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Session 2001: The Property Tax Debate
By Michael Khoo
December 26, 2000
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Since his days on the campaign trail, Gov. Jesse Ventura has railed against the state's local property tax system, calling it unfair, confusing, and in urgent need of reform. As a candidate, Ventura had few hard proposals for reform and his first budget as governor lacked any radical changes. But after studying the issue for two years, Ventura and his top aides say they're now ready for a major change in property taxes. They propose taking general education funding completely off the property tax rolls - a nearly $1 billion bite. Replacing that revenue with other taxes or spending cuts will involve tricky budget negotiations and the plan is already facing tough questions at the Capitol.

Gov. Jesse Ventura outlined his tax-reform plan in a December 22nd letter to lawmakers. Find it on the governor's Web site.
THE PROPERTY TAX IS A COMPLICATED ANIMAL.   It's collected by and for the benefit of local governments and schools, but state lawmakers play an important role in classifying property types, structuring refunds and credits, and in some cases dictating how much revenue should be generated. Take, for example, public schools. State Revenue Commissioner Matt Smith says legislators in St. Paul set the general education formula, and then require school districts to shoulder almost one-third of that burden through the property tax.

As a result, Smith says taxpayers find it difficult to understand who's controlling the size of their tax bills.

"The place to start is to take out what's a non-local component: $900 million of property tax levy that has no local decision making involved whatsoever. That levy is set in St. Paul; it's part of the state-set formula. The governor's idea is it ought to be paid for, then, by the state," says Smith.

Smith says the governor's plan would, on one hand, make property tax decisions simpler and fairer. But it also means adding nearly $1 billion to the state budget. Smith says there are a number of options for closing the gap. Since businesses benefit most from cutting the property taxes, Smith says the administration is contemplating a statewide uniform tax on businesses.

The administration might also reduce local government aid; reasoning that since property taxes will have declined dramatically, the aid can be cut as well. But restructuring the state sales tax is creating the most interest. Smith says the sales tax can be broadened to cover services such as legal or consulting fees, mortuary services, or hair cuts- most of which are currently exempt.

"Because we could spread the sales tax over a broader range of consumption, we can lower the rate. Our 6.5 percent state rate is the third-highest state rate in the country. All the states around us have state rates of either five percent or four percent," according to Smith, who says the governor has ruled out any tax on food or clothing.

Expanding sales tax collections is not popular among legislative leaders.

"When we have surpluses of $900+ million in this biennium and $2 billion-plus in the next biennium, to be talking about raising any tax or extending any tax kind of sends mixed messages to the taxpayers of this state," says House Speaker Steve Sviggum. "We would just as soon not talk about extending or raising any tax at the time when we've got such substantial surpluses."

The administration says critics have to focus on the entire picture, complicated as it may be. The sales tax would expand but the rate would likely fall.

Senate Majority Leader Roger Moe says even if the plan doesn't increase the state's overall tax burden, its effect isn't spread evenly among individuals.

"About half of the (property) tax relief would be in commercial and industrial property taxes. But if you raise or if you extend the sales tax to services, you now are probably going to be applying the tax to those who probably didn't get the property tax relief," says Moe.

"If the state has all the funding of our local schools, you can certainly bet that the state will come forward with more rules, more regulations."

- Steve Sviggum
Speaker of the Minnesota House of Representatives
Others are likewise responding with caution. Duane Benson of the Minnesota Business Partnership says while he appreciates the call for property tax reform, he's concerned about how such a major change would ripple through the state's tax structure.

It's almost impossible to do because our tax system is so complex that if you turn a dial with your right hand, three of them near your left hand spin anyway. So I think that notions of fairness are kind of terms of art. It depends upon who looks at it and says it's fair. Usually, tax reform means to the average person, 'I'd like to pay less,'" says Benson.

There are also reservations on the other side of the property tax equation: the school districts themselves.

Scott Croonquist, the executive director of the Association of Metropolitan School Districts, says shifting school funding from local property taxes to the state could jeopardize future education funding. Croonquist says as much as taxpayers dislike the property tax, it has the advantage of stability.

"It does not fluctuate as greatly with the economy, so in times of recession or when the economy slows down, there is definitely an advantage to having a certain portion of the school funding come via the property tax. It helps prevent wide swings and fluctuations in the revenue stream," Croonquist says.

Districts could still levy revenue for expenses above and beyond the general formula - say, to reduce class sizes or build new facilities. That's led some in greater Minnesota to worry the plan could exacerbate disparities between wealthy school districts and less fortunate ones.

"If in fact the state has all the funding of our local schools, you can certainly bet that the state will come forward with more rules, more regulations, that it would be controlled by the state Department of Education rather than by local school boards," says Speaker Sviggum.

Moe says Ventura may have taken too big a bite with his first major tax-reform effort.

"The direction that he wants to move is consistent with the direction that we've been moving. He probably is taking it a little further than can be moved all at once," according to Moe.

But Commissioner Smith says the proposal is, in some sense, all or nothing. Without full state funding, Smith says the plan's goals remain unrealized.

"Number one: the property tax can't ever be considered to reflect local decision-making as opposed to state decision-making," says Smith. "Number two: the state will continue to be essentially hiding a part of its own expenditures off-budget by burying a part of it in the local property tax. So in that sense, you either have a general education levy, or you don't."

The administration continues to wrestle with the details, where most interested parties say the devil still resides. The final plan is expected to be ready when Ventura reveals his budget in late January.

Michael Khoo covers the Capitol for Minnesota Public Radio. Reach him via e-mail at