Cities worry about taxpayer wrath

NEW ULM -- As the calendar heads into the fall budgeting season, you can feel the tax pressure building in communities all over Minnesota.

At a regional League of Minnesota Cities meeting here yesterday, for example, taxes were at the center of the hottest conversations. Cities are just setting their preliminary levies, which will be finalized in December in most cases, and property taxpayers are getting their first hints at what they'll be paying next year.

Given state cuts to local government aid to cities and the elimination of a state homeowner property tax credit, most cities seem to be grappling with how to raise property tax rates without sparking a revolt.

"We passed a zero percent increase in our levy," said New Prague Mayor Chuck Nickolay during a breakout session on problem solving. But the state replaced the homestead credit with an "exclusion" that reduces some homeowners' property values for the purpose of taxation. That means overall rates will likely go up, pushing more of the tax burden on to property owners that don't benefit from the exclusion. "On average our property tax rates will go up 6.5 percent," said Nickolay.

To prevent the rate hike, he said, the city would have had to lower its levy and cut $355,000 from the budget, painful, in light of significant cuts in recent years.

Because the state exclusion only applies to homesteaded homes valued up to around $400,000, the property tax increase may fall increasingly on the backs of business owners, said Lewiston city council member David Fischer during the same small-group session. "This will all be dumped on local businesses," he said. "The Legislature says they didn't raise taxes. Well, of course they did."

Still, because the state in recent years rarely came through with the promised homestead credit payments to cities, Nickolay said he wouldn't necessarily want the program back, despite an effort by some legislators to reinstate it.

During a full-group session called "Find Out What Really Happened in St. Paul," the League's intergovernmental relations director, Gary Carlson, addressed the elimination of the credit. He acknowledged that the League and other groups had "begrudgingly supported the repeal of the program because the Legislature wasn't paying for that program anyway. In 2010 and 2011, we were receiving 15 cents of every dollar of credit that should have been paid back to cities," he said. That wreaked havoc with local budgets.

"If the Legislature had only eliminated the (credit), only homeowners would have felt it," said Carlson. "But the Legislature thought that wasn't acceptable, so they gave the homeowners an exclusion. That's the piece of the equation that's puzzling to many people."

He said the impact of the exclusion would be felt differently by different communities, depending on their mix of housing and businesses. By Carlson's estimate, smaller communities with lots of lower-value houses could lose 20 or 30 percent of their tax base.

One attendee expressed concern that lowering the tax base could affect a city's ability to issue debt, since the base is part of the formula. In poorer cities, the impact could be dramatic. Carlson acknowledged this unintended consequence of the new law and said the League is working on a solution.

He explained that tax rate hikes could fall mostly on properties not covered by the exclusion--that is non-homesteaded properties. "This is going to push the taxes from those (homesteaded) homes to business property, apartments, industrial properties and certain agricultural properties."

That brought up the delicate matter of how to explain to taxpayers why their rates are increasing, even when the city levy might be staying the same or going up only slightly. Many city leaders at the meeting agreed the onus should fall on legislators, since they eliminated the homestead credit and imposed the exclusion. Legislators have argued that it's up to local leaders whether they raise property taxes. Carlson said the League would issue guidelines that city leaders can use when making explanations. He promised the materials by October.

"Legislators are going to be saying it's our fault," said Alexandria Mayor Dan Ness. "We can't let them do that."

Fischer raised his hand. "Where did the idea originate?" he asked.

"It was actually a technically-adept staff member who lobbies for counties who came up with the suggestion," answered Carlson. "The legislators put it in their tax bill. It was vetoed by governor. But in the end he signed it."

"I guess everybody is to blame," Carlson said.

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