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Dan Salomone, Deputy
Commissioner, MN Dept. of Revenue
Civic Caucus, 8301
Creekside Circle #920, Bloomington, MN 55437
April 29, 2011
Verne Johnson (chair),
Sallie Kemper, Ted Kolderie, Dan Loritz, Tim McDonald, Clarence
Summary of meeting:
Dan Salomone, Minnesota deputy commissioner of revenue, discusses whether
state aid to cities should be continued; whether the aid should relate to
level of spending and property tax wealth; whether property tax relief
should be accomplished by giving cities state aid or whether the state aid
should be given directly to citizens based on income; whether local
non-property taxes should be allowed; whether state aid should be limited
to certain functions, and whether aid should be contingent on a city's
achieving state-prescribed results.
Welcome and introductions
Salomone is former Commissioner of the Minnesota Department of Revenue. He
was appointed commissioner in 2003, and has stayed over for a brief time
from Governor Pawlenty's administration to accommodate the transition of
Governor Dayton. He is currently Deputy Commissioner of Revenue.
Salomone served as
Executive Director of the Minnesota Taxpayers Association from 1991-2003,
has worked in several other positions in state government, and has taught
at the university level throughout his career. He earned Bachelor's and
Master's degrees in economics from the
Comments and discussion
- "I want to thank you for inviting me to visit with you," the
commissioner opened his remarks. "I have looked forward to this
opportunity to re-examine the relationship between the state and its
cities and townships. I have written a lot over the years about the state
and local government relationship-and not all of it has been terribly
complimentary." It's obvious that Minnesota has experienced fiscal
difficulties in recent years, he said, and will continue to face
challenges. But big challenges often provide political cover for big
Government Aid (LGA) was instituted in a different state financial context
Taking a long look
back at the state and local relationship, Salomone recalled Governor
Wendell Anderson's 'Minnesota Miracle. "Those were good years,
financially" he said. Responding to political pressures to reduce
property taxes, Governor Anderson came up with a bold proposal to raise
almost every state tax, and to use the resulting new revenue to buy down
property taxes. It was truly a sea change to the state and local
With the enactment of
the Minnesota Miracle, state tax revenues were substituted for local
property tax revenues. Several years after the Miracle's launch, the
economy plummeted and
began to get into trouble with its relatively new commitment to local
governments. "Now, with the benefit 20/20 hindsight", Salomone said, we
should have had more discussion about whether the structure of this bold
tax plan was durable, or would need regular periodic revisions."
has become increasingly unequal
When the Minnesota
Miracle was implemented, all cities received some form of assistance, but
over time some cities were benefited more from the plan while others were
left out entirely.
Salomone went on to
remind us of a major reform of LGA from 20 years ago-one that continues to
be the basis of current city aid.
"Beginning in 1991,
with the help of three academics Minnesota retooled the LGA formula. Two
of the academics--professor Helen Ladd from Duke University and professor
John Yinger from Syracuse University had just completed a book on how to
develop a thoughtful state aid formula for cities. (see America's
Ailing Cities-Fiscal Health and the Design of Urban Policy.
Hopkins University Press,1989).
A 1991 LGA working
group consisting of 21 state and local non-partisan fiscal analysts
exchanged "policy memos" once or twice a month with the consulting
academics. The memos were necessary to adapt the so-called "Ladd" formula
to Minnesota's fiscal institutions and data. The goal of the Ladd formula
was to provide aid to cities, which, through no fault of their own had
high expenditure needs and/or low tax bases. The Ladd formula provided
city aid in direct proportion to each city's "expenditure-revenue" gap.
Introducing city expenditure needs into the analysis of state aids was the
principal innovation of the Ladd formula (early aid formulas focused
solely on city tax bases, and as such, provided an incomplete measure of a
city's need for aid).
While the Minnesota
Miracle deserves credit for creating a fairer distribution of state funds
for K-12 education and other local needs, it may have discouraged cities
from being more thrifty or judicious in their spending, Salomone said. "I
think that the Minnesota Miracle created some perverse incentives at the
local level. It may have been easier for many cities to lobby the state
for more aid than to engage in local government reforms. "
the state replace direct subsidy to cities, with aid targeted to homes?
There has never been
serious consideration given to discontinuing direct aid to cities and
townships, Salomone said, nor has there been serious consideration given
to extending the "circuit-breaker", i.e., the income-based limit on
homestead property tax increases, to all property types. If such proposals
were implemented, all other things constant, the existing property tax
refund program would automatically provide more generous circuit-breaker
payments. The LGA program provides relief to all types of property.
cities expect LGA to continue to decline?
recent LGA history, and the growing demands in other portions of the state
budget, Salomone said communities should anticipate continued reductions
in general aid to local governments.
A participant asked
the commissioner whether he could envision the governor being interested
in reforming LGA, or in phasing it out. Salomone said he sees the governor
wanting to keep it, though a gradual phase-out may occur as a matter of
necessity. There could be another dramatic drop this year, he said, and
"if I were a city leader I'd be planning to see less, year after year."
"Half the cities in
this state don't get any aid, and the legislators in these areas are
asking not just why they don't get any, but also why they are subsidizing
those that do."
cities be allowed to exceed levy limits by local referendum?
In the Pawlenty years,
levy limits were often accompanied by a local referendum option to give
communities some degree of flexibility and to clarify responsibility for
local property tax increases. Surprisingly, no city or county has ever
used the local referendum option.
Expanding localized non-property taxes would exacerbate disparities
Within limits, access
to local non-property taxes can provide needed revenue to communities and
reduce pressure for increased state aid. However, Salomone said, data show
that disparities in the distribution of local sales tax bases are greater
than those of the local property tax. (This is not true for local
income-tax bases). Providing a general local sales tax option could
result in a call for costly sales tax equalization aid. This would result
in increased pressure on the state budget.
A participant asked
whether local sales taxes need to be on the table as an option to help
resolve the deficit: Don't we need to throw a second form of tax into the
that the state doesn't have much history with a generalized local sales
tax option. Generally, we continue to restrict local sales taxes to
specific projects and time frames. Proliferation of project-based local
non-property taxation may complicate any future transition to a more
generalized local tax option. Almost all existing local sales taxes were
adopted by local referendum. As for to throwing another tax into the
equation, it might make more sense to eliminate selected sales tax
expenditures, of which there are many (See our on-line list of them).
LGA be made more accountable by categorizing funds and measuring outcomes?
The state has not
required cities to measure outcomes associated with LGA payments, Salomone
said. The current LGA program provides "general aid" to cities distributed
through a formula that calculates the gap between local needs and local
taxing capacity. The current formula recognizes that various cities face
different service costs because of differing local "environmental
factors." The aid formula uses statistical techniques to identify and
compensate for the costs of these local environmental factors.
Salomone said, LGA payments could be transformed into a menu of
categorical payments, each of which is associated with specific local
governmental functions and outcome measures. To do this the state would
have to clearly distinguish state interests from local interests, and
compensate cities accordingly.
General aids have the
virtue of simplicity but lack accountability. On the other hand,
categorical aids tend to be more complex, but are more accountable. With
categorical aids and associated outcome measures it's easier for the state
to know when it has provided sufficient support to communities.
the state look for alternative ways to relieve costs on small cities?
Salomone said that few
public officials would advocate for a minimum population as a condition of
receiving state aid because it would be too controversial. Of Minnesota's
855 cities, 630 of them have populations less than 2,500. He cast this as
both a blessing and a curse. Small cities have a more intimate and
accountable relationship with their taxpayers, he said, but they are
denied the benefits of economies of scale in service delivery that larger
local governments consider purchasing, but not provide, services?
should see themselves as purchasers of services on behalf of their
residents, Salomone argued, rather than the deliverer of the services,
though in some instances it might make sense to play both roles,
particularly in the metro area. In recent years there has been a trend
toward transferring responsibility for police and other emergency services
to counties. However, without some incentives, citizens may be hesitant to
turn over certain services to higher-level governments.
In general, he argued,
market-based solutions to public policy problems can result in more
limits are a sign of dysfunction-and are being removed
property taxes payable in 2012, Salomone told the group, there will be no
levy limits for cities and counties. In a sense, he said, the existence of
levy limits is a sign of dysfunction-it infers that local communities
can't be trusted to control year-to-year increases in levies and property
taxes. Strict levy limits undermine the power of local governments by
denying them their most important tool-the power to tax. Absent that
power, local governments, to an extent, "are reduced to social clubs, with
limited ability to address local fiscal needs." If the legislature
re-imposes levy limits, they should be tight and meaningful.
While there is
variance in property tax rates throughout the state, by and large
Minnesota's overall rate of property taxation is much below the national
average, particularly for homesteads. Relative to other states, then, our
property tax ranking is low.
Leadership during the interim
Can you give us your
perspective, a participant asked, on the need for interim work between
legislative sessions, and who should do that work?
public spending comes from the public and elected officials who are in a
position to lead. "It's easy for the governor to issue an executive order
for a study commission that would work during the interim," he said.
That's the easy part.
What about legislators
setting something in motion? This is not likely. "I'd expect greater
effectiveness from an executive-led effort."
Getting back to the
interim, it is difficult to predict whether property tax reform will be on
the interim agenda, Salomone said. Property tax reform is risky and
complex, with potentially many winners and losers. Those interested in
reform will have to force the discussion and commit to having interim work
groups and committee hearings. For these reasons, reform plans tend to
come from private interest groups, not government.
The state and local
fiscal relationship should be reviewed to assure that it continues to meet
the policy goals of the state and the needs of communities. Because
reforming the state and local relationship generally creates winners and
losers, it will take strong leadership to propose reforms and deal with
their technical and political implications. If there's sufficient
interest, leadership might consider this an interim priority.
It is becoming
increasingly more difficult for the state to maintain the covenant it has
had with property owners, Salomone continued. "There is a lot of
unfinished business on state/local relationship, and the interim is a good
time to reassess the relationship. But one should not minimize the
difficulty of launching a large scale restructuring-this requires a lot of
leadership and effort."
Even so, Salomone said
he is not sure the governor will work on the state and local relationship
in the coming interim, saying, "he may have other fish to fry."
Perhaps there could be a process by which every other year we revisit the
state and local relationship. The complexity of the issue requires more
focus than is likely possible in the near term.
LGA to encourage use of the Joint Powers law?
We tend to think of
cities cooperating with cities, and school districts with school
districts, a participant commented-but there is a law in Minnesota called
Joint Powers that enables any two entities of government to do together
that which either of them is allowed to do separately. Would it be
possible to use LGA as a lever to drive the joint powers law?
"That sounds like it
has merit," Salomone said. "One approach could be to withhold the second
year of funding until a locality demonstrates efficiency. Another could be
to shift the LGA from lump-sum aid (property tax reduction) to categorical
aids as was discussed previously."
In lieu of reducing or
denying funds to small cities, Salomone suggested the state could consider
re-tooling current aid formulas to create more incentives for small cities
to enter into joint powers agreements for collaboration and consolidation.
Some small cities have high sunk costs, which make consolidation
difficult. The state should also take a close look at the boundaries of
police and fire districts. Many are based on 1950's populations. However,
most small cities are in rural areas where opportunities for joint powers
agreements and consolidation and collaboration are rare.
"You're definitely on
track thinking about LGA and education," Salomone told the Civic Caucus.
"Given the size of our budget deficit this session, the Governor and both
bodies of the legislature will have to find a budget compromise. I'm
confident they'll figure it out-they always do. Hopefully we won't be in
special session this summer."