes both the Circuit Breaker and the Renters’ Credit.

Division Chair Rep. Paul Marquart organized the event to give more publicity to the Property Tax Refund and encourage people to file. Guests included former Gov. Wendell Anderson, former House Speaker Martin Olav Sabo, former Tax Committee Chair Bill Kelly and former Senate President Alec Olson, all who played key roles in passing the 1975 legislation.

Rep. Morrie Lanning said the Property Tax Refund has support across party lines. Marquart highlighted its role in reducing the regressivity of the state’s tax system. “This is a program that has a track record,” he said. “It has passed the test of time.”

For those people making between $10,000 and $30,000 a year, the Property Tax Refund provides an average refund of $415, which dropped their property tax payments from 6.2 percent of income to 3.7 percent of income, the largest drop of any income bracket.

Still, nearly one-third of all homeowners making between $10,000 and $30,000 a year pay more than 5 percent of their incomes in property taxes.

–Scott Russell

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House and Senate tax committees make cuts to aids to local governments

March 19, 2010

The legislature continues to fill in the details on their budget-balancing plans. The tax committees’ contributions to resolving the budget shortfall came this week by cutting the state’s aids to local governments. The state provides aids to local governments with two goals: so that all areas of the state have the resources to provide basic levels of service and so that property taxes are lower than they otherwise would be.

On Tuesday, the House tax committee passed HF 2077, which makes $105 million per year in reductions to aids to local governments. In the 2010 calendar year, the cuts are divided evenly between cities and counties, each being cut $52.5 million. These cuts are on top of the $200 million in cuts that counties, cities and townships experienced earlier this year through unallotment. The proposal further cuts counties by another $37 million, cities by $63 million, and townships by $5 million per year in the 2011 and 2012 calendar years.

Rep. Lenczewski, the bill’s author and chair of the tax committee, describes the key outcomes of the bill as:

  • There will be no increases in property taxes in 2010 due to these cuts in aids (those property tax levies have already been set.)
  • The cuts are significantly less than in the Governor’s budget. (The Governor’s proposal cut local aids by $250 million in 2010 and $450 million per year in 2011 and 2012.)
  • The impact in 2010 is pretty close to evenly divided between the metro area and Greater Minnesota.

On Wednesday, the tax portion was added to HF 1671, the supplemental budget bill with the cuts to housing, public safety, higher education, economic development, state government, and all other parts of the budget except for K-12 education and health and human services.

On Thursday, the Senate followed much the same process, passing $106 million in cuts to aids to local governments, which was attached to SF 3223, the Senate’s supplemental budget bill. The Senate’s package of cuts to aids to local governments is fairly similar to the House’s. Their total dollar figure is $871,000 higher, because they chose to take out a cut to counties through PILT payments in the environment portion of SF 3223 and instead make that cut in the tax target.

In both the House and Senate, the bill authors expressed their concerns about the impact these cuts will have on local government services and the relationship between the state and local governments. Senator Bakk acknowledged that the state has not been a great partner with local governments over the past several years, and noted that there will be higher property taxes in the future as a result of these choices.

Representative Lenczewski also noted that she was proud to be able to put this bill together without making cuts to the property tax refunds that the state provides directly to Minnesotans – these refunds are commonly called the Circuit Breaker (for homeowners) and Renters’ Credit. These credits are critical tools for helping people whose property taxes are high in relation to their incomes and addressing some of the regressivity in the property tax system. The Minnesota Budget Project has long argued for the crucial role of the Renters’ Credit, and we thank Representative Lenczewski, Senator Bakk and the members of both tax committees for their strong commitment to the Renters’ Credit.

We are expecting floor votes on these bills early next week and even conference committee action before the legislature takes their Easter/Passover break on March 29.

-Nan Madden

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House tax proposal focuses on balance in the tax system

April 21, 2009

The House tax committee saw the draft omnibus tax bill Monday.  Representative Lenczewski described the goals that the bill, available from the committee’s web page, attempts to meet. First, in order to meet House targets, the bill must raise $1.5 billion in the FY 2010-11 biennium and make $275 million in spending reductions. And it seeks to improve balance in the tax system. She noted that, even with these revenue increases, the House is making significant reductions to spending elsewhere in the budget.

Here are some of the bigger pieces:

  • New income tax bracket. The bill creates a new income tax rate of 9% on taxable income above $300,000 for married joint filers. This raises $468 million in FY 2010-11.
  • Reform of income tax expenditures. A whole range of tax deductions and credits would be eliminated from the income tax, including many itemized deductions. In return, new credits related to mortgage interest, charitable giving, and low-income families with children are proposed. These credits would benefit more taxpayers than just those who itemize, but less would be spent in total on these “tax expenditures.” The net impact is $489 million raised in FY 2010-11. (These provisions are similar to Rep. Lenczewski’s tax expenditures bill, HF 1782.) The Minnesota Council of Nonprofits is evaluating the potential impact of the proposed reduction in tax incentives for charitable giving.
  • Eliminate business tax preferences. The bill would repeal Foreign Operating Corporations and some other special corporate tax provisions, but would provide new tax cuts for larger businesses by speeding up the state’s transition to Single Sales Factor apportionment and for smaller businesses through conforming to Sec. 179 expensing. The net impact is $123 million raised through corporate tax changes.
  • Increase alcohol and cigarette taxes. The bill would raise $209 million for the biennium through increasing the gross receipts tax paid at the retail level and increasing the alcoholic beverage taxes by about a penny a drink for most kinds of alcohol and about three cents a drink for distilled spirits. Taxes on cigarettes would increase by 54 cents a pack, which, combined with some other changes to tobacco taxes, raises $204 million for the biennium. These are smaller reductions than proposed in bills heard on these issues last week.
  • Cut to aids and credits. The bill largely includes the property tax division report, which sought to cut aids to local governments and property tax credits by $275 million, make the property tax more based on ability to pay and recognize the challenges faced by local governments by giving them more flexibility. While aids to cities and counties are cut, the bill would allow counties the option to raise a 0.5% sales tax.

The House tax committee is hearing additional testimony tonight and amendments to the bill on Tuesday, and then it needs to pass a floor vote,  so the details could change. After that, it’s off to conference committee to reach a compromise with the Senate. We’ll see the Senate’s omnibus bill Tuesday as well, so stay tuned.

-Nan Madden

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House property tax legislation adjusts homeowner credits and reforms local government funding

April 8, 2009

The House Property Tax Division passed their “division report” on April 1, which are their recommendations for the property taxes and aids to local governments sections of the House omnibus tax bill.

The House set a target of $250 million in cuts to this area of the budget for FY 2010-11, and the committee has sought to come up with cuts while still paying attention to the rising regressivity of the tax system and the need for local governments to fund services in their communities. (This compares to $520 million in cuts in aids and credits in the Governor’s budget.)

Here are some of the big pieces:

Property tax credits: The report makes a $19 million increase to the homeowner property tax refund, commonly called the “Circuit Breaker”. That’s a 6% increase, and it is achieved by 1) increasing the maximum amount of credit by 10 percent, and 2) for households with incomes between $18,120 and $67,909, it would now be a little easier to qualify and the amount of credit would be larger. The proposal also cuts the Market Value Homestead Credit by a similar amount – so they reduce the credit that is based on home value and increase the credit that is based more on income. The division report does not accept the Governor’s proposal to cut the Renters’ Credit.

Aids to local governments: The House would cut aids to cities (Local Government Aid) by 8% in FY 2010-11 and 7% in the next biennium – considerably less than the Governor’s proposal – and repeals levy limits for cities. Counties would face deeper cuts in County Program Aid in the FY 2012-13 biennium than proposed by the Governor, but would be allowed the option of enacting a 0.5% local sales tax. Counties would still be subject to levy limits in Pay 2010.

The House Property Tax Division has had several working groups this legislative session, focusing on local government performance measurement and improvement, local government mandates, and state property tax benchmarks and indicators. The outcomes of those working groups are also incorporated in this bill…stay tuned for additional analysis in the weeks ahead on understanding the potential impact on local services both of reductions in aid and changes in state mandates.

If you want to see the bill itself, visit the House Property Tax Committee’s web site and look for the amendments to HF 2020.

Next step: the division report will go to the full House tax committee, which will consider whether to fully incorporate the report into the omnibus tax bill, or make changes.

-Nan Madden

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Governor’s budget cuts aids to local governments, cuts taxes on businesses

February 18, 2009

The Governor’s tax bill is made up of two main parts. First, there is a $272 million package of tax cuts for businesses, Second, there is $536 million in cuts, primarily in aids to local governments and property tax credits.

The size of the tax cuts means that the cuts in aids and credits only make a small dent in the state’s overall budget deficit. In fact, 51% of the cuts to aids and credits made in FY 2010-11 – and 73% of the cuts made in FY 2012-13 – pay for the new tax cuts, not for deficit reduction.

The Governor’s tax cuts package includes:

  • Gradually cutting the state’s corporate tax rate in half over six years. This is by far the largest of the tax cuts, costing the state $120 million in FY 2010-11, $410 million in FY 2012-13, and more in future years.
  • Changing the sales tax exemption for capital purchases so that businesses will get the exemption at the time of purchase, rather than applying for a refund. This costs $78 million in FY 2010-11 and $23 million in the next biennium.
  • A new Green JOBZ initiative that provides twelve years of tax incentives for companies that “create renewable energy, represent manufacturing equipment or services used in renewable energy, or that create a product or service that lessens energy use or emissions.”
  • A few other credits for investments in small businesses.

This package of tax cuts would cost the state $272 million in lost revenues in FY 2010-11 and $455 million in FY 2012-13. The ongoing cost is likely to be even higher, as some provisions don’t have any impact until five years in the future, and the corporate tax cut is not fully in effect for six years.

The administration argues that these tax cuts will provide incentives for growth. However, it is not clear how much “bang for the buck” the state will get in the near term. In an analysis of several options to stimulate the economy, economist Mark Zandi found that small business expensing provisions and cuts in the corporate tax were among the least effective of the options studied. Given the large cost, especially of the corporate tax reduction, policymakers will have to consider whether the state can afford to gamble on whether such provisions will pay off.

The Governor’s budget also includes deep cuts to the “aids and credits” portion of the tax budget, which includes aids to local governments, as well as the state’s Property Tax Refund.

There are cuts to four different ways the state provides aid to local governments in order to reduce property taxes and to ensure that even communities with low property wealth can provide a basic level of services:

  • County Program Aid is cut by $126 million in FY 2010-11 and $132 million in FY 2012-13. This is a 27% cut compared to base funding.
  • Local Government Aid, which provides state aid to cities, is cut by $246 million in FY 2010-11 and $259 million in FY 2012-13, a 23% cut compared to base.
  • The Homestead Market Value Credit and Agricultural Market Value Credit are cut by 13% and 17%, respectively.

The cuts to aids to local governments raise real questions about their ability to continue to provide critical services. The Governor’s budget recognizes that some increase in local property taxes will likely result.

The Governor’s budget also includes a 27% cut to the Renters’ Credit, which provides a property tax refund to nearly 274,000 low- and moderate-income households whose property taxes are high in relation to their income. This provision is likely to have a detrimental impact on the economy, as it would mean 51 million fewer dollars circulating in the local economy. (There is still time to join our sign-on letter opposing this cut.)

The Governor also would eliminate the Political Contribution Refund, which provides a refund of $50 for individuals and $100 for married couples for contributions to political parties or candidates, and makes changes to three other smaller aid programs.

-Nan Madden

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Governor’s recommended E-12 budget would do little to help struggling students and schools

February 13, 2009

The future success of our state’s economy hinges on our E-12 school system. Yet Minnesota has work to do to ensure all children have the opportunity to learn and succeed. There are large racial and income disparities in educational achievement. Low-income children are twice as likely to not be ready for kindergarten compared to children from families with the highest incomes. Business leaders recognize that closing this gap is not only the right thing to do, but the smart thing to do: the Itasca Project, a group of about 40 Minnesota CEOs, asserts that reducing racial and income disparities is critical to preserving Minnesota’s strong economy and business competitiveness.

Making sure every student succeeds is one of the fundamental challenge before policymakers, but I can’t help but feel that this important topic is getting lost in the black hole-that-is-the-budget-deficit.

Certainly schools across the state are in survival mode after years of budget austerity and cuts to programs and staff. State funding for E-12 education has actually declined since 2003, dependence on local property taxes to fund education has increased and school revenues have dwindled. (see our analysis of state spending on E-12 in the 2000s for more on this). Just recently the Rochester school board closed their latest budget shortfall by eliminating 30 teaching positions and increasing class sizes from Kindergarten to grade 6. The Anoka-Hennepin school district, which has a $15.8 million budget deficit, slashed 130 teacher jobs and will cut down on textbook purchases, bus services and other expenses.

In the Governor’s state of the state address last month, he touted that he would “improve” E-12 education, which would be one of the few budget areas to receive more money. Yet few of the Governor’s budget recommendations (read them yourself here) address educational disparities, instead focusing on bumping up funding for schools with good test scores while students in other schools are left behind:

  • The most substantive recommendation from the Governor on E-12 education is to turn back the clock to 2003 and re-enact a budget gimmick we used the last time the state faced such a large deficit. The Governor would shift over $1.2 billion in state aid to school districts that is supposed to go to schools in the coming budget biennium to the FY2012-13 biennium. Sounds like a relatively painless accounting sleight of hand, right? Not quite, it’s more like a taking-away-of-the-buck from already cash-strapped school districts, which could force some into drawing down their cash reserves or short-term borrowing (made more expensive by tight credit markets – the Governor’s own budget points this out). Bottom line: This measure is a short-term fix for the state’s budget woes, just delays the deficit problem to the next biennium, and may worsen school district finances. Note: As in 2003, I expect the DFL budget proposal will include this budget gimmick too.
  • Spends more money on expanding the Governor’s Q-Comp program to all school districts, but partially pays for it via higher local property taxes. The Q-Comp program is a 2005 initiative from the Governor that involves restructuring teacher pay, professional development and performance pay. Recent reports from the Legislative Auditor and the State Education department have differing things to say about whether this program improves student achievement. Currently, less than a quarter of all school districts participate in Q-comp – the Governor wants to require all school districts to participate (not clear if the teachers’ union has a say in this). The expansion would cost the state more than $40 million in FY 2011, and $109 million in FY 2012-13. However, though the state would require each school district to apply to the Q-Comp program, it would not entirely pay for Q-comp funding:under the Governor’s plan, 35% of Q-Comp funding would come from an “optional”  local levy – that is, the school district would be authorized to increase local property taxes to pay for the Q-comp program. So, no tax increases at the state level, but local tax increases are ok…?
  • Eliminates the Arts High School at the Perpich Center for Arts Education. The St. Paul-based school, which is a public, tuition-free school for 11th and 12th graders with an arts-centered education, would be turned into a charter school. Net savings to the state: $2.2 million in FY 2010-11.
  • Spends $91 million on schools that improve test scores as part of a new “pay for performance plan.” The program would reward charter schools and school districts that have increases in certain standardized test scores with more general education revenue. This leaves out a swath of schools, including those schools where all students are proficient in test scores, as well as schools that need the most help getting their test scores up.
  • Dedicates a modest amount of money to various programs to establish stricter teacher licensing requirements and new training programs, but on the other hand would create a less rigorous ”alternative route” to teacher licensure. Commissioner Seagren noted in testimony to the House E-12 committee that 40% of teachers will retire in the next 10 to 12 years, and they need to be proactive in filling the gap. I’m sure we are all for well-trained teachers, I was just left a bit confused by the Governor simultaneously proposing greater standards and requirements to become a teacher, while proposing an alternative route to teacher licensure that is less rigorous. Beyond addressing teacher licensure, the Governor would spend $2 million on creating online courses for Advanced Placement coursework training for teachers.
  • Spends $10 million on a new pilot program for an intensive summer school for 8th graders that are tested as not yet proficient in math or reading. This would reach 2,000 students in FY 2010 and 4,000 students in FY 2011 (there about 63,000 public school 8th graders in Minnesota). This additional spending, though small and only a summer program, is at least targeted towards helping struggling students.

In summary, few of the Governor’s new E-12 spending initiatives are targeted towards lessening educational disparities. His most substantive budget recommendation is a budget gimmick to delay some of the budget deficit pain. In that sense, his recommendations fall far short of addressing the central challenge facing our state today.

-Katherine Blauvelt

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Report from state auditor finds as state funding dried up, property taxes made up the gap

January 20, 2009

With the state sending less money to cities over the past decade, cities have had to significantly increase property taxes to make up the difference. This according to the just-released 2007 Minnesota City Finances Report from our State Auditor. Check out Bob Von Sternberg’s good coverage of the report in the Strib.

This report has some scary numbers in it that really illuminate the state’s “passing the buck” to cities. To quote from the report: “Between 1998 and 2007, actual revenues derived from property taxes for cities grew 98 percent compared to 14 percent for revenues derived from intergovernmental sources.” So with the state sending fewer dollars, cities had to turn to local homeowners to try to make up the difference. Two important points to note:

1) The bulk of spending by cities went to essential city functions like street maintenance and public safety.

2) Cities have not gone on a spending spree – on the contrary, total spending by cities shrunk by 4% from 1998 to 2007, after adjusting for inflation.

The same troubling trend has happened with school districts (see our recently published report, The Lost Decade for a pithy explanation). Per pupil state aid to school districts has fallen since Fiscal Year 2003. The inevitable result – districts have increasingly relied on local referenda to fund schools.  And, just like with cities, the increase in property taxes hasn’t been enough to replace the reductions in state aid, i.e. school districts still have less money.

-Katherine Blauvelt

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Posted by Katherine Blauvelt