If cities lose LGA money, will property taxes rise?

If the Republicans have their way and cut state government spending — including aid to cities — property taxes will go up for many Minnesotans.

That's what DFL Gov. Mark Dayton contends, anyway. But is it true?

Republican legislators at the State Capitol want to cut Local Government Aid (LGA) as part of a $5 billion state budget fix. Dayton says he favors raising income taxes on Minnesota's top earners because it's based on a person's ability to pay. He argues that the property tax is unfair because it's based on the value of property not on a person's income.

Dayton has long argued that his plan to preserve the funding for aid to cities would mean property taxes won't go up.

"I think to solve a [at the time] $6.2 billion deficit, with no property tax increase on anyone other than million-dollar homes, no local government-imposed property tax increase and no income tax increase on 95 percent of Minnesotans is a pretty extraordinary accomplishment," Dayton said when he announced his budget plan in February.

The budget deficit has since dropped to about $5 billion.

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Dayton says property taxes have increased dramatically in the past eight years as cities dealt with cuts in state aid. He cites Revenue Department research that said cuts in state aid force property tax hikes.

"If we increase our property taxes, it will not attract investment into our community."

His plan is being backed by city leaders across Minnesota. Fergus Falls Mayor Hal Leland said his city won't raise its property tax levy if they continue to receive their LGA payment of nearly $4 million.

"We wouldn't have to raise property taxes and that is a very significant kind of thing because if we increase our property taxes, it will not attract investment into our community," Leland said. "It will not attract people coming to us."

But a tax researcher said history shows not every city will follow that lead. Mark Haveman, with the Minnesota Taxpayers Association, said it's true that property taxes increased over the past eight years when LGA was cut.

But he said property taxes also increased in the early 1990s when LGA funding increased.

"Even in the LGA boom days, there has always been historical increases in per capita city property taxes," Haveman said. "They've been lower than in recent periods, but that doesn't say it won't happen."

Haveman said he believes local governments would spend differently if they didn't receive state aid.

Rep. Linda Runbeck, R-Circle Pines, agrees. Runbeck, who is pushing a bill that would phase out aid to Minneapolis, St. Paul and Duluth, said all cities need to rethink their budgets.

"There are many cities that don't receive any Local Government Aid and neighboring cities adjoining them receive $1 million or $2 million every year," Runbeck said. "My point is we have, at the state, enabled cities to spend at rates higher than their tax base would allow."

"We have, at the state, enabled cities to spend at rates higher than their tax base would allow."

City leaders say further cuts in state aid could jeopardize public safety and other essential services. City officials also worry that, as politicians debate, taxpayers may get confused.

"It does put city officials in a difficult situation because there could be some expectation created by the Dayton budget," said Gary Carlson, a lobbyist with the League of Minnesota Cities.

Carlson, who is lobbying the Legislature to preserve LGA funding, said cities mostly rely on state aid and property taxes for their budgets. He said some cities may be forced to raise property taxes even if LGA is fully funded.

"If state aid is simply held harmless and not cut, it still means there is pressure in the local budgets to fund services or inflationary increases and the only source of revenue would be the property tax," Carlson said. "I think what Gov. Dayton has been suggesting is that his budget would not force local property taxes to rise because of state action."

When asked about his comments that property taxes would hold steady, Dayton was careful to note that his budget would only guarantee that there won't be any "state-imposed" property tax hikes. But he also said he didn't expect city leaders to increase spending if LGA was held harmless.