Where does the money go?

Part 3: A breakdown of the Property Tax Aids and Credits programs

Property Tax Aids and Credits is the state’s third largest expenditure area after K-12 Education and Health and Human Services, and just ahead of Higher Education. The state’s November forecast shows Property Tax Aids and Credits accounting for 9 percent of all General Fund spending. So what programs are supported in this budget area, who benefits from these programs and where does the money go?

Chart A shows the programs funded in the Property Tax Aids and Credits budget, the largest program being Property Tax Refunds. The largest portion of the Property Tax Refund programs is commonly called the “Circuit Breaker.” The Circuit Breaker refunds a portion of property taxes paid, with state dollars, to individual homeowners and renters whose property taxes are high compared to their income. For homeowner taxes payable 2008, if the property taxes were greater than 3.5 percent of the household income and the household income was less than $96,000, the homeowner could qualify for a refund up to $2,300. Of course, a homeowner just under these thresholds would see a much smaller refund. In general, the higher a homeowner’s property taxes are compared to their income, the larger the tax refund. Renters receive a refund under a similar formula. As of taxes payable 2007 (refunds 2008), 68 percent of the homeowner and rental refunds were distributed to the seven-county metro area and approximately one-third of the refunds went to residents over the age of 65.

Chart A: General Fund Tax Aids & Credits

Click to enlarge

Click to enlarge

In addition to the Circuit Breaker, the $1.01 billion Property Tax Refunds budget also contains two smaller programs: Targeting, which helps offset large year-to-year property tax increases over $100 and 12 percent, and Forest Land Credits, which provides reimbursement to counties for property tax relief to landowners who practice long-term forest management. These two programs are forecasted to cost $41 million in the 2012-2013 General Fund budget.

The next largest portion of State Aids and Credits is Local Government Aid (LGA). This program distributes state dollars to cities based on a formula. The formula attempts to measure a city’s needs and tax base strength. The higher the need and the lower the tax base strength, the greater the amount of LGA a city receives. Roughly 65 percent of LGA goes to cites in greater Minnesota.

The third largest program is the Market Value Homestead Credit program, which reduces a homeowner’s property taxes by up to $304 if the homeowner has a property valued at $76,000. Homes over and under $76,000 in value receive less than $304, with the program phasing out at a home value of $414,000. The credit is calculated on a homeowner’s property tax statement and automatically reduces the property taxes owed, therefore reducing the revenue coming to local governments. The state then reimburses local governments for the amount of the credit given to the homeowners. In recent years, the state has not fully reimbursed the credit to local governments.

County Program Aid (CPA), a program similar to LGA, is the fourth largest program in the Property Tax Aids and Credits budget. CPA is distributed to counties based on two formulas, one that relates to need and one that relates to tax base. As of 2008, 61 percent of CPA goes to counties outside the seven-county metro area.

The remaining 11 percent of the Property Tax Aids and Credits budget goes to several smaller programs. Many of these programs, such as Aid to Police and Fire and Taconite Aid, are paid for with dedicated taxes on related industries. Other programs relate to pensions, while several smaller credits and refunds are available for agricultural, environmental and political activities.

Cities descend on the Capitol for Legislative Action Day

On February 9, nearly 100 greater Minnesota city officials gathered in St. Paul for the Coalition of Greater Minnesota Cities’ (CGMC) annual legislative action day and reception dinner. This significant turnout represents one of the largest action days in CGMC history. Members were treated to a comprehensive overview of CGMC activities and strategies as well as a legislative leadership panel at the Flaherty & Hood offices. Members then dispersed to the Capitol to meet with their local legislators to discuss CGMC issues and local concerns.

In the evening, the group, along with their legislators, dined at Mancini’s Char House and heard remarks from Gov. Mark Dayton, fresh off his State of the State address that afternoon. CGMC was pleased to hear the governor commit anew to the local government aid program, promising cities that his budget (scheduled for release February 15) would not be balanced on the backs of local property tax payers.

CGMC adopts policy on invasive species

At the request of several member cities, CGMC recently adopted a policy position on invasive species. Aquatic, plant and other invasive species threaten the lakes, rivers, and parks in greater Minnesota. The advance of these species threatens residents’ enjoyment of these resources and may impede tourism in many areas. CGMC supports legislation targeted at slowing or stopping the spread of these species, including dedicating funding from the legacy amendment and other sources to address this issue.

At a recent hearing, the Minnesota Department of Natural Resources indicated it is exploring possible legislation to address the growth in species such as the zebra mussel, asian carp, curly pondweed and asian milfoil. CGMC will continue to monitor legislative progress on this issue and provide support where appropriate. For more information, contact Elizabeth Wefel at eawefle@flaherty-hood.com.