Minnesota's Fiscal Disparity tax redistribution explained

State Capitol
Minnesota State Capitol in St. Paul, Minn. Sept. 28, 2011
MPR Photo/Jeffrey Thompson

One topic addressed at the Capitol this session is a 40-year old program intended to even out the property tax burden in the metro area.

The program, known as Fiscal Disparities, shifts tens of millions of dollars of property tax base between communities in the metro. Some cities, counties and school districts gain tax base, while others lose it.

The Legislature commissioned an independent consultant to study whether the program is achieving its goals. That report was delivered late Wednesday.

So how does Fiscal Disparities work?

The idea is to share the wealth between metro communities — specifically growth in commercial and industrial tax base. Since 1971, when a business expands or moves into a metro city, that city no longer retains all of the new property tax base from that expansion. Forty percent it goes into a common pool, and then all the tax revenues from that pool are divvied up among all the local governments in the seven-county metro.

Why do that?

The idea is to take some away some of the incentive for cities to compete for businesses and infrastructure projects that tend to spur business development — things like highway interchanges.

Politicians would be less inclined to lure businesses away from neighboring communities by offering them subsidies. Because even if they did, their city would net only 60 percent of the tax base. The rest goes to the fiscal disparities pool.

So obviously there are winners and losers. Who are the big ones?

We should be cautious about calling them winners and losers — if the program works correctly, we all win, right?

In terms of who contributes the most tax base, that is Bloomington, which has grown tremendously since the 1970s, most notably in 1992 with The Mall of America. About $19 million of Bloomington's tax base goes into the fiscal disparities pool. The property taxes for a $208,000 median-value home in Bloomington would be about 8 percent lower without the fiscal disparities program.

So Bloomington loses tax base. Who gains?

St. Paul gains the most terms of property value. One reason is because Fiscal Disparities only takes into account the growth in commercial and industrial tax base since 1971, when St. Paul was already a well-developed city, compared to Bloomington, Rogers or Eden Prairie.

One clear winner is the tiny city of Landfall, population 686. The city is actually a mobile home park with very little tax base of its own. The independent report found Landfall's taxes would have to more than double if the Fiscal Disparities program went away.

What else did the report find?

There is a great deal of information in the 234-page report. Some of the more interesting tidbits are in regards to where the tax base comes from — that's Hennepin County. Adding up all the taxes collected by all local government units in each county, overall taxes would go down in Hennepin County if the Fiscal Disparities program were discontinued. All other counties would see some kind of tax increase under that scenario.

But in general, the independent consultants found the program does not "overburden" those donor communities, in the sense that commercial industrial tax base generally provides much more tax revenue than it costs local governments to provide services to those businesses.

Did it recommend any changes to the program?

It did not. It just provided analysis. But we can expect lawmakers on the House and Senate taxes committees to ask the consultants to draw firmer conclusions, when they testify at the Capitol later in February.