The Civic Caucus
8301 Creekside Circle #920, Bloomington, MN 55437
September 14, 2012
Notes of the Discussion
Verne C. Johnson, chair (phone), John Adams, Janis Clay, Bob DeBoer, Rick
Dornfeld, Paul Gilje, Steve Hinze, Nancy Homans, Sallie Kemper, Ted
Kolderie, Dan Loritz, Jim Olson (phone) , Bill Schreiber, Dana Schroeder,
and Clarence Shallbetter
Summary of Discussion:
Paul Gilje, former Citizens League research
director and now Civic Caucus coordinator, describes the evolution of the
1971 Metropolitan Tax-Base Sharing Law and the effects of its
implementation. He contends that the law has effectively functioned as a
tax-base insurance policy, assuring a share of metro-wide tax-base growth
for all communities in the seven-county metro area, irrespective of where
in the area the growth occurs. He sees recent proposals to limit or
abolish the law as detrimental to the long-term financial stability of the
Introduction of guests
Guests with various interests
in the metropolitan tax-base sharing law, popularly known as the fiscal
disparities law, were introduced: John Adams, retired professor of
geography, University of Minnesota; Bob DeBoer, director of policy
development, Citizens League; Nancy Homas, mayor's office, city of St.
Paul; Steve Hinze, Minnesota House of Representatives research staff, and
Bill Schreiber, government relations, Messerli & Kramer.
Introduction of interviewee.
Paul Gilje staffed the Citizens League
committee in 1968-69 that developed the recommendations for the
metropolitan tax-base sharing law. After passage of the law he prepared
several annual analyses of the law for the Citizens League. Gilje served
as research director and later associate director of the Citizens League
from 1964-1988. He has through the years held positions in fund-raising
for a church, for a consultant, and for a senior housing firm. He has been
coordinator of the Civic Caucus since 2005.
The Original Problems.
Gilje outlined the major problems in 1969-1971
that caused the tax-base sharing to be proposed, considered, and enacted
Skewed fiscal incentives
-Faced with a
"winner-take-all" development landscape, cities were reluctant to accept
land uses that didn't pay their own way in property taxes, such as
lower-priced housing and large public open spaces. Conversely, they
engaged in major competition for offices, industries, and other business
properties. The resulting process was labeled "fiscal zoning".
Accidents of location
enough to have interstate freeway interchanges or a major airport in or
near their boundaries were favored with a more beneficial tax base.
Anticipated impact of the Metropolitan Council
just been established in 1967, the Metro Council was expected to be
playing a major role in metropolitan land use decisions. Cities not likely
to benefit from such decisions feared they'd be on the short end of
property tax revenues.
Wide differences in local rates and spending
-Some metro cities, with little tax base, but lots of
children in schools, were encountering high property tax rates but still
inadequate revenues for schools. Meanwhile other cities, highly favored
with tax base, had lower property tax rates and enjoyed higher per pupil
spending for schools. The Citizens League helped create public awareness
of these differences when in 1967 it began city-by-city metro-wide
comparisons of homestead taxes.
To see the Citizens League report in 1969 that
proposed tax-base sharing:
The Goals. The League report identified the
reduce the winner-take-all reward in the metro-area competition for
limit the portion of tax base subject to sharing;
work within the existing government structure;
retain the independent autonomy of cities;
refrain from creating any new metro taxing authority.
The Citizens League recommended:
1. Take into account only tax base growth after
1971, so that no one loses what already is in the local tax base.
2. Share only a part of actual growth: 40
percent of commercial-industrial growth, none of residential values.
Retain the traditional discipline that elected officials must know the
potential burden on residents/homeowners when taxes are levied.
3. Redistribute the shared growth immediately
back to the same governmental units that made the contribution. Don't try
to solve every social problem with distribution; a simple per capita
approach would be adequate.
4. Apply to the entire seven-county area, and to
all units of government that levy property taxes,i.e., cities, townships,
school districts, counties, and special districts.
The 1971 metropolitan tax-base sharing law,
popularly known as "the fiscal disparities law," functions as a tax-base
insurance policy, Gilje said, assuring a share of metro-wide tax-base
growth for all communities in the seven-county metro area, irrespective of
where in the area the growth occurs. No matter what happens within its own
borders, each community is guaranteed a share of the growth since 1971 in
the combined metro area commercial-industrial tax base.
Gilje outlined the underlying principle:
Everyone contributes; everyone shares. The law requires that 40 percent of
the growth since 1971 in the taxable value of commercial-industrial
property be excluded (temporarily) from the tax base of local communities.
The amounts excluded are pooled and immediately fully redistributed to all
metro area communities based primarily on current population, with a
slight adjustment favoring communities with a below-average tax-base
Another illustration was offered by Gilje:
"Figuratively," he suggested, "lift up in the air 40 percent of the growth
in commercial industrial value in every metro area city and township,
flatten it out, and drop it back down again."
For those curious about the details of the tax
rate calculation under tax-base sharing, an example is provided at the end
of these notes.
The Problem in 2012.
tax-base sharing is centered in metro area cities that contribute more
commercial-industrial value to the metro area pool than they receive in
return.Bills were introduced in the 2012 Legislature and might be
considered in 2013 that would severely limit or abolish the law. See
summary of HF 3040, authored by Rep. Jennifer Loon:
Among other changes this bill would lower the percentage contribution,
thereby reducing the size of the metro pool. The pool would also be used
to finance metro light rail transit operating expenses. Also see summary
of HF 398, authored by Rep. Ann Lenczewski:
This bill would abolish tax-base sharing as part of comprehensive changes
in the state-local fiscal relationship.
A detailed analysis of the tax-base sharing law
was prepared by a consultant for the Minnesota Department of Revenue in
Gilje enumerated the on-going benefits of the tax-base sharing law and
considered some recent concerns.
Gradually and partially, the law reduces
differences in commercial-industrial tax base per capita.
with the highest per capita commercial-industrial tax base still are
highest, and lowest cities still are lowest, but differences are narrowed.
In 2012, for example, with sharing, the maximum ratio of per capita
commercial industrial value among metro area cities over 10,000
population, is 3 to 1, that is, the city with the highest
commercial-industrial value per capita has three times that of the
lowest-ranked city, according to Minnesota House Research. Without sharing
that ratio would be 9 to 1 today. In 1975, the first year the law was
implemented, and when the amount of tax base shared was much less than at
present, the ratio in per capita commercial-industrial value among cities
over 10,000 population was narrowed from 6 to 1 to 5 to 1.
Gilje described another way to illustrate both
the concentration of tax base in a few communities and the law's only
partial reduction of the differences. It is instructive to compare how
communities fall relative to the metro average commercial-industrial net
tax capacity per capita. Without the impact of the tax-base sharing law,
in 2012, 29 of 193 communities would be above average per capita and 164
would be below average. With the law in effect, only four more
communities, a total of 33, are ranked above average. The rest are below.
Again, as contemplated, the law makes slight adjustments in local property
tax base, in order to slightly adjust rewards for fiscal zoning.
Gilje noted that over the last 37 years, had the
law not been in effect, the gap between cities at the top and the bottom
in per capita commercial-industrial tax base would have widened.
Taxes on commercial-industrial property now are
more uniform across the metro area.
Gilje pointed out a
significant, but usually overlooked, impact of tax-base sharing. He noted
that the actual taxes paid per $1,000 of value by commercial-industrial
property are much closer together across communities than would be the
case without the law. The reason is that a uniform tax rate--a weighted
average of all local property tax rates in the metro area--is derived and
applied to all the shared tax-base value, now approaching 40 percent of
all commercial-industrial value in the metro area.
Consequently, a business considering a new
location anywhere in the seven-county metro area can know that--for up to
40 percent of its value--its property taxes will be the same, no matter
which location is selected. This is an impact that affects all localities
the same, regardless of whether they are net contributors or net gainers.
Administrative change on property tax statements
would help ease some concern
. Gilje noted that some concern over
the law has resulted from a misunderstood line on the tax statements.
Commercial-industrial tax statements in the metro area have a separate
line titled "fiscal disparity", which can imply, however incorrectly, that
the property owner is paying an additional tax. The "fiscal disparity"
does nothing more than identify the tax on that portion of the property
owner's value which assumes the metro average property tax rate. The
balance of value assumes the local rates. Some participants suggested that
clearer labeling could and should replace the term "fiscal disparity" on
The law affects the capacity of cities,
counties, and school districts to levy taxes, but by itself the law
doesn't raise revenue.
The amount of shared tax base under the
fiscal disparities law that is assigned to each local taxing jurisdiction
doesn't yield revenue automatically. The city, county or school district
must levy taxes against that shared tax base, just as it levies taxes on
property physically located within its borders. The city, county or school
district can't just "raid" its shared tax base either by levying a higher
rate against it. The same rate is applied to all property that remains
local, both residential and commercial-industrial.
No annual or biennial appropriations or new or
higher taxes are necessary, unlike conventional revenue sharing
Gilje noted that the law functions automatically
without legislative action. Only administrative actions are required. No
policy decisions are made beyond the law itself. Localities report their
growth over 1971; the amounts are added together by an administrative
auditor and immediately distributed back to the same localities,
consistent with requirements of the law. This differs from conventional
revenue sharing: when cities, counties and school districts receive
revenue directly from the state, new legislation must be enacted with
every biennial budget.
In the long run no one really loses.
Gilje added that today much public policy discussion focuses mistakenly on
so-called "winners" (localities that receive more from the pool than they
contribute) and "losers" (who contribute more than they receive). But the
so-called "winners" still rank low in per-capita commercial-industrial
base. And the so-called "losers" are still winners, because they still
Moreover, a city that today contributes more
than it receives back may see that situation change in years to come, as
it becomes a built-up city and has a lesser amount of new growth, plus,
probably, more write-down in value. It, too, will share in growth
elsewhere in the metro area. Over the long term no one really loses or
Even in the short run, losses aren't that great.
Gilje cited the 2012 Minnesota Department of Revenue study which revealed
that if tax-base sharing were eliminated, actual property taxes in
Hennepin County, the biggest contributor, would decline only by 2.6
Be careful not to make winner-loser conclusions
only by looking at the impact on city governments.
out that it's not at all uncommon that a city can be a net contributor of
tax base but the larger school district or county of which it is a part
could be net gainers. Cumulative tax bills for taxpayers in that city,
therefore, could be less than without the law, even though the city is a
net contributor of tax-base growth.
Some debate under way over whether certain
properties create "municipal overburden" and should not be subject to
Some opponents of tax-base sharing contend that retail
businesses should be removed from the tax-base sharing pool because the
Department of Revenue study found that city government expenses to serve
retail exceed the tax revenue produced by such businesses. However, Gilje
said, those same retail businesses are located in and pay property taxes
to school districts and counties and don't create county or school
A participant noted that some states, not
including Minnesota, attack the municipal overburden issue directly by
allowing cities to impose what are called "development impact" fees
directly on properties to pay for selected services.
Cities clearly have more than tax base in mind
when encouraging commercial-industrial development.
use of tax-increment financing indicates how willing cities are to forego
taxes on new development for many years, and to accept whatever "municipal
overburden" might occur, to get such development to locate within their
borders, Gilje observed. Among the reasons for doing this are: promoting
overall growth of the community, providing more jobs, and offering
shopping convenience for residents. Cities aren't allowed to escape making
a tax-base sharing contribution by placing property in tax-increment
The law has functioned for
37 years exactly as intended, Gilje concluded. Cities within the
seven-county metro area still compete aggressively for tax base. But the
rewards or the losses if development occurs on one side of the freeway
rather than the other are no longer winner-take-all. Everyone in the metro
area can look at commercial-industrial property anywhere in the area and
legitimately claim, "We've got a piece of that."
Depending upon the law's impact at a given time
in a given locality, proposals are always likely to be made to share more
or less tax base, to change the method of distribution, or even to "steal"
the tax base for other use. But, according to Gilje, there's no compelling
need to change a law that has and continues to function as effectively and
as fairly as the 1971 metropolitan tax-base sharing, or "fiscal
below, for an example of the calculation of property tax under the
tax-base sharing law.
Property tax calculation under the tax-base
Consider an example: City A has taxable
residential property value totaling $10 million and taxable
commercial-industrial property value also totaling $10 million, of which
$9 million represents growth since 1971. Without tax base sharing City A's
total taxable property value would be $20 million. With tax base sharing
here's how the city's taxable value is determined:
$10 million, its entire residential taxable
Plus $1 million, its pre-1971 commercial-industrial taxable value.
Plus $5.4 million, which is 60 percent of its $9 million growth in
commercial- industrial taxable value since1971. (The other 40 percent,
or $3.6 million, is combined with the 40 percent of
commercial-industrial tax-base growth from all communities in the metro
area to form the sharable pool.)
Plus its share of the pool. The share is proportional to City A's
population as a fraction of the metro area population.
Depending upon its share of the pool's
distribution, City A's final valuation will be something more or something
less than $20 million.
With a few minor exceptions, taxable value is
determined this way for every metro-area unit of government with the right
to levy property taxes, i.e., cities, townships, school districts,
counties, and special districts.
Dividing the local unit's total adjusted taxable
value, (including its share of the metro commercial-industrial pool) into
its spending budget, each local taxing unit computes its local tax rate.
This rate is then applied against the local unit's adjusted taxable value
to determine its total tax revenue (equal to its spending budget).
Finally, the local taxes resulting from the
total commercial-industrial shared pool are added together and a metro
rate is calculated as the ratio of those total taxes to the metro-wide
pooled growth in property values since 1971, giving a weighted average of
all local rates.
As a result of tax base sharing then, the
resultant tax rate on commercial-industrial property might be greater than
or less than the local tax rate applied to residential property. Each
parcel of commercial-industrial property has two parts (a) the local
portion (60%), to which the local tax rates apply, and (b) the
metropolitan portion (40%), to which the metro tax rate is applied. If the
metro-wide tax rate on a parcel of commercial-industrial property is less
than the local tax rate, that parcel's effective (local plus metro) tax
rate will be lower than the (local only) tax rate applied to all
residential property in its local community. Conversely, if local tax
rates are less than the metro tax rate, that parcel's effective tax rate
will be higher than the (local only) tax rate applied to all residential
property in the community.
The Civic Caucus
is a non-partisan,
tax-exempt educational organization. The Core participants
include persons of varying political persuasions, reflecting years of leadership in politics and
business. Click here
to see a short personal background of each.
Verne C. Johnson, chair; David Broden,
Paul Gilje, Jim Hetland, Marina Lyon,
Joe Mansky, John Mooty, Jim Olson,
and Wayne Popham