Minnesota Eats Itself

Another Pawlenty budget, another round of bloodletting

Revenue enhancement through taxes that go by other names is only one trick of the no-new-tax trade. To further maintain the appearance of fidelity to his anti-tax pledge, Pawlenty has also dramatically altered the terms of the cooperative relationship that existed between state and local governments in Minnesota for many years. The result has been to "hold the line" on taxes at the state level only to see the real costs reappear as local levies.

The governor and his Republican allies frequently claim that Minnesota's per capita state taxes are the second-highest in the nation. What they don't say is that a large chunk of that money takes the form of local government aid. As its name implies, LGA is transferred to local units of government across the state, to aid them in providing a wide variety of vital services to local residents. Those transfers keep local government taxes relatively low. That's why, when it comes to measuring the total amount of money consumed by government (the combination of state taxes, local taxes, and non-tax revenue), Minnesota's per capita burden falls to a very middling 24th in the country.

In his budget for the current biennium, Pawlenty cut the state's LGA transfers by $140 million while shifting responsibility for funding many programs, some of them mandated by state law, onto local government. This double whammy was compounded by Pawlenty's cuts to education funding, at a time when the schools were facing huge increases in the cost of health care and transportation.

Steve Johnson and Lou Fancher

The cuts in education were particularly striking, because just two years earlier the state had agreed to take on primary responsibility for funding local school districts. Pawlenty, at the time minority leader of the State Senate, was among those who championed the plan and took credit for the sharp reductions in local property taxes resulting from the takeover. It was the end days of the Clinton-era stock market bubble, and Pawlenty was not alone in claiming the state could finance its commitment to education, which cost nearly $1 billion a year, out of surpluses in the state budget. Then the market took its nosedive, the fallout from 9/11 exacerbated the downturn, and the state found itself awash in red ink and lacking a dedicated source of revenue to pay for its billion-dollar obligation.

As might be expected, the LGA cuts were especially harsh for local governments that had received a disproportionate share of the LGA monies, including many of the state's less affluent towns and cities. Faced with the loss of key personnel such as police and firefighters, or the possibility that they would fail to fund state-mandated services, many local governments levied steep property tax increases. Property taxes also rose in areas where voters passed school referendums to mitigate some of the state cuts and inflationary costs on education. In all, local property taxes were increased by $355 million across the state in 2003.

Judging by the net loss of 12 Republican House seats in last November's election, Minnesotans believed DFL claims that this property tax spike was caused by Pawlenty's LGA and education cuts and his shifts in budgetary responsibility--that those costs, in essence, were Pawlenty's taxes. Pawlenty in turn blames local government officials for not copying his fiscal restraint, and DFL legislators for not passing his proposal to severely limit the amount local government could levy in taxes.

But Pawlenty's last education budget overtly called for school boards to levy local property taxes in at least a couple of provisions. One is a line item known as "transition revenue," which previously had received all of its $30.8 million annual funding from the state. Pawlenty's budget lowered the state's responsibility to $12.1 million and indicated that the other $18.1 million could be accessed by the school boards if they levied local property taxes. On another line item, known as equity revenue, Pawlenty again ratcheted down the state's commitment, from funding the entire $41.2 million each year down to $18.9 million, with local property tax levies responsible for the remaining $22.3 million. A third shift in the education budget, in which local levies were responsible for generating $39.9 million of the $191.3 million annual cost of the line item known as operating capital, was proposed and enacted by the House and Senate conference committee in the waning days of the 2003 legislative session.

Put them all together and one sees that the state shifted the responsibility for $80.3 million worth of annual education funding back over to local property taxes, $40.4 million of it directly suggested by Pawlenty's budget. Local school boards had the option to decline to levy the recommended taxes, but doing so would have deprived them of the state's portion as well, and in tight times, no district could afford to leave that money on the table.


III. Who Bleeds Next?

Pawlenty is bound by law to submit his budget proposal for the upcoming biennium no later than next Tuesday, January 25. His prefatory comments indicate that he is heeding the message sent by voters in November: There will likely be no further cuts to LGA, and the education budget he proposed last week appears to keep pace with the growth of inflation, though no more. But the deficit is $1.4 billion, and other expenses loom. The cost of housing sexual predators and a burgeoning population of meth addicts is straining the corrections budget. Nearly all of the state's onetime monies are gone. To make ends meet, the governor needs to decimate some significant area of the budget, and he's left little doubt that it will be accomplished by razing the state-supported health insurance programs. If so, many tens of thousands of impoverished single adults will lose their state health insurance.

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